[1] On January 10, 1997, the family home of Mr. and Mrs. Sienema was substantially destroyed by fire. Mrs. Sienema owned the home. Three mortgages were registered against title. The Sienemas were insured by the British Columbia Insurance Company ("BCIC"). In August, 1997, BCIC denied coverage on the basis that proofs of loss contained wilfully false statements. The CIBC Mortgage Corporation ("the mortgage corporation") was named as loss payee in the BCIC policy, which also contains a Standard Mortgage Clause.

[2] Three actions were commenced. The Sienemas claim against BCIC for the building and contents. They also claim consequential and punitive damages. BCIC has counterclaimed for the return of monies paid under the policy. In addition to allegations in respect of statements in the proofs of loss, BCIC says that certain actions of the Sienemas were fraudulent.

[3] The bank and the mortgage corporation also claim against BCIC for breach of the policy of insurance and seek compensation for the building. Both claim as legal or equitable assignees of the Sienemas and the mortgage corporation claims under the mortgage clause. Bad faith is also alleged against BCIC and punitive damages are sought.

[4] Finally, the bank and the mortgage corporation have commenced foreclosure proceedings. The relief claimed includes rectification of a mortgage in the face amount of $360,000 to substitute the mortgage corporation for the bank. The claim for rectification must succeed if the claim of the mortgage corporation under the mortgage clause is to succeed. South Bay Homes Ltd. ("South Bay"), a defendant in the foreclosure proceedings, was rebuilding the home before the denial of coverage. It filed a lien for approximately $195,000. South Bay joins with BCIC in arguing against rectification and also asserts that the bank is not entitled to foreclose on its collateral mortgage.

[5] The central issue is whether BCIC has proven that the Sienemas made wilfully false statements or were fraudulent. I will deal first with the proof of loss dated March 3, 1997. It is alleged by BCIC that wilfully false statements were made about a number of items listed in the schedule of loss which is appended to the proof of loss.

[6] The schedule is 198 pages in length and contains descriptions of items of property which were damaged beyond repair. For many items, place and date of purchase is described, as is the original cost. Replacement cost, depreciation and actual cash value are given for all items. With some exceptions, the descriptions of the items were prepared by an employee of On Side Restorations. The balance of the information was supplied by Mr. Sienema.

[7] BCIC's adjuster instructed that costs should be exclusive of tax. Mr. Sienema testified that he followed those instructions. It was the evidence of Mr. Sienema and Mr. Latham, one of the independent adjusters retained by BCIC, that depreciation was discussed. Mr. Latham suggested that all items should be depreciated by 40%. Mr. Sienema testified that as he did not agree, Mr. Latham told him to indicate the figure that he felt was appropriate but also said that it was not likely that Mr. Sienema's figures would be accepted. Actual cash value is, of course, determined by reference to replacement cost and depreciation.

[8] Mrs. Sienema testified that her only involvement with the schedule of loss was in respect of the replacement costs of the living room and family room upholstered furniture, the dining room suite and a table lamp. She had a number of meetings with Mr. Tylor at the Jordans store in Vancouver. She described the damaged items. He assisted in choosing comparable replacements and provided information as to replacement cost.

[9] Although Mrs. Sienema had actually purchased some of the items which have assumed significance in these proceedings, Mr. Sienema prepared the schedule without consulting his wife about original costs. Nor did Mrs. Sienema read the schedule, although she swore it to be true.

[10] It was not until August 29, 1997, that BCIC completed its investigation and advised the Sienemas of its position. A letter of that date states that the investigation undertaken by BCIC disclosed that wilfully false statements had been made in respect of the particulars of loss required to be provided under statutory condition 6. Such statements included descriptions of certain items and information as to original cost, when and where purchased, repair/replacement cost and actual cash value. Four items were specifically referred to in the August 29 letter. An additional four items were the subject of correspondence dated September 24, 1997.

[11] Five items remain in dispute. They fall into two categories - furnishings allegedly purchased from J. Collins Furniture and two television sets.

[12] Dealing with the first category, upholstered furnishings allegedly purchased from J. Collins were used by the Sienemas in their living and family rooms. The third item said to be purchased from the same store was a dining room suite.

[13] It is agreed that the family room furniture was purchased at J. Collins. BCIC asserts that wilfully false statements were made about its retail price and acquisition cost. As to the other items, statements as to place of purchase as well as retail price and acquisition cost are said to be false.

[14] I will begin by referring to the evidence of the Sienemas about these furnishings.

[15] Mr. Sienema testified that to the best of his recollection, these furnishings were purchased at J. Collins in 1990 or 1991. Twelve thousand dollars remained of a line of credit which had been taken out to renovate a home. The price paid was $12,800. The items are described as a sofa, loveseat and a wing back chair manufactured either by Henredon or Bernhardt. Because the furniture was rarely used, Mr. Sienema felt that depreciation should be 5%. Replacement cost was listed at $14.000.

[16] J. Collins was not in business in 1997, so Mrs. Sienema went to Jordans to look at similar furniture. Mr. Tylor suggested a replacement cost of $14,000.

[17] It was Mr. Sienema's evidence that this had been purchased at J. Collins. The schedule of loss states that the purchase price was $16,000, which is described as a 50% discount. Mr. Sienema said he believed the suite was made from black walnut because the salesman, Colin Ryan, told them so. The schedule of loss contains a notation indicating that this furniture was black walnut. After litigation was commenced, he spoke with Colin Ryan who suggested that the price range was probably $10 - $12,000. Mr. Sienema later located records of his holding company containing an entry which indicated that $10,000 was paid on April 17, 1986, re furniture. He now believes that $10,000 was the price paid.

[18] Again, information as to replacement cost was obtained from Mr. Tylor. The amount set out in the schedule is $33,000. Because the furniture was in pristine condition, Mr. Sienema was of the view that depreciation should be calculated at 5%. The actual cash value is listed as $31,350.

[19] Mrs. Sienema testified that she had first seen this furniture almost a year before it was purchased from J. Collins. It was priced in the range of $24,000, and was therefore too expensive. At the time of its purchase, J. Collins was having a sale. Her recollection is that the price paid was $10,000 to $12,000, but because of the accounting entry, believes it must have been $10,000. She, too, testified that she believed it was black walnut. However, when she was attempting to get replacement costs, she spoke to a salesperson at the Jordan's store in Coquitlam and learned that black walnut furniture would cost $50,000 to $60,000. She concluded that their furniture could not have been black walnut.

[20] Mrs. Sienema agreed in cross-examination that in March, 1997, she knew they had not paid $16,000 and that the retail price was not $32,000. She stated that it was her recollection the furniture was 50% off, but could not explain the seeming contradiction flowing from her testimony that the retail price was $24,000, and the purchase price was $10,000, not $12,000. As she did not read the schedule of loss before she executed the proof of loss, she did not note the error.

[21] Mr. Sienema testified that this was purchased when J. Collins was in receivership. His wife had made an offer in the amount of $5,500, which was refused by the receiver with the proviso that if the furnishings did not sell, he would reconsider. Mr. Sienema recalled that the receiver telephoned at the end of the sale to say that he would accept $5,500. It was his recollection that the retail price was $14,000. Mr. Tylor also felt that would be the replacement cost.

[22] In fact, the price paid was $3,508 plus tax. The invoice reflecting this amount was obtained some time after the preparation of the schedule of loss.

