The Rights of Mortgagees

A Video Explaining the Union or Standard Mortgage Clause

Since properties are frequently encumbered by mortgages, most first party property policies contain provisions that protect the mortgagee’s interest in the event the insured property is damaged or destroyed.

Historically there have been two types of mortgage clauses:

a loss payable or open mortgage clause, which only provides that loss shall be payable to the mortgagee as interest may appear. Most courts have construed the phrase, “as interest may appear” as referring not to the mortgagee’s interest in the insured property, but rather to the amount of debt owed to it secured by the mortgage or deed of trust.
the standard or union mortgage clause (Form 438 BFU NS), which states, in addition to the loss payable provision, that the mortgagee’s interest in the proceeds of the policy shall not be invalidated by any act or neglect of the mortgagor.

Where an insurer issues a policy knowing that the property is subject to a mortgage, and in fact the policy itself contains a standard mortgage clause extending coverage to mortgage holders, there is no added risk. At the time the policy was issued, it was foreseeable that a mortgagee could take possession and control of the property in the event of default.

The union mortgage clause in an insurance policy creates a separate contract between the mortgagee and the insurer. [Vargas v. Nautilus Ins. Co., 248 Kan. 881, 887, 811 P.2d 868 (1991); see also Neises v. Solomon State Bank, 236 Kan. 767, 778, 696 P.2d 372 (1985); Iron Horse Auto v. Lititz Mut. Ins. Co., 156 P.3d 1221, 283 Kan. 834 (Kan. 2007)

A standard mortgage clause creates an independent contract between the insurer and the mortgagee that prevents the mortgagee's interest from being invalidated by the conduct of the mortgagor. [Allen, 167 Minn. at 149–50, 208 N.W. at 817–18 (quoting Syndicate Ins. Co. v. Bohn, 65 F. 165, 178 (8th Cir.1894)); Magoun v. Fireman's Fund Ins. Co., 86 Minn. 486, 490, 91 N.W. 5, 7 (Minn. 1902).]

ZALMA OPINION

Every first party property adjuster must understand the effect a standard mortgage clause has on claims handling and that, even if it is proved that the insured intentionally committed the crime of arson-for-profit and burned down his house the mortgagee may still recover from the insurer up to its security interest.

© 2021 – Barry Zalma

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 54 years in the insurance business.

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He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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