A Video Explaining the Union or Standard Mortgage Clause

The Mortgage Clause to a Property Insurance PolicyShow more

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. 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

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).

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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