To understand what a mortgage clause is and what an additional insured on a mortgage is, you must first understand what a mortgage is. According to Investopedia, “A mortgage is a loan that the borrower uses to purchase or maintain a home or other form of real estate and agrees to pay back over time, typically in a series of regular payments. The property serves as collateral to secure the loan.”
Now that we have an agreed upon definition of what a mortgage is, we will go on and explain what a Mortgage Clause is.
Mortgage Clauses: Loans in insurance
In the Insurance Industry, parameters and characteristics for mortgages are considered inside “mortgage clauses.” Inside these mortgage clauses there are four parties that appear: The lender, the insurer, the mortgagee and the insured. Before dwelling in the clause, itself we should analyze the role of these four parties.
- The Lender: Is the entity or institution lending the money for the mortgage. This is the money the mortgagee will receive and must pay.
- The Insurer: The provider of the insurance policy on the mortgaged property. This is the party that collects the premiums on the insurance policy and deals with occurrences and the claims they can produce.
- The mortgagee: is the person who mortgages the property. In the case that the mortgagee is not the same person as the tenant, the mortgagee can face responsibilities for the tenant’s actions.
- The Insured: There are a lot of parties who can be involved in coverage for a mortgagee property, but the insured is usually the mortgagee. They are differentiated for the purpose of having two separate contracts. One for insurance on the mortgaged property, one for the mortgage itself. Usually, it is the lender who demands the insurance policy. It is the tenant’s and mortgagee’s responsibility to abide by the policy. The insurance policy can also include additional insured interests in the case that the tenant and mortgagee are not the same person.
The International Risk Management Institute (IRMI) defines mortgage clauses as follows: “Mortgagee Clause — a property insurance provision granting special protection for the interest of a mortgagee named in the policy, in effect setting up a separate contract between the insurer and the mortgagee. 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.
It also grants continuing coverage for the benefit of the mortgagee in the event that the policy is voided by some act of the insured (e.g., arson). In this situation, the clause specifies the obligations of the mortgagee in continuing coverage.
The mortgagee would be expected to notify the insurer of any changes in ownership, occupancy, or exposure; pay any due premium; and submit a signed, sworn statement of loss within the appropriate time frame. Without the protection of the mortgagee clause, financial institutions would be unlikely to loan the large amounts of money necessary to purchase homes, office buildings, or factories.”
Breaking this definition into pieces will allow for a better understanding of what a Mortgage Clause is, how insurance policies that cover mortgages work, and how to handle a claim.
What Mortgagee clauses do in insurance
The International Risk Management’s Institute definition starts by naming what the clause does. “It grants special protection for the interest of a mortgagee named in the policy” and generates a separated contract between the insurer and the mortgagee.
This Mortgage clause will establish that loss to the mortgaged property will be payable to a mortgagee named in the policy. Finally, it promises written notices to the mortgagee in case of cancelation.
Secondly, a mortgagee clause grants coverage for the mortgagee in case the policy cannot act because of some act of the insured.
The clause also specifies the obligations of the mortgagee for them to able to keep the mortgage. The definition states that the mortgagee should notify the insurer of any changes, pay due premiums, and submit sworn statements within a specified time frame.
If we consider that an Additional Insured is an insured that gets coverage from an existing insurance policy, and are a type of “Endorsement” Or addition to an existing policy, we can consider that the Additional Insured Mortgages are people to whose property is mortgaged and have an insurable interest in the property.
As an additional insured, the mortgagee, obtains protection for its own liability, if liability arises from the ownership, maintenance, or use of the premises by the named insured and as designated in the endorsement.
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