Benefit of the policy
Banfield v Leeds Building Society
 EWCA Civ 1369
Can the borrower take the benefit of a mortgage indemnity policy? Can a cross-claim for damages discharge the mortgage debt? No to each.
In 1984 borrowers (B) obtained an offer of mortgage from lender (L) for £30,000 repayable over 25 years. The offer required an endowment policy with Abbey Life to be assigned to L as further security and was also subject to two mortgage indemnity guarantee policies – one with Sun alliance, and the other also with Abbey Life “that in the event of L exercising its powers of sale and there being a deficiency, Abbey Life will pay to L an additional surrender value of the endowment policy charged to L”.
Arrears accrued from 1990 onwards, and in total L brought five sets of mortgage possession proceedings, the first four of which were adjourned following payment by B. However, in the fifth action, B raised a number of issues concerning the validity of the security and the conduct of the account including the conversion of the account from interest-only to repayment, and problems with the surrender of the life policies.
When the trial judge disposed of the various points, B put forward proposals for clearing the arrears and alleged that there were no arrears because L was able to take advantage of the mortgage indemnity guarantees. The judge decided that the Abbey Life guarantee had been taken for the benefit of L and that it was not required to account to B (citing Bristol & West Building Society v May, May & Merrimans  1 WLR 336 at 346-7). B appealed on this and other points.
In giving limited permission to appeal, Chadwick LJ said that it was not clear why no claim had been made by L under the Abbey Life guarantee and that it was possible that had a claim been made the amount received may have been sufficient to eliminate the arrears.
B’s argument was that the premium paid to L for the mortgage guarantees gives rise to a right in B to claim under the guarantees through L.
The judge was right to apply the principle that a person who has the benefit of a mortgage guarantee is not liable to account.
In Woolwich Building Society v Brown  CLC 625, Waller J had held that a mortgage indemnity policy was not a contract of guarantee but an insurance contract. The mortgagor’s debt was not discharged by the payment from the insurance company to the society, and the mortgagor was not entitled to credit for any sum paid or payable by the insurers. The result was not affected by the fact that the mortgagor had to pay the premium.
Commenting on Bristol & West Building Society v May, May & Merrimans in which Chadwick J said that he did not think it was helpful to attempt to categorise the arrangement as a ‘guarantee’, an ‘indemnity’ or ‘insurance’, it was held that if the contract is one of guarantee the right of the guarantor against the borrower is a right of indemnity. If it is a contract of insurance, then the right of the insurer would be based on its right of subrogation. But in either case the borrower cannot be heard to say, as against the lender, that the debt is reduced by the guarantor/insurer’s payment under the mortgage guarantee.
This case possibly would not have got this far had it not been for Chadwick LJ’s concern about what L was actually doing with the policy. His, and the borrowers’ concerns are understandable. In the absence of interesting points of insurance/subrogation law, what actually is the point of having a policy? Lenders can and should do much more to explain the workings of MIGs when they sell the mortgage product.
The Court of Appeal also revisited the issue as to whether a cross-claim for damages might discharge the mortgage debt, and said this:
“Even if [B] had an unliquidated cross-claim against [L] for failure to surrender the policy, it would not discharge the mortgage debt: Samuel Keller (Holdings) Ltd v Martins Bank Ltd  1 WLR 43, 51. This has been said to apply even if the cross-claim is liquidated and admitted: Mobil Oil v Rawlinson (1981) 43 P & CR 221, 226. But whether the result is the same for equitable set-off in the case of a liquidated or quantified sum has been left open: National Westminster Bank v Skelton  1 WLR 72, 78; Ashley Guarantee Plc v Zacaria  1 WLR 62, 66”.Finally, a word of warning to litigants in person and vexatious litigants! Bearing in mind that this was the fifth mortgage possession action to come before the court, and that on this occasion, the trial judge had to deal with a “vast number of points”, all of which were dismissed, at great additional cost, Lawrence Collins LJ had this to say:
“Had Mr & Mrs Banfield devoted as much effort to keeping up the mortgage payments, as they have devoted to this litigation, they would not be in the position they are”.
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