If you look closely at the fine print in just about every lender’s mortgage commitment, you’ll see a reference to the “Standard Mortgage Clause.” We never think much about it, but it serves a valuable purpose for lenders.
Essentially what it does is provide that the insurance coverage remains in place for the lender even if the borrower breaches a condition of the insurance. Sounds boring, so why is this important? Here’s an example: If the borrower is doing something on the property that breaches a term of the insurance and a loss, such as a fire, occurs, the lender may deny coverage to the borrower. They’d say, they’re not paying because the owner caused the loss. Makes good sense. But without the Standard Mortgage Clause, the lender could also lose coverage; however with that clause in place, the insurer still has obligations to indemnify the lender.
The improvements on the property make up a big part of the value that the lender is taking as security, so it makes sense that they insist on the Standard Mortgage Clause and coverage in the event of an insurance breach by the borrower.