Commercial Property Policy
Protection for Third Parties (Mortgagees)
As a general rule, losses under insurance policies are payable to the
insured named in the policy. The widespread practice of mortgaging real
property as security for a loan has brought into use a special clause
which modifies the policy in this respect - a Mortgageholder clause. The
clause also can be utilized for the benefit of trustees.
All policies covering buildings provide a space to insert the name of the
mortgagee or trustee, if any. When the name of a mortgageholder is
included in the policy, it brings into action the Mortgageholder clause
which appears in all building forms, and the provisions of the policy on
"Mortgageholder Interests and Obligations."
The Mortgageholder clause sets up a separate contract between the
insurance company and the mortgageholder. The clause grants the
mortgageholder specific protection and imposes certain requirements on
it.
Benefits Received by Mortgageholder:
1. Any loss on the property is payable to it, as its interest may appear.
2. If the company wishes to cancel the policy, it must give the
mortgageholder, or trustee, 30 days' notice, except if the cancellation is
being made for nonpayment of premium, in which case, only 10 days'
notice is required.
NOTE: Since the mortgageholder usually retains the original policy, the
insured cannot cancel without the mortgageholder's consent.
3. The mortgageholder's protection will not be affected by any act or
neglect of the owner, unless the mortgagee is aware of such actions on
the part of the insured. Thus, an insured may cause the suspension of
his or her policy by increase of hazard, or by vacancy or unoccupancy
of the premises beyond the permitted period. He may neglect to protect
and preserve the property from further loss at or after the time of a loss.
Under these and similar situations, the insured may be unable to collect
under his or her policy; but any mortgageholder named in the policy will
continue to be fully protected to the extent of its interest in the property.
NOTE: If the company, in a particular loss, claims that it has no liability to
the insured because of some act or neglect committed by him or her, and
the company pays the mortgageholder because of the protection
afforded it by the Mortgageholder clause, the company will be
subrogated to the claim of the mortgagee against the owner under its
mortgage.
Furthermore, the company has the option of paying off the balance of the
mortgage and receiving a full assignment of the mortgage.
Thus, assume Jones' building worth $100,000 is mortgaged to a bank
under a $60,000 mortgage. Jones carries a policy of $50,000 with a
Mortgageholder clause. A fire breaks out and does $30,000 of damage
to the property. The insurance company will pay $30,000 in a check
made payable to the bank and to Jones, as their interests may appear.
The bank either will endorse the check over to Jones, who then can use
the money to rebuild the property, or will credit him with $30,000 in
reduction of his mortgage.
Suppose, however, that Jones had violated the terms of his insurance
policy and the company disclaims any liability to him. Since the
Mortgageholder clause protects the mortgageholder to the extent of its
interest, despite any act on the insured's part, the company will pay the
bank $30,000 in settlement of the loss. The mortgagee will not credit
Jones with any of this money, since Jones was not entitled to protection
under the policy.
In this type of situation, the insurance company is legally subrogated to
the extent of its payment to the mortgageholder and is entitled to recover
$30,000 from the owner, Jones, after the bank has received the balance
of its money from Jones. Thus, Jones, the owner, loses $30,000, since
he had no protection to cover the loss; and settlement is made with the
mortgageholder bank as though there were a separate contract between
the insurance company and the bank.
4. The mortgageholder is protected against voidance of the policy by
foreclosure, change in title, or ownership, unless it is aware of such
change.
5. If the owner fails to furnish a proof of loss within the prescribed time,
the mortgagee may file.
6. The mortgageholder may sue on the policy in its own name.
Obligations Imposed on the Mortgageholder:
1. If the insured fails to pay the premium, the mortgageholder shall, on
demand, pay the premium; otherwise, it forfeits the protection afforded
under the Mortgageholder clause.
PACIFIC COAST TERRITORY - The standard Mortgagee clause used in
this territory obligates the mortgageholder to pay the premium if the
insured fails to do so.
2. The mortgageholder is required to notify the company of any changes
in ownership or increase in hazard of which it has knowledge.
3. The mortgageholder is required to furnish proof of loss if the insured
fails to do so.
4. The mortgagee is bound by the time to file suit.
5. The mortgageholder is bound by the appraisal provisions of the policy.
NOTE: Several cases decided recently indicate that the mortgageholder is
not bound by the appraisal provisions of the policy unless it is actually a
party to the appraisal.
6. Where a policy is subject to coinsurance, the mortgageholder is bound
by the coinsurance provisions of the policy.
LOSS PAYABLE CLAUSE
Other clauses are sometimes used under which it is agreed that loss will
be payable to a third party instead of the insured. These clauses read
simply, "Loss, if any, shall be payable to……" or "Loss, if any, shall be
adjusted with and payable to " Under this type of Loss Payable clause,
the mortgageholder places itself in the same position as the insured. It is
not immune to acts of the insured as it is under the terms of a
Mortgageholder clause.
There are also loss payable clauses available under policies covering
chattels which do give the lender special protection along the lines of the
Mortgageholder clause.
NEW YORK - All policies (other than those covering one- or two-family
dwellings) include a statement notifying the insured that a tax district may
be entitled to the proceeds of the policy in the event of a loss if there is a
tax lien against the property.
Lender's Loss Payable Clause - A second Loss Payable clause is
available to lenders under warehouse receipts, bills of lading, contracts,
etc. Under this type of clause, the lender is immune to acts or breaches
of policy conditions by the insured, provided that the lender was
unaware of such acts or breaches.
Loss Payable Clause-Contract of Sale - A third form of a Loss Payable
clause is available when the property is being transferred by sale.It
provides coverage for the future buyer, as his or her interest may
appear.
