standard mortgage clause

standard mortgage clause

A clause in a fire and casualty insurance policy providing additional coverage for the mortgage lender and also providing that the lender's rights to recover proceeds will not be compromised if the borrower is guilty of wrongdoing relative to the insured loss.Also called a union mortgage clause.Contrast with an open mortgage clause.

Example: Ted cannot make his mortgage payments and fears foreclosure, so he burns down his house to collect the insurance proceeds. Unfortunately, his neighbor saw the whole thing and alerted the police. Ted will not be able to collect any insurance money, but his mortgage lender will because it was not involved in the wrongdoing.

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This modified provision (originally known as a union or New York clause) came to be known as a standard mortgage clause.
Interestingly, the union or standard mortgage clause is a type of clause that creates an independent contract between the insurance company and the lender.
However, the court found that, while the language was not identical to the language contained in a standard mortgagee clause that the West Virginia legislature had declared, the standard mortgage clause was the exclusive form of fire insurance to be used in the state.
The court held that the bank was entitled to payment of the insurance proceeds as of the date of the fire, because, under a standard mortgage clause, the right of a lender to the insurance proceeds becomes vested at the time of the fire damage.

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