[23] Mrs. Sienema testified that her first offer on this furniture, the regular price of which was $14,000, was rejected. Towards the end of the sale, she returned to the store and saw that the furniture had not been sold. An offer of $4,000, including tax, was accepted by a salesman. She agreed that had she reviewed the schedule of loss, she would have noted that the original cost was incorrectly stated.

[24] A number of other witnesses gave evidence relevant to the issues raised by BCIC in respect of these items.

[25] Mr. Jamieson, an accountant, was asked by BCIC to review the records of J. Collins. It was submitted that the relevant findings include the following:

- A review of over 7,000 invoices in the period from 1990 to 1995 failed to disclose any issued to the Sienemas;

- A review of all the customer cards in existence for that period failed to reveal a customer card for the Sienemas;

- A quality control check found that of 60 substantial sales selected at random from the invoices for that period, 60 corresponding customer cards were located;

- The computerized customer list did not include the Sienemas;

- The invoices were kept in numerical sequence, and for the period from 1990 to 1992 there are only three missing invoices for the Burnaby store (where the goods were allegedly purchased), namely ones in the following periods:

- There were no Sales Commission Records for any of the invoices that were missing;

- A quality control check of cancelled invoices revealed that no cancelled invoices appeared on the invoice register, or sales commission reports, leading Mr. Jamieson to conclude that the three missing invoices were likely cancellations rather than genuine sales.

[26] BCIC also relied upon the evidence of Colin and Dennis Ryan in support of its assertions that wilfully false statements were made in respect of place of purchase, retail price and acquisition cost.

[27] Colin Ryan is 79 years of age and was a principal of J. Collins Furniture Gallery, which carried on business until late 1995. Until 1992, Mr. Ryan was active in the business.

[28] Colin Ryan testified that inventory records dated March 31, 1985, confirm that a dining room suite, including eight chairs, of the type owned by the Sienemas was then in inventory. The total landed cost of the suite, which includes all duties, taxes and shipping costs, was $5,154. He testified that dining room furniture was usually priced at approximately twice its landed cost. It was therefore not possible that the retail price of this suite was $24,000.

[29] The suite was manufactured by Thomasville and Mr. Ryan testified that it was part of the Parameter line. An agreed statement of facts filed in these proceedings confirms that Thomasville manufactured Parameter dining room furniture and one suite was shipped to J. Collins. Mr. Ryan testified that the sales tag stated what kind of wood an item was made from. The wood was cherry veneer. He stated that he would not have said this was black walnut, and the grain of black walnut is different from cherry.

[30] Mr. Ryan was asked about a notation on the invoice for the sale of the family room furniture. He had made a note as follows:

Cost of goods
2775 factory
368 frt

$3,143

Gross profit $355.17

The selling price, exclusive of tax, was $3,508.77. He testified that he would have referred to inventory records destroyed in November, 2000, to obtain information as to cost. He would have expected the regular price of these items to be in the range of $6,500 in total.

[31] As to furniture manufactured by Bernhardt or Henredon, Mr. Ryan testified that in approximately 1984, J. Collins became an exclusive dealer for Thomasville Furniture and remaining products manufactured by others were sold off. He did not believe that they would have had any discontinued product by 1990.

[32] In cross-examination, Mr. Ryan was asked about statements made to Mr. Flavell, an investigator who was acting on behalf of the Sienemas. He denied that he had ever told anyone that the original price of the dining room suite was in excess of $20,000, although he recalled being interviewed by Mr. Flavell and signing a statement. He denied having told Mr. Flavell that there was a 90% chance that the Sienemas had purchased the dining room suite from them or that the price could have exceeded $20,000. Further, he denied having read the statement before signing it.

[33] Mr. Flavell testified about taking of the statement. I accept that the statement he prepared for Mr. Ryan's signature included only information that had been provided to him by Mr. Ryan. I also accept that Mr. Flavell asked Mr. Ryan to review the statement before he signed it and that Mr. Ryan did, in fact, do so. Mr. Flavell recalled that some changes were discussed and a review of the document reveals that changes were made and initialled. I therefore accept that Mr. Ryan told Mr. Flavell the following:

[34] While I do not believe that Mr. Ryan was attempting to mislead, it seems clear that his memory is failing. The inconsistencies between his testimony and statements to Mr. Flavell necessarily call into question the reliability of some of his evidence. I also do not accept Mr. Ryan's evidence that he did not speak with Mr. Sienema about the dining room furniture and other matters in 1997, as Mr. Sienema testified. That conclusion is reinforced by the fact that Mr. Ryan told one of the individuals who was reviewing the documents of J. Collins in 1997 that he had received a telephone call from Mr. Sienema.

[35] Dennis Ryan is the son of Colin Ryan. He worked at J. Collins from 1972 until the end of 1995 when the business was liquidated. He testified that dining room furnishings were normally priced at between 2.1 and 2.3 times their landed cost and therefore, on furnishings with a landed cost of $5,154, retail price would have approximated $11,000. He testified that he could not recall ever having any dining room suites which were priced in the range of $25,000.

[36] His recollection was that they began to sell Thomasville products on an exclusive basis in 1987. It was possible, but not likely, that discontinued stock was still being sold in 1990.

[37] As to upholstered sofas, chairs and loveseats, Dennis Ryan was asked in general terms about 1990 prices. His evidence was that the maximum price for a sofa was in the range of $2,800. For a loveseat, it was be $2,200 and for a wingback chair, $1,100. In his view, a customer would not have paid $12,000 for these items.

[38] He was also asked about 1995 prices. He testified that the maximum retail price for a sofa, chair and ottoman would have been approximately $6,800. Custom orders may have been more.

[39] Mr. Hawkins, who began with J. Collins as a salesman in 1985 and was with that company until it ceased to do business, gave evidence on behalf of the Sienemas. He testified that for approximately the first three years of his employment, J. Collins did not sell only Thomasville products. Approximately one year after J. Collins became an exclusive Thomasville dealer, he became manager of the Vancouver store.

[40] It was his evidence that as a salesman, his income was 100% commission. The commission earned on any sale depended on the mark-up of the item sold. If it was sold for three times or more than its landed cost, salesmen would be paid at the rate of 15%. The lowest commission rate was 5% and it applied on items sold at a price below 2.3 times their landed cost. The commission structure was one reason why salesmen needed to know the landed cost of items. The second related to negotiations with customers. Salesmen were permitted to negotiate a discount of as much as 30% without approval.

[41] As to the retail price which appeared on tags on the furnishings, Mr. Hawkins testified that the sticker price was a minimum of 3.2 times and a maximum of 4.6 times landed cost. On Thomasville case goods, including dining room tables, the mark-up was 3.2 times landed cost. He estimated the cost of this suite at $17,000, which happens to be 3.2 times its landed cost.

[42] The evidence of Mr. Hawkins about the price of range of furnishings also differed from that of Dennis Ryan. He testified that the range for dining room suites was from a low of $5,000 to a high of between $25,000 to $30,000. He was referred to an invoice in respect of a sale that he made in July, 1992, which included a special order sofa which was sold for $4,500. He testified that there were "definitely" similarly priced items on the floor and the maximum retail cost was higher.

[43] Mr. Hawkins confirmed that J. Collins had carried furnishings manufactured by Bernhardt and Henredon, although more so the former. He believed that discontinued stock was sold within six months to one year after the commencement of the exclusive agreement with Thomasville. Henredon was considered one of the very best lines in terms of quality.

