With the unfortunate increase in foreclosures that have occurred because of the poor economy, it is important to understand the two basic clauses protecting lienholders. It is also important to appreciate the significant protections provided to those lienholders holding the loss payable clause known as the "standard" or "New York" loss payable clause.

In Secured Realty Inv. Fund v. Highlands Ins. Co., 678 So. 2d 852, 854 (Fla. Dist. Ct. App. 3d Dist. 1996), the Court set forth the basic differences:

"A loss payable clause is one method by which a lienholder or mortgagee protects its property interest. Generally, two types of loss payable clauses exist and are often referred to as (1) an open loss payable clause, and (2) a union, standard or New York clause."…An "open loss payable clause simply states that ‘loss, if any, is payable to B. as his interest shall appear’, or uses other equivalent words, merely identifying the person who may collect the proceeds."…A union, standard, or New York clause, on the other hand, provides, in addition to the above quoted provision, language to the effect that "the owner/mortgagor’s acts or neglect will not invalidate the insurance provided that if the owner/mortgagor fails to pay premiums due, the lienholder/mortgagee shall on demand pay the premiums."…(Citations omitted)

While a "simple" loss payee may bring an action under the policy, a loss payee under such an "open" loss payable clause has rights to collect only if the named insured as described in Demay v. Dependable Ins. Co., 638 So. 2d 96, 97 (Fla. Dist. Ct. App. 2d Dist. 1994):

The loss payee clause under the policy at issue is commonly referred to as the "ordinary," "open-mortgage clause" or "simple" loss payable clause…such a clause without language to the effect that the interest of the lienholder shall not be invalidated by any act or neglect of the mortgagor, does not create a contract between the insurer and the loss payee and does not give the loss payee any rights greater than those to which the insured is entitled. …Thus, the DeMays are subject to any defenses Dependable might assert against Finch. Although the DeMays are subject to those defenses, such a loss payee clause has been construed to confer upon the loss payee third-party beneficiary standing to bring an action against the insurer…The trial court, therefore, erred in dismissing the DeMays’ complaint with prejudice on that ground. (citations omitted)

On the other hand, Independent Fire Ins. Co. v. NCNB Nat’l Bank, 517 So. 2d 59 (Fla. Dist. Ct. App. 1st Dist. 1987) discusses how a "standard" clause provides much greater rights:

[F]ire insurance policies usually contain either of two distinct types of mortgage clauses. An "open" mortgage clause states only that any loss is payable to the named mortgagee as his interest shall appear and subjects the mortgagee to any defenses the insurance company may have against the owner or mortgagor of the property based on the latter’s neglect or default. A "standard union" (also known as a "New York") mortgage clause contains similar provisions, but characteristically provides, in addition, that the mortgagee’s coverage will not be invalidated by a foreclosure, a change in ownership, a more hazardous use of the property, or a loss caused by the neglect of the owner, provided that the mortgagee pays any premium demanded should the owner fail to do so…A standard union mortgage clause has been held to create a separate agreement between the insurance company and the mortgagee in which policy provisions of the insurance contract not in conflict with the mortgage clause become part of this separate contract. (citations omitted)

I view the standard mortgagee clause as making a mortgagee a "super insured." For example, the insured can burn the structure and the mortgagee will still collect. On the other hand, a lienholder with a "simple" loss payable clause better hope that fire was caused by something or somebody other than the named insured because that lienholder is collecting only if the insured can collect.

  • Rosemarie Gray
  • Lee Wheaton

    I would like to find out if a homeowner association can mandate itself to be listed as ” co-loss payee” on New Jersey homeowner policy? Especially, when there is no mortgage on the property. Thank you!

  • Carol C

    I have a vague recollection of there being a special vacancy permission afforded on a property held by a trusted or executor after the death of the property owner. Can you lead me to the policy text?

  • Kim

    If a person goes to an insurance company to purchase a residential homeowner policy and tells the insurance company there is no mortgage on the property, the insurance company writes the policy and it is in place then months later the home is a total loss. If the customer lied and there was in fact a mortgage on the property, would the insurance company be required to pay the settlement to the mortgagee? If so, where can I find the regs on that? Statue #?

  • Tony Manero

    To Kim – May 5 – 2016
    The situation you described cannot happen. The mortgage lender requires insurance on the property; when there’s no evidence on file, it will place insurance (“force place”) and send a bill to the borrower; the cost of insurance will be 2-4 times higher. There’s absolutely no way a borrower would not cover his (commercial) lender’s interest. If personal loan, then the lender could be sloppy.
    A lender will make sure the borrower has insurance; same with a car with a loan.