Standard Mortgage ClauseArchived Article
When writing property insurance, the agent must be sure that all interests are properly covered. If there is a mortgage on the property, the mortgage holder must be listed. If there is more than one mortgagee, they must be listed in order.
It is important to rememberand to explain to the customerthe difference between mortgagee and loss payee. The standard mortgage clause sets up a separate and distinct contract between the mortgage holder and the insurance company. It says that nothing the insured does will prevent the mortgagee from collecting under the policy. In other words, if the insured burns his house down and the company can prove it, the insured will not collect anything. However, the insurer must still pay the mortgagee the remaining amount on the mortgage, up to the limit of liability on the policy.
A loss payee, on the other hand, has no more rights under the policy than does the insured. The lien holder on a car is a loss payee. In this case, if the insured burns up his car and the company can prove it, the insured will not collect and neither will the lien holder.
There is disagreement among courts as to whether or not a mortgagee must meet the other terms of the policy, such as examination under oath, proof of loss, etc. (See [IDL:The Standard Mortgage Clause] .) The best advice is if the company requests it, encourage the mortgagee to cooperate.
One problem often encountered is that many banks and mortgage companies sometimes require little, or no, downpayment. Or, the price of the property far outstrips the actual replacement cost. However, the lending institution still demands an insurance policy written for the amount of the loan.
Agents should work up a good replacement cost estimate and send it to the mortgagee, along with an explanation that the interests of both the customer and the mortgage company are fully protected. To write a policy for an amount significantly greater than replacement cost is to set up a moral hazard. In fact, in some states by law an insurance company cannot be forced to issue a homeowners policy for more than replacement cost.