[44] It is difficult to reconcile the evidence of the Ryans and Mr. Hawkins as to mark-ups and the range of prices. Mr. Hawkins worked for the company for a decade and was paid on a commission basis. One would expect that he would be knowledgeable on such matters. The Ryans would obviously be knowledgeable. They were all independent witnesses.

[45] Because of the way the trial proceeded, Colin and Dennis Ryan were not asked about how commission was calculated, nor did they comment on Mr. Hawkins' evidence. Counsel for BCIC suggested that Mr. Hawkins may have been confused about the difference between average cost and landed cost.

[46] Landed cost was the total paid, being factory cost converted from US to Canadian dollars, plus brokerage, duty and tax. Average cost was the cost from the factory expressed in US dollars. Dennis Ryan testified that profit calculations in the records of J. Collins was calculated by subtracting average cost from net sale price. He agreed that this was not particularly sensible as calculations of profit margin should have been based on landed cost.

[47] But again, this suggested confusion was not put to Mr. Hawkins and the records placed into evidence do not even permit this theory to be tested. Further, it seems unlikely that the Vancouver store manager would not understand the difference. It is nevertheless the case that the records in evidence to not show the kind of profit levels that would have been attained if the selling price was routinely as much as 3.2 to 4.6 times landed cost. For the reason, I conclude that they were not.

[48] As to the evidence of price ranges of upholstered furnishings, Dennis Ryan's evidence about 1995 prices, does not seem to accord with his evidence that mark-ups were in the range of 2.3 times landed cost and the evidence of Colin Ryan about the landed cost of the family room furniture. If $3,143 is multiplied by 2.3, the result is $7,229, yet he testified that $6,800 was the maximum retail price. Further, the figures given by Mr. Ryan seem low for furnishings sold by what was described as a high end store. I therefore do not accept Dennis Ryan's evidence as to maximum prices.

[49] I turn next to the conclusions to be drawn from this evidence. As to the family room furniture, the acquisition cost of the family room furniture was $3,500 plus tax, not $5,500 plus tax as set out in the schedule of loss. I accept that the landed cost was $3,143 as Colin Ryan testified. It is unlikely that the retail price was $14,000.

[50] Mr. Jamieson's review of the records of J. Collins satisfies me that the living room furniture was not purchased there. I cannot draw any conclusions about retail or acquisition cost.

[51] Referring finally to the dining room, the suite owned by the Sienemas was in stock at J. Collins at the time they said it was purchased and inventory records confirm a sale although no invoice could be located. I accept that the suite was purchased at J. Collins and that the price paid by the Sienemas was approximately $10,000. As to its regular price, it is unlikely that it was as much as $24,000. Even on the evidence of Mr. Hawkins, it was several thousand dollars less. The schedule of loss is therefore incorrect as to both original cost and regular retail price. Further, the dining room furniture was not black walnut, as stated. I accept Colin Ryan's evidence that the wood was cherry and that he would not have told a customer that it was black walnut.

[52] I turn next to the two television sets. Mr. Sienema testified that all information on the schedule of loss regarding the colour projection system made by Panasonic is accurate. He testified that the original unit was purchased through Citiclaims for $5,600. He attempted to obtain a copy of an invoice but was unsuccessful.

[53] Mr. Bedard, formerly a principal of Citiclaims, testified that although he could not recall selling a television to Mr. Sienema, Mr. Sienema did make purchases from them. The company went out of business in 1996 and he no longer has its records. He described those records as very sophisticated. He would have expected a record to exist if a television had been sold.

[54] Patricia Buckley was a long time employee of Citiclaims and in 1994 became manager of its Vancouver office. When it ceased to do business, she worked with the receiver and assisted in cleaning up the receivables. In September, 1997, at the request of BCIC, she did a search of the records of Citiclaims using the model number of the television and the code for Mr. Sienema's name. Three documents were located, none of which was for the purchase of this item. It was her evidence that if Citiclaims ordered a product and it came to their warehouse, there would have been a record. She agreed that for some products, Citiclaims' suppliers might extend a discounted price to a customer of Citiclaims. In other words, the customer would not buy from Citiclaims, but from its supplier. Although she could not recall an instance where this had occurred in respect of a television but did not deny that it could have.

[55] Citiclaims had provided a quotation dated November 20, 1992, to Ms. Moulton, who worked with Mr. Sienema, for three large screen TVs. The most expensive was $3,100. Ms. Moulton testified that she gave the quotation to Mr. Sienema. Mr. Willock, the estimator who provided the quotation, followed up with Ms. Moulton. She had no further knowledge of any purchase by Mr. Sienema from Citiclaims. The quotation of November 20, 1992, was one of the documents retrieved by Ms. Buckley.

[56] Ms. Burdeny, an employee of Panasonic whose duties include providing product and pricing information testified that the suggested list price of model no. PTP4586SC, which was the model destroyed, was $3,899.95. As Citiclaims would have sold to the insurance industry at much lesser cost, I agree that this television could not have been purchased through Citiclaims for $5,600, nor is it reasonable to suggest that incidental costs such as set up fees or delivery could bring the cost up to that amount. The information in the schedule of loss is therefore incorrect.

[57] The second television was an RCA model no. FKC2022T. In the schedule of loss, Sight and Sound, North Vancouver, is listed as the place of purchase. Mr. Sienema testified that he was incorrect. The television was purchased from Soundcraft TV Ltd. in North Vancouver. In the schedule, the original price is stated as $2,100. The invoice in respect of this television was subsequently located and is in the amount of $509.32. Mr. Sienema testified that the invoice does not reflect the fact that he had traded in a new television which had just been purchased but which his wife did not find satisfactory.

[58] Mr. Wong is the owner of Soundcraft TV. He could not recall the regular price of the television in question at the time of its purchase , but he had located documents which suggested a price of approximately $1,100. In cross-examination, he agreed that it could have been in the range of $1,200 to $1,400. Counsel for Mr. Sienema acknowledged that $2,100 could not have been the cost.

[59] In summary, misstatements were made as to each of the five items in dispute. The final question is whether BCIC has proven that wilfully false statements were made by either Mr. or Mrs. Sienema.

[60] There is no disagreement of significance as to the applicable law. Statutory conditions 6 and 7 are included in the policy of insurance. Statutory condition 7 provides:

Statutory condition 6 sets out the requirements after loss, including that the insured must do the following:

[61] By reason of the statutory conditions, materiality need not be established in respect of the information required from the insured. In respect of other matters, materiality must be proven. A statement is material if it is capable of affecting the mind of the insurer: Inland Kenworth Ltd. v. Commonwealth Insurance Co., [1990] 72 D.L.R. (4th) 594 (B.C.C.A.)

[62] In Peterson v. Bannon [1993] B.C.J. No. 2357 (B.C.C.A.), the meaning of wilfully false was considered. It was said that the onus is on the insurer to prove on a balance of probabilities that statements are false but as the allegations are serious, a careful scrutiny of the evidence is justified and cogent evidence will be required to support an allegation of dishonesty. As to the meaning of wilful, Finch J.A. (as he then was) speaking for the court, said:

[63] In Kruska v. Manufacturers Life Insurance Co., [1984] B.C.J. No. 2812 (B.C.S.C.), affirmed [1985] B.C.J. No. 2143 (B.C.C.A.), Mr. Justice Finch considered s. 135 of the Insurance Act, R.S.B.C. 1979, c. 200 and the meaning of the word "fraud" as used in that section. He said this:

It is thus the absence of actual and honest belief which constitutes fraud.

