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A General Discussion

Summary: A standard mortgage clause is commonly incorporated into property policies covering both personal and commercial buildings. The clause protects the interests of the holder of the mortgage (the lender) and controls the disposition of insurance proceeds between the insured and mortgagor (borrower). The provision is generally regarded as a separate agreement between the lender and the insurer, independent of the borrower. This discussion describes the nature and purposes of the standard mortgage clause and reviews various issues and court decisions regarding its interpretation.

Topics covered:Nature and purposeRights and conditionsCourt interpretationsSubrogationOther policy terms

Nature and Purpose

A mortgagee wishing to protect its financial interest in property that is the subject of a mortgage has two options. The first is to purchase insurance covering its interest. This type of insurance provides protection only for the mortgagee’s interest in the property, which is usually limited to the balance of the outstanding debt at the time of loss. The mortgagee would have the responsibility of paying the premiums and maintaining the coverage in force. This coverage is discussed in “Mortgageholder’s Errors and Omissions Form,” Fire & Marine, Commercial Property section.

Mortgagee protection errors and omissions insurance provides coverage of direct damage to property in which a lending institution has an interest when the damage occurs as a result of the institution’s error or mistake. It also protects the insured institution against liability from failing to insure the mortgagor’s property when this is required and the mortgagor suffers property damage loss. However, only losses covered under the insurance that should have been in force are covered under this contract.

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