Loss Payee / Mortgagee Clause
The loss payee / mortgagee clause protects the interest of a mortgagee or other loss payee in the insurance proceeds by making its claim, to varying degrees, independent of acts or breaches of duty by the policyholder.
- Clause type
- Condition
- Origin/Market
- International programme
- Favours
- Neutral
- Negotiability
- Market standard
Purpose
Where a bank or other creditor finances the acquisition or construction of a building, it has an independent interest in ensuring that insurance proceeds are actually available, in the event of a loss, to reinstate the secured property or repay the loan. The loss payee / mortgagee clause creates, in effect, a separate form of cover for the named creditor, independent of the contractual relationship with the policyholder.
Effect and limits
In its simple form (the “open” or loss payable clause), the creditor is merely a payee; its claim is entirely dependent on the policyholder’s rights, so the same defences (for example breach of the duty of disclosure or deliberate arson) can be raised against it. The “standard” or “union” mortgagee clause goes considerably further: it creates a separate contract between insurer and creditor under which the creditor’s claim is generally unaffected by acts or omissions of the policyholder – such as vacancy or an increase in risk – provided the creditor fulfils its own obligations (paying the premium if the policyholder defaults, notifying known changes in risk, and giving timely notice of loss). The insurer must also give the creditor advance notice of cancellation or non-renewal of the policy.
Negotiation and practice
Lenders reviewing evidence of insurance should check carefully whether a simple loss payable clause or a full standard mortgagee clause has been agreed, since only the latter provides effective protection against breaches of duty by the borrower. Policyholders, in turn, should be aware of their own notification and cooperation obligations, since the insurer will typically be subrogated to the creditor’s security rights over the mortgaged property once it has paid the creditor.