Protection for Third Parties (Mortgagees)
As a general rule, losses under insurance policies are payable to the
insured named in the policy. The widespread practice of mortgaging real
property as security for a loan has brought into use a special clause
which modifies the policy in this respect - a Mortgageholder clause. The
clause also can be utilized for the benefit of trustees.
All policies covering buildings provide a space to insert the name of the
mortgagee or trustee, if any. When the name of a mortgageholder is
included in the policy, it brings into action the Mortgageholder clause
which appears in all building forms, and the provisions of the policy on
"Mortgageholder Interests and Obligations."
The Mortgageholder clause sets up a separate contract between the
insurance company and the mortgageholder. The clause grants the
mortgageholder specific protection and imposes certain requirements on
it.
Benefits Received by Mortgageholder:
1. Any loss on the property is payable to it, as its interest may appear.
2. If the company wishes to cancel the policy, it must give the
mortgageholder, or trustee, 30 days' notice, except if the cancellation is
being made for nonpayment of premium, in which case, only 10 days'
notice is required.
NOTE: Since the mortgageholder usually retains the original policy, the
insured cannot cancel without the mortgageholder's consent.
3. The mortgageholder's protection will not be affected by any act or
neglect of the owner, unless the mortgagee is aware of such actions on
the part of the insured. Thus, an insured may cause the suspension of
his or her policy by increase of hazard, or by vacancy or unoccupancy
of the premises beyond the permitted period. He may neglect to protect
and preserve the property from further loss at or after the time of a loss.
Under these and similar situations, the insured may be unable to collect
under his or her policy; but any mortgageholder named in the policy will
continue to be fully protected to the extent of its interest in the property.
NOTE: If the company, in a particular loss, claims that it has no liability to
the insured because of some act or neglect committed by him or her, and
the company pays the mortgageholder because of the protection
afforded it by the Mortgageholder clause, the company will be
subrogated to the claim of the mortgagee against the owner under its
mortgage.
Furthermore, the company has the option of paying off the balance of the
mortgage and receiving a full assignment of the mortgage.
Thus, assume Jones' building worth $100,000 is mortgaged to a bank
under a $60,000 mortgage. Jones carries a policy of $50,000 with a
Mortgageholder clause. A fire breaks out and does $30,000 of damage
to the property. The insurance company will pay $30,000 in a check
made payable to the bank and to Jones, as their interests may appear.
The bank either will endorse the check over to Jones, who then can use
the money to rebuild the property, or will credit him with $30,000 in
reduction of his mortgage.
Suppose, however, that Jones had violated the terms of his insurance
policy and the company disclaims any liability to him. Since the
Mortgageholder clause protects the mortgageholder to the extent of its
interest, despite any act on the insured's part, the company will pay the
bank $30,000 in settlement of the loss. The mortgagee will not credit
Jones with any of this money, since Jones was not entitled to protection
under the policy.
In this type of situation, the insurance company is legally subrogated to
the extent of its payment to the mortgageholder and is entitled to recover
$30,000 from the owner, Jones, after the bank has received the balance
of its money from Jones. Thus, Jones, the owner, loses $30,000, since
he had no protection to cover the loss; and settlement is made with the
mortgageholder bank as though there were a separate contract between
the insurance company and the bank.
4. The mortgageholder is protected against voidance of the policy by
foreclosure, change in title, or ownership, unless it is aware of such
change.
5. If the owner fails to furnish a proof of loss within the prescribed time,
the mortgagee may file.
6. The mortgageholder may sue on the policy in its own name.
Obligations Imposed on the Mortgageholder:
1. If the insured fails to pay the premium, the mortgageholder shall, on
demand, pay the premium; otherwise, it forfeits the protection afforded
under the Mortgageholder clause.
PACIFIC COAST TERRITORY - The standard Mortgagee clause used in
this territory obligates the mortgageholder to pay the premium if the
insured fails to do so.
2. The mortgageholder is required to notify the company of any changes
in ownership or increase in hazard of which it has knowledge.
3. The mortgageholder is required to furnish proof of loss if the insured
fails to do so.
4. The mortgagee is bound by the time to file suit.
5. The mortgageholder is bound by the appraisal provisions of the policy.
NOTE: Several cases decided recently indicate that the mortgageholder is
not bound by the appraisal provisions of the policy unless it is actually a
party to the appraisal.
6. Where a policy is subject to coinsurance, the mortgageholder is bound
by the coinsurance provisions of the policy.
LOSS PAYABLE CLAUSE
Other clauses are sometimes used under which it is agreed that loss will
be payable to a third party instead of the insured. These clauses read
simply, "Loss, if any, shall be payable to……" or "Loss, if any, shall be
adjusted with and payable to " Under this type of Loss Payable clause,
the mortgageholder places itself in the same position as the insured. It is
not immune to acts of the insured as it is under the terms of a
Mortgageholder clause.
There are also loss payable clauses available under policies covering
chattels which do give the lender special protection along the lines of the
Mortgageholder clause.
NEW YORK - All policies (other than those covering one- or two-family
dwellings) include a statement notifying the insured that a tax district may
be entitled to the proceeds of the policy in the event of a loss if there is a
tax lien against the property.
Lender's Loss Payable Clause - A second Loss Payable clause is
available to lenders under warehouse receipts, bills of lading, contracts,
etc. Under this type of clause, the lender is immune to acts or breaches
of policy conditions by the insured, provided that the lender was
unaware of such acts or breaches.
Loss Payable Clause-Contract of Sale - A third form of a Loss Payable
clause is available when the property is being transferred by sale.It
provides coverage for the future buyer, as his or her interest may
appear.
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MY Insurance Agency
The materials on this page is meant to be
informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.
informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.