Key takeaways
- A mortgagee clause is found in many property insurance policies and provides protection for a mortgage lender if a property is damaged.
- While lenders do receive protections with the mortgagee clause, borrowers benefit as well from reimbursem*nts for repairs to the home as well as any documented lost property.
- During the approval process, the lender will advise that the insurance policy you choose must have the proper mortgagee clause (likely documented in your commitment letter).
Found in many property insurance policies, a mortgagee clause provides protection for a mortgage lender if a property is damaged. If your property is damaged while you (the borrower) are paying off the mortgage, the insurance company will pay your mortgage lender for this loss, even though it’s covered on your insurance policy.
Mortgagee clause definition
According to Merriam-Webster, a mortgagee clause is a clause in an insurance contract that entitles a named mortgagee to be paid for damage or loss to the property.
Additionally, according to the International Risk Management Institute, it establishes that loss to mortgaged property is payable to the mortgagee named in the policy and promises advance written notice to the mortgagee of policy cancellation.
Without the protection of the mortgagee clause, financial institutions would be unlikely to loan the large amounts of money necessary to purchase houses.
Sections of a mortgagee clause
To provide protections that ensure a return on the lender’s investment if the home is damaged or destroyed, several sections are commonly included in the mortgagee clause:
ISAOA
The ISAOA, or “its successors and/or assigns” extends the protections granted by the mortgagee clause to separate institutions should they decide to purchase the loan. This allows the lender to operate in the secondary mortgage market.
ATIMA
The ATIMA or “as their interests may appear”, is another common component of a mortgagee clause. This component extends the insurance policy’s coverage to any associated parties who may incur losses if the property becomes damaged or destroyed.
Loss Payee
A loss payee is the party who is entitled to the insurance payout if a claim is made. In most cases, the loss payee and the lender are the same. If a claim is filed, complete the loss payee section with your mortgage lender’s name, address, and loan number.
How does a mortgagee clause work?
In the event of property damage, the mortgagor works with their insurance company to assess the damage, determine the payout amounts, and coordinate payments to the mortgagee and the mortgagor.
The mortgagee clause stipulates that the mortgagee (lender) is listed as payee on any insurance payments to ensure the property can be restored to its pre-damaged condition.
If you were to stop making insurance payments or the policy is canceled, the loss payee will be notified and given the option to force a new policy with a different provider. The cost of this new policy will be covered by the monthly mortgage payments.
Even if the mortgagors insurance policy has lapsed due to missed payments, the mortgagee can collect on the insurance policy if they meet these conditions:
- The outstanding premiums are paid
- A proof of loss is submitted on time
- The insurer is notified of changes in the property’s occupancy or ownership
Everybody benefits: Protection for the borrower and the lender
While lenders do receive protections with the mortgagee clause, borrowers benefit as well. These protections, built into insurance policies, significantly reduce risks to the lender when a home is financed, allowing buyers to apply for the money that they need to afford their dream home.
Generally speaking, homeowners’ insurance provides security to the borrower against property damage or loss of personal belongings. If damage were to occur, this insurance coverage will reimburse the homeowner for repairs to the home as well as any documented lost property. Additionally, this policy also protects the homeowner from legal liabilities should a loss or if an injury occurs on the property.
How do I get a mortgagee clause?
During the approval process, the lender will advise that the insurance policy you choose must have the proper mortgagee clause (likely documented in your commitment letter).
Once you select your homeowner’s insurance company, you will provide the lender mortgagee clause, including the address of the lender.
For a complete understanding of a mortgagee clause and how it may apply to your specific loan, contact your loan officer.
