Mortgagor and Mortgagee Insuring The Same Property

Category: Law on Insurance

Mortgagor and Mortgagee Insuring The Same Property

Is it alright if both the mortgagor and the mortgagee insure the same property?

YES.  The mortgagor and the mortgagee have each an insurable interest in the property mortgaged, and this interest is separate and distinct from the other.  Consequently, insurance taken by one in his own name only and in his favor alone does not inure to the benefit of the other.  And in case both of them take out separate insurance policies on the same property, or one policy covering their respective interests, the same is not open to the objection that there is double insurance.

What is the extent of the insurable interest of the mortgagor?

The mortgagor of the property, as owner has an insurable interest to the extent of the value of the property, even if the mortgage debt is equal to such value.  The reason is that the loss or destruction of the property insured will NOT extinguish the mortgage debt.

What is the extent of the insurable interest of the mortgagee?

The mortgagee or his assignee has an insurable interest in the mortgaged property to the extent of the debt secured, such interest continues until the mortgage debt is extinguished.

Up to what extent can each recover?

The mortgagor cannot recover upon the insurance beyond the full amount of the loss, and the mortgagee cannot recover in excess of the credit at the time of the loss.

Under Sec. 8, what are the effects of insurance when the mortgagor effects insurance in his own name and provides that the loss be payable to the mortgagee?

The legal effects of this are:

(1)     The contract is deemed to be upon the interest of the mortgagor, hence he does NOT cease to be a party to the contract;

(2)     Any action of the mortgage prior to the loss which would otherwise avoid the insurance affects the mortgagee even if the property is in the hands of the mortgagee;

(3)     Any act which under the contract of insurance is to be performed by the mortgagor, may be performed by the mortgagee;

(4)     In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit; and

(5)     Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished.

What is the effect if the mortgagee effects insurance on behalf of the mortgagor?

Practically the same rules apply.  Upon the destruction of the property, then the mortgagee is entitled to receive the proceeds equal to the amount of the mortgage credit.  Such payment operates to discharge the debt.