What is a mortgagee clause?

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If you’re like most homeowners, you’ll need a mortgage to buy a home. Since your home serves as collateral on the loan, your lender will want to ensure the property — its investment — is adequately insured. Along with proof of homeowners insurance, your lender will likely require you to have a mortgagee clause in your policy, a provision that protects the lender from financial loss if your home is damaged or destroyed.

Mortgagee definition

While legal language can be tricky to decipher, “mortgagee” is another word for the lender: a bank, credit union, mortgage company or other lending institution that provides the funds to purchase or refinance a home.

On the other hand, a mortgagor is the borrower who accepts the funds.

What is a mortgagee clause, and how does it work?

Your lender will require you to have a homeowners insurance policy that helps cover costs if your home is damaged or destroyed by a covered peril, such as:

• Fire and smoke
• Wind and hail
• Lightning strikes
• Theft or vandalism

A mortgagee clause protects your lender’s interest in the mortgaged property for these same losses. The lender is covered up to the outstanding amount of the mortgage, to pay for repairs that can restore the property to its pre-damaged condition. The clause is usually a prerequisite for mortgage approval. Although you pay for the policy, both you and your lender are protected.

If your home is substantially damaged or destroyed, your insurance company will evaluate the damages, determine the payout amounts, and then issue payments—first to your lender, for its portion of the loss, and then to you.

The protection applies even if the damage is intentional. If you deliberately burned down your house, your lender would still be covered, even though your insurer would void your policy if it determined you committed arson.

Finally, the mortgagee clause ensures the insurance company will notify the lender if you stop paying your insurance premiums or your policy is canceled for another reason. Your lender may obtain a new policy with a different provider and add the costs to your monthly mortgage payments.

What are the components of a mortgagee clause?

Here’s a quick look at a few terms that may appear in the mortgagee clause.

• Lender protections. These are the heart of the clause: the stipulations that protect the lender against financial loss and limit its exposure if the mortgaged property is damaged or destroyed — even if it’s a deliberate act by the borrower/mortgagor.
• Loss payee. The party entitled to the insurance company’s reimbursement — synonymous with the mortgagee or lender, in this case. Mortgagee clauses are sometimes referred to as “loss payee clauses.”
• ISAOA. ISAOA is an acronym for “its successors and/or assigns.” It means the mortgagee can transfer its rights to a different financial institution or lender.
• ATIMA. ATIMA is an acronym for “as their interests may appear.” It extends the insurance coverage to third parties the lender does business with that could suffer losses, even when they aren’t explicitly named in the policy.

The latter two sections allow the lender to sell the loan on the secondary mortgage market. If your mortgage is sold, be sure to update your policy’s mortgagee clause with the new lender’s name and details.

How do you get a mortgagee clause?

During the mortgage approval process — often in your commitment letter — your lender will inform you that you must take out a homeowners insurance policy before your loan can close and whether it must include a mortgagee clause. Once you’ve chosen a homeowners insurance company, you’ll tell the insurer to add a mortgagee clause or loss payee clause in your policy. You’ll probably provide your lender’s details and your loan number.

If you ever do file a claim, you’ll complete the loss payee section with your mortgage lender’s info.