Mortgagee Clause: What it Means, How it Works, Example

A mortgagee clause is found in many property insurance policies, and it provides protection for a mortgage lender if a property is damaged. Normally, you will be asked to agree to a mortgagee clause when you take out a mortgage.

In effect, a mortgagee clause is a separate agreement between your mortgage lender (the mortgagee) and the insurance company that is insuring your property. A mortgagee clause ensures that if your property is damaged while you are paying off the mortgage, the insurance company will pay your mortgage lender for this loss, even though it’s covered on your insurance policy.

A lender would not lend a substantial amount of money secured by property without the inclusion of a mortgagee clause in the borrower’s property insurance policy, so they are an important part of your mortgage and property insurance contracts.

What Is a Mortgagee Clause?

Most mortgage providers (mortgagees) will require you (the borrower, or mortgagor) to take out homeowners insurance to get a loan. Homeowners insurance provides you with protection against damage to your property and its contents, but it also provides protection for your lender. The mortgagee clause is a key part of these protections.

A mortgagee clause states that if a property is damaged during the mortgage period, the insurance company must pay the mortgagee for this. For example, if you obtain a mortgage to buy a home or property and that property is then destroyed in a hurricane, the mortgagee clause would ensure that the loss would be payable to your lender even though it’s part of your standard insurance or hurricane insurance policy.

This clause also protects the lender if you cause damage to the property, which leads the insurance provider to cancel the policy. Fire damage is one of the most common causes of home damage and is usually protected by insurance. But not when the damage is caused intentionally. If you commit arson—an act that would void your insurance policy—the clause protects the mortgagee, ensuring that your lender will still be covered.

How a Mortgagee Clause Works

Most lenders require that borrowers have homeowners insurance and that the insurance policy include a mortgagee clause. The policy will state who has the lien within the policy. In some cases, if it’s not a requirement to get a mortgagee clause, then a borrower must contact a lender to add the clause to their current contract.

Mortgagee clauses provide valuable protection for lenders because of the way that mortgages work. When you take out a mortgage, you are essentially offering your home as collateral for a loan, which you promise to pay back. If you can’t keep that promise, then your lender (the mortgagee) can foreclose on the property and sell it to recoup costs. But if the property is damaged, then the mortgagee’s investment is put in jeopardy. The mortgagee clause ensures that the mortgagee will be paid out even if you are responsible for the damage to the property.

In other words, a mortgagee clause is a form of indemnity protection for the lender, because if there is any loss or damage to the collateral property, the lender is indemnified up to the interest that it has in that property.

Mortgagee clauses are an important component of the mortgage market. Without the protection of the mortgagee clause, financial institutions would be unlikely to loan the large amounts of money necessary to purchase homes, office buildings, or factories.

The Bottom Line

A mortgagee clause is a part of your homeowners insurance policy that protects your lender (the mortgagee) from losses incurred due to damage to your property. Many mortgage providers will require a mortgagee clause to grant you a mortgage.

A mortgagee clause states that if a property is damaged during the mortgage period, the insurance company must pay the mortgagee for this.