When you purchase a home with a mortgage, it is very common for the mortgage lender to require you to maintain home insurance, as it protects their collateral. If something were to happen to the home and you did not properly insure it, the mortgage lender would lose their investment. However, have you ever wondered how the mortgage lender ensures that you rebuild the home after a claim? Or, if you don’t rebuild the home, how the lender still receives the funds to repay the mortgage? The answer is a simple part of the policy known as the mortgagee clause, which guarantees the mortgage lender is paid out of the proceeds of your home insurance policy.
In a standard home insurance policy, the policy conditions section explains how and to whom payment will be issued. In most policies, the default is to adjust losses and issue payment directly to you, the named insured. However, there is an exception to this where the policy states that it may pay others if another person is named on the policy or is legally entitled to payment for a claim. The reason for this wording is to ensure the proper party receives the funds.
The home insurance policy goes further with a detailed mortgagee clause that basically states the policy will pay you (the named insured) and your mortgage lender(s) as your respective interests appear. This means that your insurer wants to make sure each party is receiving the proper amount of settlement money from the policy in the event of a claim. If you have more than one mortgage on your home, the interests can be quite complicated. In many instances, instead of trying to sort out each party’s interest, the insurance company may issue a joint check to you and your mortgage lender(s), forcing you to resolve the distribution of funds and leaving the insurer out of any dispute.
The mortgagee clause is built into home insurance policies because it is very common for people to have a mortgage on their home. However, it usually requires that you specifically inform the insurer to name your mortgage lender on the policy in order for them to receive the benefit of a mortgagee. In many instances, your lender will require you to provide them with evidence that you have taken the necessary steps to name them on the policy. This is an important step in your home buying and ownership process regardless of where you live – Miami, Milwaukee, Minneapolis, Nashville, Oakland. If you neglect to maintain insurance or name your lender as a mortgagee, you may be subject to force-placed insurance, which can turn out to be a very costly mistake.
Overall, you should not be surprised if you have a claim and your mortgage lender ends up receiving the majority of the funds to repair or rebuild your home. The mortgagee clause protects their interests, but it also keeps homeowners honest. By ensuring the funds go to rebuilding the home, it eliminates any temptation to spend the money on other matters for which it was not intended.