[64] BCIC argued that wilfully false statements as to when and where an item was purchased, although not matters which are referred to in statutory condition 6, can vitiate the right to recovery. Reliance was placed upon Dorosh v. Co-operators General Insurance Co., [1991] 6 W.W.R. 539 (Sask. Q.B.) and Royal Insurance Canada v. Dimario, [1988] I.L.R. 1-2260 (Ont. S.C.). In Dorosh, the form provided by the insurer was similar to the form provided to the Sienemas in that it contained a column headed "Where and When Purchased". The Statutory conditions do not refer to such matters. Armstrong J. considered the argument of the insured that false particulars therefore cannot bring statutory condition 7 into operation. He rejected this argument, stating, at 545:

Counsel for the Sienemas did not argue that these authorities should not be followed.

[65] Turning to the arguments, the Sienemas acknowledged that there were mistakes in the schedule of loss, but Mr. Sienema testified that it was prepared to the best of his ability and recollection. The submission on their behalf was that errors were inadvertent. Mrs. Sienema's failure to read the proof of loss was careless but she did not purposely make false statements.

[66] Counsel for BCIC agreed that it was not realistic to expect that anyone would have an exact recollection of prices paid for items years earlier. The process of completing a schedule of loss necessarily involves some estimating and an element of reconstruction. It was said, however, that the Sienemas consistently overvalued to a significant extent and that certain of their statements simply could not be anything but wilfully false.

[67] In circumstances such as the present, whether a false statement is the result of inadvertence or carelessness as opposed to intentional or purposeful is a difficult question. Much of the argument of BCIC focussed on credibility.

[68] Mr. Sienema testified that very soon after the fire, he was told by Mr. Latham that there would be an investigation into the fire. He was a high profile individual in the insurance industry as he had been fired from his employment because of alleged improprieties with a restoration contractor. Those allegations had adversely affected his reputation and were apparently widely known. Mr. Sienema also believed that Mr. Latham was of the view that he was under financial pressure. Mr. Sienema was thus aware that all aspects of the loss would be closely scrutinized, which might support an argument that he would not knowingly misstate.

[69] Although Mr. Sienema denied that he was under financial pressure, he had lost his employment at the end of 1995, not long after construction of their home was completed. In 1996, he secured employment in Winnipeg. He earned $4,000 per month, less than half of what he had previously earned. Mrs. Sienema, who had not worked outside the home for many years, had to obtain part time employment, which was not lucrative. They had three children. They owed approximately $500,000 to the bank/mortgage corporation. Their monthly debts were $3,600 which would have been more than Mr. Sienema's net income. At the time of the fire, the Sienemas were clearly in financial difficulty and in my view, his denials are not credible.

[70] Personnel from On Side Restorations were apparently satisfied that the descriptions of items on the schedule was accurate, including the model numbers of the television sets. Mr. Anton, an experienced adjuster, testified that BCIC gave instructions that depreciation on contents was to be 40% across the board, a view he did not share. He agreed that in such circumstances, information as to original cost was not significant. Certain misstatements therefore relate to matters which could have little relevance to any assessment of how much was payable. As model numbers for electronic equipment were available, information about the price paid, place or date of purchase was of little significance. Using the model numbers, the insurer would obtain its own quotes, as both Mr. Anton and Mr. Sienema were aware, and the balance of the information would not be relied upon to any great extent. That is not to say that the insurer must prove materiality. The relevance is in the determination of credibility.

[71] It is of relevance that although the schedule of loss is very lengthy, it contains relatively few items which have an original cost or repair/replacement cost exceeding $500. Apart from the items in question, those to which a value of greater than $500 was ascribed include a piano, drapes, an area rug, a bed, encyclopaedia, a computer and certain personal items. BCIC is therefore correct that in terms of the most expensive items, a significant number were overvalued. In fact, the dining room furniture alone accounts for approximately one tenth of the total.

[72] I also agree with the submission of BCIC that the financial significance of certain of these purchases is a consideration. For example, the dining room furniture was a significant expenditure, particularly in relation to Mr. Sienema's earnings, and the difference between $16,000 and $10,000 or a retail price of $32,000 versus $18,000 is also significant. An individual might be expected to have a recollection of significant purchases or at least, would not be so wrong.

[73] The purchase of the family room furniture was made approximately 16 months before the proof of loss was sworn, yet the price was stated to be $5,500 plus tax, an overvaluation of more than 50%. I do not accept that there was a phone call from the receiver or that Mr. Sienema was told by his wife that $5,500 had been paid. As Mrs. Sienema actually made the purchase, one would expect her recollection to be more accurate than that of her husband.

[74] In my view, there cannot be a question but that a television was not purchased from Citiclaims either for anywhere near $5,600 or at all. There is evidence about the competitiveness of retailers which would suggest that even an individual not in the insurance industry who was looking for the best price would have been able to purchase a unit at less than the suggested retail price of $3,800. Again, the overvaluation approximates 50%. While the purchase of the RCA television was many years before, the discrepancy was almost 100%.

[75] Considering all of the evidence, I do not accept that the false statements were the result of negligence or inadvertence on the part of Mr. Sienema. I do not accept that he had an honest belief that all of the statements were true. I am therefore satisfied that BCIC has proven that wilfully false statements were made by Mr. Sienema.

[76] Turning next to Mrs. Sienema, she did not read the schedule of loss. She signed the proof of loss before a notary public, Mr. Cammack. He testified that his invariable practice in these circumstances would have been to ask if she had both read and understood the document. He would not go on to ask if she declared it to be true if she had not read the document. He had no specific recollection of dealing with the Sienemas, or of the document which was presented.

[77] At her examination for discovery, Mrs. Sienema was asked about whether as far as she was concerned, she was swearing that the contents of the document were true. She commenced her response as follows:

In essence, she acknowledged that she could not have had an actual and honest belief in the truth of a statement that she had never read. As was stated by Duff J. in Redican v. Nesbitt, [1924] 1 D.L.R. 536 (S.C.C.), at 544:

[78] In Sleigh v. Stevenson, [1943] 4 D.L.R. (Ont. C.A.), the court considered the meaning of the word "knowingly" as used in the Ontario Insurance Act, R.S.O. 1937, c. 256, which provided that the claim of an applicant who "knowingly misrepresents" any fact shall be rendered invalid. The application for insurance had been filled out by the insurance agent and the plaintiff did not read the document before she signed it. The conclusion of Kellock, J.A. was as follows:

[79] Sleigh has been followed in a number of subsequent cases, including decisions of this court. In Gill v. Insurance Corp. of British Columbia, [1998] B.C.J. No. 1417, one of the issues was whether a wilfully false statement had been made. The plaintiff had signed a proof of loss declaring that the value of a missing vehicle was $59,000. The plaintiff testified that she had relied on the advice of her brother, Inderjit, as to value but on cross-examination said she had signed the proof of loss without reading it. Drost L.J.S.C. (as he then was) did not believe this testimony. He concluded:

That reasoning applies equally well to a statement made with respect to a claim under a policy of insurance. Thus, the plaintiff by signing the proof of loss declaration authenticated the statement of value contained therein and must take responsibility for it.

However, before forfeiture will occur, it must be found that the false statement was made wilfully as well as knowingly. In Black's Law Dictionary, 5th Ed., at p. 1434 the following definition is given:

I find on all the evidence that when she signed the declaration of loss the plaintiff, as well as Inderjit, knew that the valuation of $59,000.00 was a significant exaggeration. I find that the false declaration of value was knowingly and wilfully made or adopted by the plaintiff and that her right to recover under the policy of insurance was thereby forfeited.

