If you take a look at the fine print in almost 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, this insurance clause provides protection for the borrower even if the borrower breaches a condition of the insurance.
Sounds boring…so why is this important?
If the borrower is doing something on the property that breaches a term of the insurance and suffers a loss (such as a fire) the lender may deny coverage to the borrower. They could say that they’re not paying out the policy because the owner caused the loss.
And that makes good sense.
And without the Standard Mortgage Clause, the lender in turn would also lose coverage. 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 only makes sense that they insist on the Standard Mortgage Clause in the event of an insurance breach by the borrower.