I believe the loan can be characterized as a chattel mortgage. My view is that a mortgagee can be on either real or personal property, it just needs to be some type of secured loan.

— Louisiana Subscriber

Answer: We agree with your view. In the ISO Mortgageholders E&O Coverage Form, CP 00 70, “mortgageholder's interest” is defined as “your interest, as mortgageholder, in real or personal property, including your interest in any legal fiduciary capacity.” This acknowledges that the property can be real or personal. There is nothing in the ISO Commercial Lines Manual rules stating that a mortgage must be only on real property, so it is our opinion that it can be on real or personal property.

Mortgagee subject to policy provisions

Question: If the insured is in violation of the policy's coinsurance clause and his loss settlement is being reduced as a result, how does that affect a mortgagee listed on the policy?

Here is an example: The value of the building at the time of loss is $1,000,000; coinsurance required is 80 percent; the amount actually carried at the time of loss is $400,000; amount of loss to building is $600,000. In this case, the insured would be 50 percent underinsured and would receive $300,000 But, the bank, which is named on the policy as mortgagee, has a $400,000 outstanding loan. How much will the bank be paid?

— Michigan Subscriber

Answer: Typically, both the insured's and the bank's names will be on the check, and the bank will take its share first. But, the bank is bound by the terms of the policy, including the coinsurance clause. So, the most the bank could be paid is the $300,000 available.

Mortgagee clause applied in foreclosure

Question: We insure a large property valued at over a million dollars. The mortgagee foreclosed on the property. Shortly after this, there was a fire and nearly $700,000 in damage resulted.

What is the extent of the obligation of the insurance company to the owner of the property after the mortgage company has obtained foreclosure?

— New York Subscriber

Answer: The insurer's obligation to the mortgage company is determined not so much by the value of the loss as the amount of debt owing on the mortgaged property. That is the mortgage company's insurable interest. Presumably, the debt in this case is in excess of the $700,000 loss.

The insurer's obligation to the named insured owner is the value of the loss limited to the (former?) owner's insurable interest. And if the owner can show any insurable interest at all, we believe the insurer may be courting legal jeopardy to issue a draft payable only to the mortgage company. In fact, this is so much more a matter of law than of insurance, we would counsel insurance people to leave it to the lawyers.

Mortgagee's claim covered?

Question: We received a call from a mortgagee. The insured defaulted on the loan, and the mortgagee foreclosed on the home. When an inspector from the mortgage company arrived, he found that the insureds had moved out, and the home had been vandalized. The company submitted a claim to us, but it appears that the home had been vacant for more than 30 days prior to the loss.

Do we owe for this loss? The insured had an ISO HO 00 03 04 91.

— California Subscriber

Answer: In order for the insurer to respond to a valid claim, the mortgagee must carry out three conditions. The mortgagee must: (1) notify the insurer of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware; (2) pay any premium due on demand if the mortgagee has neglected to pay the premium; and (3) submit a signed, sworn statement of loss within 60 days after receiving notice from the insurer that no statement has been received.

The coverage question then turns on whether the claim is valid from the standpoint of the mortgagee. The policy precludes coverage for vandalism if the dwelling has been vacant for more than 30 consecutive days immediately before the loss. Does this exclusion also then apply to the mortgagee's claim? We do not think it does.

Many courts are of the opinion that the mortgagee clause operates as a separate contract with the mortgage holder. See, for example, Travers v. Universal Fire & Casualty Insurance, 34 S.W.3d 156 (Mo. Ct. App. 2000): “Because the union mortgage clause is an independent contract between the mortgagee and the insurance company, the mortgagee is protected against loss from any act or neglect of the mortgagor or owner, so that it shall not defeat the insurance so far as the interest of the mortgagee is concerned.” So, the “act or neglect” on the part of the insured was to leave the premises vacant, but this act should not preclude coverage for the mortgagee.

The mortgagee submitted the appropriate statement of loss, and notified the insurer as soon as it learned the insured had vacated the property. A notice of foreclosure does not necessarily mean the premises are immediately vacated. And, the foreclosure does not constitute a “change in ownership” according to the case cited above; the court in Travers noted that “a mortgagee's purchase of the insureds' property at a foreclosure sale was not a 'change in ownership' within the meaning of a union mortgage clause requiring the mortgagee to notify the insurer of any change in ownership.” How much more valid, then, is the mortgagee's claim in your situation, when the foreclosure sale has not yet taken place. Bottom line, the loss is covered.

See also:

Understanding debris removal coverage, costs and settlements

Garbage mistakes spur peculiar property damage claims

What's the effect of government activity on insurance coverage?