[80] Counsel for Mrs. Sienema placed reliance on Kruska v. Manufacturers Life Insurance Co., supra, and particularly the conclusion was that the defendant had not established a fraudulent intent. However, the facts of the case must be borne in mind and it must also be recalled that Finch J. was speaking of the test derived from Derry v. Peek (1889) 14 App. Cas. 337 (H.L.). Kruska involved a policy application which had been completed, in part, by the insured's doctor. A later application was completed by her insurance agent. The insurer alleged failures to disclose medical information. As to the first application, Finch J. found there had been a misrepresentation and non-disclosure, but was not satisfied that the insured had done so knowingly or recklessly. It was just as likely that her reliance on her doctor lead her to innocently believe that all relevant medical history had been disclosed. As to the second application, the question was whether the insured qualified for a lower premium as a non-smoker. The meeting was described as casual and the insured was given the impression that smoking was the key issue, not her medical history. It was concluded that it would be speculation to infer a fraudulent state of mind.

[81] Mrs. Sienema was aware of the nature of the information contained in the schedule of loss. She understood that it related to the value of the contents of the home. She assisted in obtaining replacement costs. Had she read the schedule and given any thought to its accuracy, she would in all likelihood have realized that information about the cost of dining room furniture was incorrect. On her evidence, she knew it was not black walnut before she spoke to Mr. Tylor. She had purchased the family room furniture and thus knew that her recollection may have been better than that of her husband. She certainly knew that $5,500 was not the purchase price.

[82] The need to sign a proof of loss was conveyed to Mrs. Sienema by both Mr. Latham and her husband. She understood that it would have to be sworn before a notary public and went to Mr. Cammack's office solely for that purpose. She knew that she was swearing that the value given for the contents was true. In my view, she made wilfully false statements.

[83] It was agreed that if there was a finding that wilfully false statements were made by Mr. and Mrs. Sienema, BCIC was entitled to judgment on its counterclaim in the sum of $248,738.79 plus interest.

[84] Although not necessary to do so, I will address two further issues raised by BCIC relating to a contract entered into by the Sienemas with South Bay and an affidavit sworn by Mrs. Sienema on December 30, 1997.

[85] On May 17, 1997, a contract was entered into between the plaintiffs and South Bay to rebuild the home which had been destroyed. It did not include a finished basement. The contract price was $295,675 plus GST of $20,697.25, for a total of $316,372.25. Not long after this contract was executed, South Bay was asked to provide a quotation for finishing the basement. The quotation was contained in a letter dated June 10, 1997, from Mr. Miller. Had it been accepted, the contract price would have increased to $338,395 plus GST.

[86] Had the quotation been accepted, amendments to the May 17, 1997 contract would have been necessary. Accordingly, along with his letter of June 10, Mr. Miller forwarded a separate document containing necessary revisions to the clauses which appeared on the third page of the original contract. Using this document and a cut and paste method, Mr. Sienema created a new third page and inserted that new page into the May 17 agreement. Thus, a recipient of a photocopy of the altered document would have no way of knowing that it had been altered and would conclude that there was an agreement dated May 17, 1997 between the Sienemas and South Bay to construct a new home for the price of $338,395 plus GST. As the contract itself did not describe the scope of the work, a recipient would not be aware that South Bay was neither building a finished basement nor entitled to receive more than $316,372.25 on completion of its work.

[87] On June 14, 1997, Mr. Sienema wrote to Mr. Anton, an independent adjuster retained by BCIC, stating that he and his wife had executed a contract to build a new home for the sum of $338,395 plus GST and that based on the contract, the building loss should be calculated as follows:

He enclosed the altered contract, not the original contract and Mr. Miller's quotation for the basement.

[88] Mr. Sienema and Mr. Anton had agreed, based on the quotation from On Side Restorations Ltd., that the reasonable cost of repair was $360,396.58. Mr. Sienema was aware that policy of insurance provided that the amount payable was the amount spent on repair or replacement of the building, to a maximum of $360,396.58. The minimum payable was actual cash value. What is of significance is that to recover $360,396.58, that amount had to be spent. It would have been spent if South Bay's quotation for finishing the basement had been accepted, as the total cost would have been $362,082.65. The May 17 contract, however, was for substantially less.

[89] Mr. Sienema acknowledged that he lied to BCIC. He testified, however, it had always been his intention to finish the basement. He suggested that South Bay was never so advised because the insurer's denial of coverage intervened.

[90] There are difficulties with his explanation. Coverage was denied in mid-August, two months after construction commenced. Mrs. Sienema's evidence was that she and her husband had discussed whether the basement should be finished, but had not reached a conclusion. Mr. Miller's evidence was that he needed to know whether his quotation was accepted prior to commencing the plumbing and electrical work. He believed he told Mr. Sienema that he had to know "shortly". Mr. Miller explained that he could not have done the work for the price quoted if the decision to finish the basement was delayed.

[91] Counsel for Mr. Sienema acknowledged that a false statement had been made, but argued it was not material. In Inland Kenworth v. Commonwealth, supra, materiality was discussed. It was stated, at 4:

[92] It was argued on behalf of Mr. Sienema that BCIC would not have paid out $360,396.58 simply on the basis of a statement from South Bay that the house had been completed in accordance with the May 17, 1997, contract. Further proof that this amount had been expended would have been required. However, the question is not whether a fraud based on the forged document would have succeeded. The issue is materiality. I agree with the submission of BCIC that the cost of repair/rebuilding was directly in issue and a false statement about the contract price bears directly upon the insured's entitlement under the policy. As such, it is material.

[93] The evidence of Mr. Anton and Ms. Ribeiro is also of relevance. Mr. Anton testified that if he had been presented with a letter from Mr. Miller stating that the home had been completed in accordance with the May 17 contract, he might have recommended to BCIC that the full amount be paid. Ms. Ribeiro testified that had she been presented with such a letter from South Bay and a recommendation from Mr. Anton that the claim be paid, she might have requested that someone drive by the home to confirm that it was completed, but probably would not have done more. The materiality of the fraud is confirmed by their evidence.

[94] I have not overlooked the argument of BCIC that Mrs. Sienema was complicit in this fraud. I unhesitatingly reject the submission that she created the forged contract at her husband's request. I do not agree that evidence given on her examination for discovery supports that argument. I accept her explanation that at her examination, she was presented with a contract that she had signed and did not realize she was looking at an altered version. She denied any involvement in the forgery and I accept her statement.

[95] Had it been necessary to do so, I would have concluded that the presentation of the altered contract amounted to a fraud by Mr. Sienema.

THE DECEMBER, 1997, AFFIDAVIT OF MRS. SIENEMA

[96] BCIC argued that an affidavit sworn December 30, 1997, by Mrs. Sienema contains a materially false statement. The affidavit is very brief. Mrs. Sienema deposed:

The affidavit was sworn at the request of counsel for the mortgage corporation and was to be used in support of its claim for rectification.

[97] I do not agree that the affidavit contains a false statement. Mrs. Sienema had no involvement in arranging this financing. She left such matters to her husband. The position of the Sienemas throughout the foreclosure proceedings has been consistent. They say the mortgage ought to be rectified. As argued on behalf of BCIC, the affidavit may violate Rule 51(10) which provides that an affidavit may state only what a deponent would be permitted to state in evidence at trial, except that statements made on information and belief are permitted so long as the source of the information and belief is given. However, the question is whether the affidavit contains a false statement. Even if Mrs. Sienema did not read Mr. Blake's affidavit or her affidavit, that cannot provide a basis to avoid the claim unless what she said was untrue.

