Mortgagee Clause: Definition And How It Works

When you’re obtaining a mortgage, mortgagees (also known as mortgage lenders) put in place certain measures to ensure that the collateral for their investment – your new property – is protected. One such measure is the mortgagee clause, which goes along with your homeowners insurance policy.

What Is A Mortgagee Clause?

A mortgagee clause is a protective provisional agreement between a mortgagee and a property insurance provider. This clause is meant to protect a mortgagee if the mortgaged property is damaged. Protections will be geared toward your lender, but they could benefit you as well. A mortgagee clause in your homeowners insurance policy could end up covering costs that could otherwise put you in deeper debt to your lender.

This type of clause requires the insurer to guarantee payouts when any claims covered by the property insurance policy are made.

Mortgagee Vs. Mortgagor, What’s The Difference?

Since a mortgagee is a mortgage lender, a mortgagor is the borrower. In a real estate transaction, a mortgagee provides a mortgage loan to a home buyer who then offers the title of the property purchased to the mortgagee as collateral.

This means that if a mortgagor is unable to keep up with the monthly mortgage payments and defaults on the loan, the mortgagee can foreclose on the property and sell it to recoup costs.

How Does A Mortgagee Clause Work?

As a provision in a borrower’s property insurance policy, the clause stipulates that, in the event of loss or damage to the property, the insurance company would make payments to the mortgagee. If you obtain a mortgage to buy a home or property and that property is then destroyed in a fire, the mortgagee clause would ensure that the loss would be payable to your lender even though it’s part of your insurance policy.

This clause also protects the lender if you intentionally cause damage to the property, which leads the insurance provider to cancel the policy. For example, if a homeowner purposefully sets fire to their home in order to collect the insurance payout – an act that would void your insurance policy – the clause protects the mortgagee, ensuring that your lender will still be covered.

How Do You Get A Mortgagee Clause?

Many lenders require borrowers to have a mortgagee clause, and it’ll be a part of the loan under their property policy, issued by the homeowners insurance company. The company will need to document who has the lien within the policy. In some cases, if it’s not a requirement to get a mortgagee clause, a borrower must contact a lender to add the clause to their current contract.

Mortgagee Clauses And Property Insurance

Property insurance includes a few different types of policies:

• Homeowners insurance
• Renters insurance
• Flood insurance

Most mortgagees require a homeowners insurance policy that includes dwelling coverage to protect against physical damage to a property, and liability coverage to protect against lawsuits brought against a homeowner if someone is physically injured on the property.

The majority of mortgagees will require enough insurance to cover the mortgagor’s entire property in order to protect their investment. If a property were damaged while uninsured, the mortgagee might not be able to sell it for enough money to cover the remaining balance of the mortgagor’s loan. In this way, this insurance also protects the mortgagor, who would most likely be held accountable for repaying the difference.

What Are The Components Of A Mortgagee Clause?

A typical mortgagee clause is made up of sections for different purposes.

Lender Protections

This component of a mortgagee clause prevents lenders from financial losses and from taking complete responsibility for a failed loan due to property damage. The mortgagee clause ensures that the insurance company pays the lender if the property is damaged and guarantees that they’ll receive their money even when borrowers are responsible for the destruction of the property.

ISAOA

ISAOA is an acronym found in mortgagee clauses that stands for “its successors and/or assigns.” It’s included in the clause to stipulate that the mortgagee can transfer their rights to another bank or financial institution. This ability to assign rights to another party allows the mortgagee to sell the mortgagor’s loan on the secondary mortgage market.

This may sound like an unusual scenario, but lenders commonly sell borrowers’ loans to secure funds for future loans. This practice has little to no effect on borrowers. Even if a lender sells your loan, they can retain the servicing rights, meaning you still send your payment to them and they’re responsible for maintenance of the escrow account. You can also contact your lender about the loan at any time.

ATIMA

Another acronym commonly found in the mortgagee clause, usually used in conjunction with ISAOA, is ATIMA or “as their interests may appear.” This term is used to extend the insurance policy to include coverage for other business-related parties aligned with the mortgagee.

Its meaning is very similar to ISAOA, as it merely allows the mortgagee to include others under the policy’s protection without having to name them explicitly.

Loss Payee

The loss payee in a mortgagee clause is the party entitled to a reimbursement, which in most cases is the mortgagee.

The Bottom Line

The mortgagee clause is a provision in a property insurance policy that ensures that the insurance company will pay the mortgagee if a covered loss or damage occurs to a mortgagor’s property. The clause protects a mortgagee’s investment in a mortgagor's property. If you’re a mortgagor, it’s vital to have a strong understanding of all the contractual provisions that could have an impact on you and your real estate transaction.

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