Legal Definitions - New York standard clause

The New York standard clause is a specific type of provision found in property insurance policies, also known as a mortgage-loss clause or lender's loss payable clause. Its primary purpose is to protect the financial interest of a lender (like a bank or mortgage company) in a property that serves as collateral for a loan, even if the property owner (the borrower or insured) does something that would otherwise invalidate their own insurance coverage.

This clause creates a separate and independent contract between the insurance company and the lender. This means that the lender's right to receive payment for covered losses is not affected by any act, neglect, or default of the property owner, such as arson, misrepresentation on the insurance application, or failure to comply with policy conditions. The lender's coverage can only be invalidated by their own actions or omissions.

Here are some examples to illustrate how the New York standard clause works:

• Example 1: Intentional Damage by Property Owner

  A homeowner, struggling with debt, intentionally sets fire to their house to collect insurance money. Under normal circumstances, the insurance company would deny the homeowner's claim due to arson. However, because the homeowner's mortgage lender has a New York standard clause in the policy, the lender's interest is protected. The insurance company would still be obligated to pay the lender the outstanding balance of the mortgage, up to the policy limits, even though the homeowner committed an act that voided their own coverage.

• Example 2: Misrepresentation on Insurance Application

  A small business owner applies for property insurance for their commercial building, which is mortgaged to a bank. On the application, the owner falsely states that a state-of-the-art sprinkler system is installed, when in fact, it is not. Later, a fire severely damages the building. The insurance company discovers the misrepresentation and denies the business owner's claim. However, due to the New York standard clause, the bank (as the mortgagee) can still file a claim and receive payment for the damage to the property, as long as the bank itself did not participate in or know about the misrepresentation.

• Example 3: Failure to Maintain Policy Conditions

  A landlord owns an apartment building financed by a financial institution. The property insurance policy requires the landlord to maintain a functional alarm system and conduct annual safety inspections. The landlord neglects these duties for several years. A break-in occurs, leading to significant property damage and theft. The insurance company denies the landlord's claim because they failed to uphold the policy conditions. Nevertheless, the financial institution, protected by the New York standard clause, can still recover its financial interest in the damaged property from the insurer, as the institution itself did not violate any policy conditions.