Insurance: Insurance

G. Mortgagee Loss Payable Clauses

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G. Mortgagee Loss Payable Clauses. In the typical loan document, borrowers are required to obtain mortgagee loss payable status for their lenders. There are two typical forms of mortgagee loss payable clauses without significant difference. One is the "New York Form" and the other is the standard form. The mortgagee loss payable clause provides that the insurance company will, under all circumstances, make all payments pursuant to the insurance policy to the lender regardless of the directions or instructions of the insured, additional insureds and the provisions of the policy.

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.

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