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Property Insurance & the Mortgage Clause
Contract language used in almost every state protects the mortgagee even when the named insured commits arson or in some other manner intentionally damages the property that is the subject of the insurance.[1] The language of the standard mortgage clause exempts the named mortgagee from wrongful acts or omissions of the named insured.
The courts consider a mortgagee clause to be a separate policy of insurance. The insurer generally has the burden of proving the fact of fraud and, if it wants to deny the claim to the mortgagee, must prove that the mortgagee was actively involved in the fraud.[2]
The standard language states, in part:
The insurance under this policy, or any rider or endorsement attached thereto, as to the interest only of the Lender…shall not be invalidated nor suspended: (a) by any error, omission, or change respecting the ownership, description, possession, or location of the subject of the insurance or the interest therein, or the title thereto;…or whether before or after a loss, which under the provisions of this policy of insurance…would invalidate or suspend the insurance as to the named insured, excluding here from, however, any acts or omissions of the Lender while exercising active control and management of the property.[3]
With such wording, even if the insurer establishes that the named insured committed arson-for-profit, it must still pay the mortgagee unless it was involved in the arson. The insurer can, however, limit its payment to the interest of the lender and obtain from the lender an assignment of the mortgage.
When a standard mortgage clause is included in an insurance commitment, courts treat the policy as involving two contracts of insurance, “one with the lienholder and the insurer and the other with the insured and the insurer.” [Foremost Ins Co v Allstate Ins Co, 439 Mich 378, 384; 486 NW2d 600 (1992).] The insurer agrees to insure a single property against specified losses and, through the standard mortgage clause, undertakes separate contractual duties governing to whom the proceeds of the policy are payable in the event of loss. [Better Valu Homes, Inc v Preferred Mut Ins Co, 60 Mich App 315, 319; 230 NW2d 412 (1975); Auto Club Grp. Ins. Co. v. Louis (Mich. App., 2019)]
This provision is a “standard mortgage clause” or “union mortgage clause,” in that it allows the mortgageholder to recover in some circumstances when the insured cannot. (Allen v. St. Paul Fire & Marine Ins. Co., 167 Minn. 146, 208 N.W. 816, (1926)) (discussing the distinction between a union mortgage clause and an open mortgage clause).
A standard mortgage clause creates an independent contract between the insurer and the mortgagee that prevents the mortgagee’s interest from being invalidated by the conduct of the mortgagor.” For example, if the mortgagor sets fire to his own building, the mortgagee can still recover under a standard mortgage clause. [Commerce Bank v. West Bend Mut. Ins. Co., 870 N.W. 2d 770 (Minn. 2015)]
The standard mortgage clause creates two contracts of insurance within the policy — one with the lienholder and the insurer and the other with the insured and the insurer; as a result, the mortgagee has an independent contract with the insurer which cannot be defeated by improper or negligent acts of the mortgagor. (Najah v. Scottsdale Insurance Company, 230 Cal. App. 4th 125, 178 Cal. Rptr. 3d 400 (2014))
A union or standard mortgage clause becomes, by statute, a part of every fire-insurance policy written in Mississippi. [Carter v. Allstate Indem. Co., 592 So. 2d 66, 71 (Miss. 1991)]. The purpose of the clause is to protect the mortgagee from loss occurring after the mortgagor or owner has caused a lapse in insurance coverage. [James Allen Ins. Brokers v. First Fin. Bank (Miss., 2019)]
The Secured Lenders provision is a form of a “standard mortgage clause” that may provide a mortgagee or other secured lender with insurance coverage even where the property owner has no right to collect from the insurer. [Gibraltar Financial Corp. v. Lumbermens Mut. Gas. Co., 400 Mass. 870, 871 (1987).]