A Mortgage Clause Helps Mitigate a Lender’s Risk
Most commercial real estate transactions include a standard mortgage clause amid the commercial property insurance policy documents. It is usually listed under Additional Conditions, and it details the obligations the insurance company must fulfill should the property be damaged or destroyed while still mortgaged.
As you might expect, this is an important clause because it helps protect the lender by giving them the right to obtain compensation for a loss on the mortgaged property. It even allows the lender to obtain compensation if the policyholder violated the terms of their insurance policy.
Who Does a Mortgage Clause Protect?
A mortgage clause protects the mortgage holder who is listed in the commercial property’s declarations. If there is more than one mortgage holder, then each mortgage holder’s name needs to be included in the declarations in addition to their address and the description of the mortgaged property.
In the event a property has two mortgages, the lender holding the first mortgage will be compensated first. With a mortgage clause in place, the lender is even protected should something happen to the property after foreclosure action has been initiated.
What Does a Mortgage Clause Cover?
In any real estate transaction, the property acts as collateral for the loan. Therefore, the mortgage clause covers any “loss or damage to the building or structure in which the lender has an interest.”
Lenders receive payment “as their interests may appear,” which means that the amount paid to the lender(s) is determined by the extent of damage to the insured building and the unpaid balance of the loan.
What Happens if the Insurer Cancels the Policy?
If the insurance company decides to cancel or to not renew the policy because the policy holder failed to pay their premium, the mortgage clause requires them to notify the lender in writing at least ten days before the policy is canceled.
But, if the policy is being canceled for any other reason besides missed premium payments, then the insurer needs to notify the lender at least 30 days before the policy’s cancellation.
The exact rules for notifying the lender in advance of a policy cancellation can differ by state, however. For example, many states require insurers to notify lenders no fewer than 45 days before the policy is canceled for any reason other than non-payment of premium.