[98] BCIC described the agreement as being a triparteid agreement as between Mr. Blake, Mr. Sienema and Mrs. Sienema. While Mrs. Sienema was the owner of the lands and premises, her husband was acting on her behalf. To read her affidavit as stating that she personally made an agreement is, in my view, to distort the words used.

I therefore reject the submission that this affidavit contains a materially false statement.

[99] There are four issues raised in respect of the claims of the bank and the mortgage corporation, as follows:

[100] The mortgage corporation seeks rectification of a mortgage number BJ14509.

[101] Although many authorities were referred to during argument, the applicable principles are well settled. In Bank of Montreal v. Vancouver Professional Soccer Ltd. (1987), 15 B.C.L.R. (2d) 34 (B.C.C.A.), McLachlin, J.A. (as she then was) discussed the remedy of rectification. She stated, at 36-37:

These statements have been referred to with approval in a number of subsequent authorities including I.C.R.V. Holdings Ltd. v. Tri-Par Holdings Ltd. (1994), 41 R.P.R. (2d) 312 (B.C.C.A.).

[102] BCIC does not dispute that the mortgage corporation instructed solicitors to prepare a mortgage in its favour and advanced funds based on the belief that such a mortgage was in place. The argument of BCIC is that there is not convincing proof that all parties to the contract were in agreement as to its essential terms and therefore, rectification cannot be granted.

[103] The argument of BCIC relies to some extent on the understanding of Mrs. Sienema, who was the mortgagor. (Mr. Sienema was a guarantor.) Mrs. Sienema testified that she was not aware of the existence of the mortgage corporation. Thus, it was argued that the mortgage as drawn was not in accord with her understanding of what was to occur. I do not agree that her lack of awareness of the existence of the mortgage corporation leads to the conclusion that the mortgage ought not to be rectified. What Mrs. Sienema understood was that financing had been arranged by her husband and her intention was to do whatever was necessary to obtain that financing. Mr. Sienema dealt with all business and financial matters on behalf of the family. Mrs. Sienema had no involvement in the negotiation of loans. In my view, it is clear that Mr. Sienema was acting on behalf of his wife, that he did so with her consent, and that she intended to be bound by the agreement he negotiated. It is therefore the evidence of Mr. Sienema and Mr. Blake, the loans officer with the bank who was assigned to deal with Mr. Sienema's account, that is of importance. The question is what agreement they made.

[104] Mr. Blake testified that he had dealt with Mr. Sienema in respect to three loans. In early 1994, Mr. Sienema borrowed $150,000 to purchase shares in the company for which he then worked. This loan was secured by a collateral mortgage over the Sienema home. Later in 1994, he dealt with Mr. Sienema in respect of another $150,000 loan, again from the bank, which was to be used for interim construction financing. It was also secured by a second collateral mortgage over the Sienema home.

[105] As to the mortgage in question, Mr. Blake had no specific recollection of his conversations with Mr. Sienema. He stated that it was his practice to advise customers of the advantages of conventional financing and explain that the mortgage would be with the mortgage corporation not the bank. He believed he followed his practice in this case. He made application to the mortgage corporation for the mortgage and in the application indicated that a portion of the funds was to be used to pay out the $150,000 construction loan. That one mortgage was replacing another was therefore certainly discussed with Mr. Sienema. I would add that as conventional financing was not offered by the bank, there is no question but that Mr. Blake did not say that the bank was to be the lender.

[106] Mr. Sienema testified that in respect of the construction of the family home, he initially dealt with Mr. Blake after the lot had been purchased. He advised Mr. Blake that they required funds for construction. A loan of $150,000 was arranged and it was agreed that when construction was complete, the mortgage corporation would provide $360,000 which would be used, in part, to discharge the indebtedness of $150,000. A conventional residential mortgage was to be granted. It was Mr. Sienema's evidence that he advised his wife of what was to occur, but did not discuss the distinction between the bank and the mortgage corporation.

[107] Documents prepared by Mr. Sienema are in accord with his evidence that he was aware that the lender was the mortgage corporation. The application for insurance dated August 5, 1996, referred to the mortgage corporation, which is why the policy of insurance issued by BCIC named the mortgage corporation. Mr. Sienema testified that after he lost his employment, he had difficulty meeting his financial commitments and sought to reduce mortgage payments. A letter dated November 8, 1996, to Mr. Blake states:

The proofs of loss also refer to the mortgage corporation.

[108] Although it is acknowledged that the solicitors who drafted the mortgage made an error, it is helpful to understand what occurred. The mortgage and other documents executed by the Sienemas were prepared by the law firm of Thompson McConnell. A letter dated December 6, 1994, provided instructions regarding the mortgage. This letter is on the letterhead of the mortgage corporation and included a request that the Sienemas sign an enclosed mortgage approval form, which also contained references to the mortgage corporation. That form was not, however, forwarded to the Sienemas.

[109] Thompson McConnell opened a file in the name of the bank, not the mortgage corporation. Presumably, it was simply assumed that the bank was the client and no one looked at the instruction letter or enclosed documents. The error went undetected, although there was correspondence with the mortgage corporation and funds were requisitioned from the mortgage corporation. The mortgage which was drafted described the lender as the bank, although the standard conditions appended to the mortgage are those of the mortgage corporation and include the words "CIBC Mortgage Corporation". A consent and an acknowledgement of receipt also referred to the bank. I accept the evidence of Ms. Mooney that the contents of the documents were explained to the Sienemas when they were signed.

[110] One of the submissions of BCIC is that Mr. Sienema would have questioned the identity of the lender when he signed these documents if he truly knew and believed that the lender was to be the mortgage corporation. I do not agree that it is "inherently incredible" that Mr. Sienema failed to raise a question. There was a lack of attention on the part of several individuals. The law firm retained by the mortgage corporation was remiss. When Mr. Blake received documents which showed the bank as mortgagee, he also failed to note that fact. Given that a legal assistant, a solicitor and a banker did not notice the error, it can hardly be incredible that Mr. Sienema did not question Ms. Mooney.

[111] It was also argued on behalf of BCIC that until August, 1996, when the application to BCIC was completed, Mr. Sienema's conduct was inconsistent with his professed belief that the mortgage corporation was to be the lender. In support of that assertion, reliance is placed upon endorsements and renewal documents issued by previous insurers, some of which refer to the loss payee as the bank. One difficulty with this documentation is that the first endorsement which indicates that loss is payable to anyone other than the insured is an endorsement effective December 12, 1994, which makes the loss payable to the mortgage corporation. Another endorsement effective December 30, 1994, also states that any building loss is payable to the mortgage corporation. To that point, however, the mortgage corporation had not provided funds to the Sienemas. Presumably, an error was made. An endorsement effective February 20, 1995, named the bank as loss payee. The policy in place until August, 1996, continued to name the bank as loss payee, although the mortgage which is sought to be rectified was granted in May, 1995. There is no evidence, however, as to why or on whose application the endorsements were issued.

