The Standard Mortgage Clause under Attack: The Lender's Insurance Claim When a Borrower Commits Arson
![handle is hein.journals/udetmr66 and id is 615 raw text is: The Standard Mortgage Clause Under
Attack: The Lender's Insurance Claim
When A Borrower Commits Arson
NEILJ. LEHTO*
I. INTRODUCTION
The standard mortgage clause is under attack. The clause has
protected the fire insurance claims of lenders against the arson de-
fense for more than one hundred years. Today, that valuable pro-
tection is lost for some auto lenders. Some real estate lenders are
feeling seriously threatened by the Michigan Court of Appeals deci-
sion in Boyd v. General Motors Acceptance Corp.'
For many years, automobile and real estate lenders have re-
quired their borrowers to have property damage insurance. Insur-
ers originally responded by making the borrower's claim payable
directly to the lender. This became known as the open mortgage
clause.2 Because the open mortgage clause did not adequately pro-
tect lenders, insurers added language to the open mortgage clause
providing that no act or neglect of the borrower would prejudice the
lender's right to recovery. This became known as the standard
mortgage clause.3
* Attorney, O'Reilly, Rancilio, Nitz, Andrews & Turnbull, P.C., Sterling
Heights, Michigan.
1. 162 Mich. App. 446, 413 N.W.2d 683 (1987).
2. See generally Dwyer & Barney, Analysis of the New York Standard Fire Policy, 19
FORUM 639 (1984), reprinted in THE STANDARD MORTGAGE CLAUSE PROTECTING ALL
PARTIES 1-90 (1987). The open mortgage clause simply states: Loss or damage, if
any, under this policy, shall be payable as interest may appear to lender. This is
also frequently referred to as a simple or loss payee clause in the courts and
literature. 10A COUCH ON INSURANCE 2d § 42:694 (rev. ed. 1982).
3. COUCH, supra note 2, at § 42:694. The courts and commentators have
called this clause a breach of warranty, union, or New York mortgage
clause. Typical standard mortgage clauses from real estate insurance policies state:
Loss or damage, if any, under this [real estate] policy, shall be payable to
the mortgagee (or trustee) ... as interest may appear.... and this insur-
ance as to the interest of the mortgagee (or trustee) only therein, shall not
be invalidated by any act or neglect of the mortgagor or owner of the
within described property.., nor by any change in the title or ownership
of the property, nor by the occupation of the premises for purposes more
hazardous than are permitted by this policy; provided, that in case the
mortgagor or owner shall neglect to pay any premium due under this pol-
icy, the mortgagee (or trustee) shall on demand, pay the same.
Id. at § 42:682. Typical standard mortgage clauses from automobile insurance pol-
icies state:
Loss or damage, if any, under the policy shall be payable as interest may](ViewImageLocal?handle=hein.journals/udetmr66&div=37&collection=&method=preview&ext=.png&size=3)
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The Standard Mortgage Clause under Attack: The Lender's Insurance Claim When a Borrower Commits Arson
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