G. Mortgagee Loss Payable Clauses

The relationship between the mortgagee and insurance company is a contractual relationship. A mortgagee loss payable need not have an insurable interest in order to receive insurance proceeds where they are so designated in the policy. Therefore, it is incumbent upon lenders on refinanced transactions and borrowers to take steps immediately to change the mortgagee loss payable clause from the old lender to the new. The insurance company, in the case of a mortgagee loss payable clause, will follow its most recent instructions. While there should be no issue of the disgorgement of mortgagee loss payable proceeds by an insurance company not otherwise entitled to those proceeds, one can understand that there is a casualty before re-designation, it may take some time for the proceeds to find their way into the proper hands. Not only may there be a delay in the application of the proceeds, but there is also a loss of investment potential. Frequently, the well-informed lender will require evidence that the mortgagee loss payable clause has been changed with respect to a new loan at the closing table or shortly thereafter.