[112] I conclude that the Sienemas intended to grant security to the entity which was advancing funds. Whether the lender was to be the bank or the mortgage corporation could not have been of significance to them and I doubt that either paid much attention to the identity of the lender. In my view, the question comes down to whether Mr. Blake stated that the mortgage corporation was to be the lender. I accept the evidence of Mr. Blake that it would have been his practice to do so. It also makes sense that he would have discussed with Mr. Sienema the difference between short term financing and long term conventional financing as it was intended that the collateral mortgage would be discharged from the proceeds of the conventional mortgage.

[113] As to Mr. Sienema's evidence, because his application to BCIC for insurance specifies the mortgage corporation as the loss payee, there can be no question but that in August, 1996, he believed that the mortgage corporation was the lender. In fact, all of the documents created by Mr. Sienema identify the lender as the mortgage corporation. I do not accept the submission of counsel for BCIC that this speaks only to Mr. Sienema's understanding of the lender at the time the documents were created and not what he understood between November, 1994, when financing was discussed with Mr. Blake and in May, 1995, when the mortgage was executed. In my view, the documents are relevant.

[114] Their relevance is apparent when one considers what would have occurred had the Sienemas argued against rectification. In such circumstances, Mr. Sienema undoubtedly would have been called upon to explain why the application made in August, 1996, the letter sent to Mr. Blake in November, 1996, and the proofs of loss filed in 1997 identified the mortgage corporation as the lender if that had not been his understanding during the relevant period of time. However, he was not asked these questions in these proceedings. In my view, his evidence that he always understood that the mortgage corporation was the lender is a credible explanation for why the documents refer to the mortgage corporation. I accept his evidence that the lender was discussed with Mr. Blake.

[115] BCIC also argued that it is of some significance that Mr. Sienema was not certain that the bank and the mortgage corporation were different legal entities and did not know the precise name of the mortgage corporation. In my view, what is significant is not his lack of certainty on these other matters, but the fact that he believed there was a distinction between the bank and the mortgage corporation.

[116] I am satisfied that there was discussion about agreement about the lender. The mortgage corporation has met the requirements for rectification and it is therefore entitled to an order amending the name of the mortgagee in mortgage no. BJ14509.

[117] Counsel for BCIC submitted that the mortgage corporation could recover only actual cash value, being $330,000.

[118] The nature and extent of a mortgagee's interest is discussed in Couch on Insurance 3D (1998), Vol. 12, para. 178 53: The authors state:

[119] The relevance of the date of the fire was confirmed in Market Furniture Ltd. v. Willann Enterprises Ltd. (1982) 34 B.C.L.R. 226 (B.C.S.C.).

[120] It was argued on behalf of the mortgage corporation that the standard mortgage clause contained in the policy of insurance does not limit the amount recoverable by the mortgage corporation. It does not contain the words "at the date of occurrence of the risk" or any other such words of limitation. The policy itself, however, contains provisions as to the amount payable. A standard mortgage clause creates an independent contract of insurance between the insurer and the mortgagee, but it does not exclude other policy provisions.

[121] I agree with the submission of BCIC that the amount payable is $330,000.

[122] The position of BCIC on the question of when interest begins to run was that it could not be earlier than October 6, 1998, when the foreclosure petition came on for summary trial. The mortgage corporation says that it began to run 60 days after the filing of the proof of loss. In the usual case, I would agree with counsel for the mortgage corporation. This case, however, is not usual. BCIC was at least entitled to additional information in respect of rectification. As there is no other basis on which to do so, I conclude that proof of the claim had been presented to BCIC on October 6, 1998.

[123] The position of the mortgage corporation is that the manner in which it was dealt with by BCIC demonstrated a pronounced lack of good faith and entitles it to damages.

[124] After the claims of the Sienemas were rejected, BCIC advised the mortgage corporation that it was required to file a proof of loss. I do not propose to deal with arguments as to whether there was a legal requirement to do so. Counsel for BCIC acknowledges that it is at least arguable that its position was incorrect. In any event, it is not that advice which is the focus of the mortgage corporation's claim, and information had to be provided regardless of whether a form was used.

[125] The claims of the Sienemas were not rejected until August, 1997. Mr. McLean, a solicitor who was retained to act on behalf of the mortgage corporation, was concerned about the lapse of time and quickly prepared and swore a proof of loss as agent for the mortgage corporation. The proof of loss sworn October 9, 1997, stated that the amount claimed was $370,000. As to replacement cost and cash value, Mr. McLean said "unknown at this time". The proof of loss had an attachment in which it was stated that as more information became available, a further proof would be provided, including details of the mortgage account. Mr. McLean also explained that a copy of the cover page of the policy of insurance had been requested from the insurer, but had not yet been received.

[126] BCIC responded that this proof of loss was woefully inadequate, which was something that Mr. McLean had obviously recognized. On October 20, 1997, Mr. Altridge, as counsel for BCIC, wrote to counsel stating that the proof of loss was grossly deficient and referring to the failure to provide information with respect to replacement cost, actual cash value and the extent of the interest of the mortgage corporation in the property as of the date of loss. His letter concluded:

[127] The tenor of this correspondence is surprising. BCIC understood that the mortgage corporation had had little involvement in the matter. It was critical of a failure to provide information as to replacement costs and actual cash value, yet three repair estimates had been prepared and provided to both the Sienemas and BCIC in January, 1997. These estimates had been reviewed and compared and it had been agreed by BCIC and Mr. Sienema that the estimate of On Side Restorations should be accepted for purposes of determining repair cost. To the knowledge of BCIC, the mortgage corporation could not have obtained any estimates in the fall of 1997 because the structure had been demolished and thus, it could not have provided additional information about replacement cost or actual cash value.

[128] On November 7, 1997, Mr. McLean, again as agent for the mortgage corporation, swore a second proof of loss. An explanatory schedule was attached, together with copies of the estimates of On Side Restoration Services Ltd., Cromwell Restoration Ltd. and Edenvale Restoration Specialists, the building contract, Mr. Sienema's June 14, 1997, transmittal letter to Mr. Anton, the mortgage, the foreclosure petition and certain other letters to and from Mr. Anton. The schedule erroneously stated that Mr. Sienema and Mr. Anton had agreed that $373,156.10 was payable in respect of the building. The schedule set out the amount owing to the mortgage corporation on the date of the fire and listed further costs which had been incurred. The mortgage corporation acknowledged that the sum of $140,000 received from BCIC should be deducted from the amount otherwise payable under the claim.

[129] On the issue of rectification, Mr. McLean stated than an error had been made in naming the bank. The mortgage was on the mortgage corporation's form of mortgage, including the standard mortgage terms, and had always been administered by the mortgage corporation. Mr. McLean asserted that rectification was being sought in the foreclosure action, which was apparent from the pleadings.

[130] The response to this proof of loss was a request that Mr. McLean submit to an examination under oath and a suggestion to him that he consider obtaining legal advice from counsel experienced in insurance matters. Mr. McLean responded by letter dated December 12, 1997, stating that instructions were being sought in respect of Mr. Altridge's request. He asked for particulars of the areas of concern in respect of the proof of loss. The letter noted:

[131] The response from Mr. Altridge to Mr. McLean included the following:

[132] To comment on Mr. Altridge's letter, I do not understand the statement that the mortgage corporation's assertion that it held a mortgage was fraud or a wilfully false statement, at least as the authorities define those words. Nor do I understand how the amount claimed could be described in that fashion. There may, for example, be disputes about the amount payable, but a disagreement about whether that amount is actual cash value, repair or replacement cost or the outstanding indebtedness cannot be categorized as a fraud or wilfully false statement.

