Illinois Appellate Court Clarifies a Lender's Rights under a Property Insurance Policy | Practical Law

Illinois Appellate Court Clarifies a Lender's Rights under a Property Insurance Policy | Practical Law

The Illinois Appellate Court clarified a lender's rights under a property insurance policy, distinguishing between standard and simple mortgage clauses.

Illinois Appellate Court Clarifies a Lender's Rights under a Property Insurance Policy

by Practical Law Real Estate
Published on 03 Apr 2015 • Illinois
The Illinois Appellate Court clarified a lender's rights under a property insurance policy, distinguishing between standard and simple mortgage clauses.
In Old Second National Bank v. Indiana Insurance Co., the Appellate Court of Illinois, First District, distinguished between a simple mortgage clause and a standard mortgage clause in a property insurance policy (No. 1-14-0265, (Ill. App. Ct. Mar. 20, 2015)).
The court distinguished between a lender's right to receive insurance proceeds from a borrower's property insurance coverage under a "simple" or ordinary mortgage clause and a "standard" mortgage clause. The court explained that:
  • A simple mortgage clause makes the mortgagee a mere appointee who possesses no greater right of recovery than the insured.
  • A standard mortgage clause creates a separate contract between the insurer and the mortgagee, preventing the mortgagee from being denied coverage based on the acts or omissions of the insured. The purpose of the standard mortgage clause is to protect the mortgagee from being at its debtor's whim.
This case underscores the importance for lenders to carefully review the mortgage clauses in their borrowers' property insurance policies to ensure that they contain the standard mortgage clause language. If the policy contains a simple clause, the lender may not receive a payout if the property damage is due to the insured's actions.