Mortgagee Rights in the First-Party Context
By: Samuel Lyon
When investigating and adjusting a first-party insurance claim in Georgia, an insurer may determine, for one reason or another, the named insured is not entitled to payment. A claim denial may be warranted for a myriad of issues such as fraud, arson, or the insured’s failure to abide by the policy conditions. Regardless, after determining payment is not warranted, an insurer may initially consider themselves “free and clear” for the loss. However, the insurer should be certain to check whether the policy outlines obligations to an entity or individual other than the insured prior to closing the claim outright. This is true even if the denial is based on the insured’s actions, as described above. One such obligation may include making payments to named mortgagees under the policy’s “mortgagee clause.”
Mortgagee clauses in insurance policies covering real property come in two forms: “open” clauses and “standard” clauses. Decatur Federal Savings & Loan Assoc. v. York Ins. Co., 147 Ga. App. 797, 798–99 (1978). Under “open” clauses, the mortgagee is a “mere appointee of the named insured,” meaning the funds owed to the mortgagee are “no greater than that of the mortgagor.” Id. at 798. Put another way, in “open” clauses, the rights of the mortgagee are derivative of the mortgagor, such that any defenses the insurer can assert against the mortgagor can be asserted against the mortgagee. If a denial is based on fraud or arson, such that no payment is owed under the terms of the policy, the denial extends to the mortgagee.
While “open” clauses have their place, the “standard” mortgagee clause, also known as the “union clause” or “New York standard” clause, is typical in most Georgia homeowners insurance policies. The “standard” mortgagee clause creates a separate and distinct contract between the insurance company and the mortgagee. Id. With its independent status, the mortgagee may frequently attempt to recover under the “standard” clause even when the insured cannot. Id. See also Employers Fire Ins. Co. v. PA Millers Mut. Ins. Co., 116 Ga. App. 433 (1966). In other words, the mortgagee has the ability to enforce its right of recovery regardless of the defenses the insurer may raise against the insured. Forston v. Cotton State Mut. Ins. Co., 168 Ga. App. 155 (1983). It may be helpful to conceptualize this as a dual-contractual relationship, wherein there is: (1) a contract created between the insurer and the named insured; and (2) a contract created between the insurer and the mortgagee.
In determining what kind of mortgage clause is included in the policy, an insurer should look at the policy for language indicating the rights of the mortgagee “shall not be invalidated by reason of any act or neglect on the part of the mortgagor . . . .” Practically speaking, this often looks like the following: “the denial of the named insured’s claim ‘will not apply to a valid claim of the mortgagee,’ provided the mortgagee complies with [a list of obligations the mortgagee must meet].” If this type of language exists, then the mortgagee clause is “standard.” Alternatively, if this language is not included, the insurer should look for language making the mortgagee’s rights derivative of the mortgagor/named insured’s rights, wherein the mortgagee’s interest is “merely assigned” following the loss.
If the claim is denied and the policy includes the “standard” mortgagee clause, the insurer must act promptly to ensure it notifies the mortgagee of the claim denial. The insurer should request the mortgagee submit sworn statements in proof of loss and provide documentation supporting the mortgagee’s claim.1 Policy language and reservation of rights language should also be included in communications with the mortgagee in order for the insurer to preserve its right to request additional, supplementary documentation related to the mortgagee’s claim. Importantly, in all communications with the mortgagee, the insurer should make no mention of the reason for or underlying facts of the denial of the named insured’s claim — such statements could constitute slander or libel against the named insured, exposing the insurer to extra-contractual liability.
For the above reasons, it is important to understand the differences between the two mortgagee clauses. Failing to properly identify the obligations set forth under each may leave the insurer in a poor position relative to defending any subsequent lawsuits.
1The type of documentation requested should include, but not be limited to, documents reflecting the validity of the security interest, the insured’s payment history, and a payoff statement. Additional documentation may be required, such as communications regarding the security interest and any documents reflecting transfer from one mortgagee to another, depending on the facts and circumstances of the claim.
Attorney Contact Info
Samuel Lyon
samuel.lyon@swiftcurrie.com
404.888.6271