[133] It is not surprising that matters went downhill. BCIC was called upon to respond to the proof of loss within time limits. On January 7, 1998, BCIC advised that it was not prepared to honour the claim based on the information provided. The concern that there may be fraud or wilfully false statements and the proof of loss was repeated. BCIC stated its position that the claim must be based on actual cash value and the proof of loss contained no valuation of the claim on that basis. The areas of concern regarding "possible fraud or wilfully false statements" were said to include the following:

1. The amount of the loss claimed is $372,321.65 when the said sum:

(a) is based on the cost of building a new structure which has not in fact been constructed;

(b) includes the cost of repair or replacement of property which is not secured by the subject mortgage nor covered by the building portion of the Policy, namely "window coverings";

(c) exceeds the cost of repairing the damage sustained by the subject building in the fire;

(d) exceeds the amount owing on the subject mortgage;

(e) exceeds the limits of liability under the Policy;

(f) fails to account for the sum of $143,398.23 already advanced;

(g) fails to account for the sum of $7,149.00 retained by the CIBC Mortgage Corporation.

2. The Proof of Loss represents that the "CIBC Mortgage Corporation holds a mortgage on the property" when:

(a) the mortgage registered against the subject property is in the name of Canadian Imperial Bank of Commerce;

(b) there is no evidence in support of the further representation that the naming of the said Bank "was in error" and in particular, there is no information, documentary or otherwise, identifying when and by whom the alleged error was made;

(c) there is no indication that the deponent of the Statutory Declaration has any means of knowledge regarding such matters.

It may well be that our client's concerns about the possibility of fraud prove to be without substance. The issue, however, appears to turn on whether the deponent of the Proof of Loss, Mr. McLean, had an honest belief that a claim in excess of policy limits, etc. could be maintained and in that regard we have requested the opportunity to question Mr. McLean regarding these matters, but our request has effectively been refused.

[134] Again, I frankly cannot understand why BCIC responded in that way. Speaking generally, a proof of loss is intended to provide to an insurer the information necessary to assess the claim. The mortgage corporation necessarily had to rely on information collected from others. On the other hand, BCIC possessed all the information necessary to calculate actual cash value and that information had been in its possession for almost one year.

[135] It is surprising that an insurer would suggest that it is fraudulent, rather than simply erroneous, to include a sum for window coverings when calculating loss. If BCIC felt any such items should be deleted, it should simply have said so. Further, it was obvious from the statements in the schedule which were appended to the second proof that the mortgage corporation acknowledged receipt of $140,000.

[136] As to the fact that the mortgage named the bank as mortgagee, it was surely clear to BCIC that in stating that the bank had been named in error, Mr. McLean was stating his conclusions as neither he nor his firm had been involved. Although BCIC was not given enough information to allow it to draw its own conclusions, it defies understanding to suggest that this could be indicative of a fraud in these unusual circumstances.

[137] The approach taken by BCIC to the claim of the mortgage corporation can be illustrated by Ms. Ribeiro's evidence about the $140,000 advance. On the standard form proof of loss document, there is a blank space for the deponent to fill in the amount claimed. When Mr. McLean did so, he did not subtract $140,000. Rather, in his narrative, he stated that this amount was to be credited. Ms. Ribeiro nevertheless insisted that the mortgage corporation was claiming an amount it had already received, a position which I must regretfully describe as foolish. She further testified that an additional reason for rejecting the proof of loss was that it did not give sufficient information about the outstanding indebtedness. Although asked many times and in many ways, she could not say specifically what was lacking or conversely, what would have been sufficient. The reason for concern was therefore never delineated.

[138] I agree with the submission of the mortgage corporation that the correspondence from BCIC was inflammatory and most issues could have been resolved by a simple telephone call or a polite letter. I agree that there was absolutely no basis to suggest that the mortgage corporation was trying to defraud BCIC. Nevertheless, assuming that it has an action for bad faith, I do not agree that it was a breach to require the mortgage corporation to engage in legal proceedings, which is the argument advanced.

[139] By the end of 1997, BCIC had realized that Mr. Sienema had altered the contract with South Bay. It had reason to be concerned that the schedule of loss contained grossly inflated values. Necessarily, Mr. McLean's belief that the mortgage should be rectified depended, in part, upon the evidence of the Sienemas. BCIC was entitled to inquire about the basis of the claim for rectification and to consider whether the remedy was available as it was acknowledged by the mortgage corporation that its claim under the standard mortgage clause could not succeed unless rectification was ordered. While the way that BCIC dealt with the proofs of loss is regrettable, it is not my view than an entitlement to damages has been made out.

[140] South Bay argued that the collateral mortgage held by the bank does not secure any "indebtedness" as defined by the mortgage. Indebtedness includes demand promissory notes, personal loan promissory notes and any note taken in renewal or replacement.

[141] South Bay's argument relates to the loan given to Mr. Sienema by the bank to finance the purchase of shares ("the share loan"). The share loan was secured by a promissory note. Additional security in the form of a mortgage was required and mortgage no. BH442360 was granted by Mrs. Sienema. On May 30, 1997, the bank debited the account of the Sienemas in the amount of $150,708.90 which was the amount outstanding on the share loan.

[142] The debiting of the Sienemas' account occurred by reason of an error made by Mr. Atkinson, a bank employee. When Mr. Blake left the branch, Mr. Atkinson assumed responsibility for some of his files. Mr. Atkinson testified that he was not familiar with the flagging system for personal loans and therefore did not appreciate that he was required to review the share loan. Because of his inactivity, the Sienemas' account was debited. Because of the size of the debit, it came to his attention and it was then that he learned of the error. He attempted to reverse the entry but the bank's computer system rejected his attempts. His ultimate solution was to make application for a new loan. The Sienemas were unaware of the application.

[143] On July 2, 1997, a promissory note was forwarded to the Sienemas for execution. South Bay argues that although the covering letter stated that consumer loan number 4184636188, being the share loan, was to be renewed, Mr. Atkinson knew that this loan could not be renewed and in fact, he subsequently applied for the new loan and approval was granted on July 23. It was argued that this new loan was in Mr. Sienema's name, that the bank has failed to prove that Mrs. Sienema is liable and that there is no indebtedness secured by the mortgage in question.

[144] The response of the bank is that the payout was not authorized. The sole reason for the debit to the Sienemas' account was Mr. Atkinson's error. Mrs. Sienema, through her husband, agreed to provide a collateral mortgage for the share loan, the money was advanced and has not been repaid and there is a promissory note which evidences the debt.

[145] I agree with the argument advanced on behalf of the bank. In substance, nothing changed. Mr. Atkinson did what he felt was necessary to correct his error, but that could not affect the original contract between the parties. If the argument of South Bay is that the bank altered the loan agreement without the consent of all parties, I cannot agree. In my view, the mortgage secures the outstanding indebtedness in respect of the share loan.

[146] It is my understanding that having dealt with four issues raised in respect of the claims of the bank and mortgage corporation, counsel are agreed on the orders which follow, including the balance of the relief claimed in Action No. H970993. If issues arise as a result of the accounting, further submissions may be made. As to South Bay, it is agreed that it is entitled to a declaration that its lien is valid, although the amount has yet to be determined.

[147] Also by agreement, costs were not addressed. If that issue cannot be resolved by the parties, submissions may be made orally or in writing.

"K.M. Gill, J."
The Honourable Madam Justice K.M. Gill