Can a Mortgagee be Listed as Additional Insured?

A common question that comes up in insurance is whether a mortgagee can be listed as an additional insured on an insurance policy. The short answer is yes, mortgagees can be added as additional insureds, but there are some important details to understand.

What is a Mortgagee?

First, let’s define what a mortgagee is. A mortgagee is the lender that provides the mortgage loan to purchase a property. When you get a mortgage, the mortgagee (usually a bank or other financial institution) lends you money to buy the property. In return, you pledge the property as collateral for the loan. If you stop making payments, the mortgagee can foreclose and take possession of the property.

• Mortgagee – The lender that provides the mortgage loan
• Mortgagor – The borrower that receives the mortgage loan

Why Add a Mortgagee as Additional Insured?

The mortgagee has a financial interest in ensuring the property is properly insured. If the property is damaged or destroyed, the mortgagee wants to make sure insurance proceeds are available to repay the outstanding loan balance.

By adding the mortgagee as an additional insured on the property insurance policy, they gain certain protections:

• The mortgagee will receive notice if the policy is canceled or changed in a way that reduces coverage. This prevents the mortgagor from modifying or canceling the policy without the mortgagee’s knowledge.

• The mortgagee’s interest is protected even if the mortgagor stops paying premiums. The coverage will continue for the benefit of the mortgagee for a certain period of time.

• If there is a covered loss, insurance proceeds will be paid directly to the mortgagee up to the outstanding loan balance.

So in effect, naming the mortgagee as additional insured sets up a separate contract between the insurer and mortgagee. This provides protection for the mortgagee’s financial interest if the mortgagor fails to maintain adequate insurance.

How to Add a Mortgagee as Additional Insured

The specific requirements may vary by state and insurer, but here are some general guidelines on adding a mortgagee as additional insured:

• Use an endorsement. The additional insured status is usually added by attaching an endorsement like the ISO CG 20 18. This modifies the policy to extend coverage to the mortgagee.

• Specify Premises. The mortgagee’s additional insured status applies only to their interest in the specific property listed. Any other properties would need to be separately endorsed.

• Limits of Insurance. The coverage available to the mortgagee as additional insured is usually limited either to the amount required by the mortgage contract, or the limit carried on the base policy, whichever is less.

• Cancelled Automatically. The additional insured endorsement typically cancels automatically when the mortgage is paid off. The mortgagor would need to provide proof of payoff.

Sample Additional Insured Endorsement for Mortgagee

Here is an example of what a typical mortgagee additional insured endorsement might look like, based on ISO CG 20 18 04 13:

POLICY NUMBER:  COMMERCIAL GENERAL LIABILITYCG 20 18 04 13THIS ENDORSEMENT CHANGES THE POLICY.  PLEASE READ IT CAREFULLY.ADDITIONAL INSURED –MORTGAGEE, ASSIGNEE OR RECEIVER  This endorsement modifies insurance provided under the following:COMMERCIAL GENERAL LIABILITY COVERAGE PARTSCHEDULEName Of Person(s) Or Organization(s): ABC BankDesignation Of Premises: 123 Main St, Anytown, CAInformation required to complete this Schedule, if not shown above, will be shown in the Declarations.A. Section II – Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to their liability as mortgagee, assignee, or receiver and arising out of the ownership, maintenance, or use of the premises by you and shown in the Schedule.  However:1. The insurance afforded to such additional insured only applies to the extent permitted by law; and 2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.B. This insurance does not apply to structural alterations, new construction and demolition operations performed by or for that person or organization.C. With respect to the insurance afforded to these additional insureds, the following is added to Section III – Limits Of Insurance:If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:1. Required by the contract or agreement; or2. Available under the applicable Limits of Insurance shown in the Declarations;whichever is less.  This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations.

This shows how the mortgagee (ABC Bank) can be named as an additional insured specifically for the property at 123 Main St. The available coverage limits are restricted based on what is required by the mortgage contract.

Mortgagee Interests In Other Policies

While mortgagees are commonly added as additional insureds to property insurance policies, they may also need to be named in other policies like:

• Builder’s Risk – During construction projects, the mortgagee wants to be named on the builder’s risk policy to cover their interest in the improvements.

• General liability – For apartment/condo projects, the mortgagee may be added as additional insured to the GL policy that covers the common areas.

• Flood – If the property is in a flood zone, the mortgagee will want to be named on the flood policy.

The Mortgagee Clause

We’ve discussed adding the mortgagee as an individual additional insured. Another option is what’s known as a “standard mortgagee clause” (or loss payee clause). This is a policy provision that provides automatic coverage for the mortgagee’s interest on a covered loss.

The mortgagee clause makes the mortgagee a loss payee, meaning insurance proceeds will be paid directly to them up to the outstanding loan balance.

The main advantage of the mortgagee clause is it eliminates the need to specifically list the mortgagee on each policy. The clause provides broad, automatic coverage for the mortgagee’s interest on any property insured under the policy.

One downside is that the clause alone does not provide notice of cancellation to the mortgagee. So it may be used together with an additional insured endorsement to ensure the mortgagee also receives notice of policy changes.

Key Takeaways

Here are some key points to remember when it comes to mortgagees and additional insured status:

• Mortgagees have an insurable interest and will want to be added as an additional insured or loss payee.

• Additional insured status provides key protections like notice of cancellation and continuing coverage.

• Limits are typically restricted to the amount required by the mortgage contract.

• Use endorsements like the CG 20 18 to add the mortgagee as AI.

• The mortgagee clause provides automatic coverage without naming mortgagee.

• Mortgagees may need to be named on various policies depending on exposure.