Legal Definitions - simple mortgage clause

A simple mortgage clause, sometimes referred to as an open mortgage clause, is a specific provision found in property insurance policies, such as homeowner's or commercial property insurance. This clause acknowledges and protects the financial interest of a mortgage lender in a property that is insured. However, under a simple mortgage clause, the lender's ability to receive payment for a covered loss is directly dependent on the borrower's (the property owner's) compliance with all the terms and conditions of the insurance policy.

This means that if the borrower violates the policy—for example, by failing to pay premiums, making a material misrepresentation on the application, or engaging in activities that void the policy—the lender's insurance coverage for their interest in the property may also be compromised or denied. This type of clause offers less protection to the lender compared to a "standard" or "union" mortgage clause, which typically insulates the lender from the borrower's actions or omissions.

Examples:

• Example 1: Lapse due to Non-Payment

  Imagine John owns a house with a mortgage from "City Bank." His homeowner's insurance policy includes a simple mortgage clause. John experiences financial difficulties and stops paying his insurance premiums. The insurance company sends a cancellation notice to both John and City Bank. Before City Bank can arrange for new coverage, a severe hailstorm damages John's roof and interior. Because John failed to pay his premiums, violating a fundamental condition of the policy, the insurance was canceled. Under a simple mortgage clause, this cancellation also affects City Bank's ability to claim for the damage. The bank's financial interest in the property is not protected by the insurance policy due to John's actions.

• Example 2: Policy Violation through Unauthorized Use

  Consider a scenario where Maria owns a commercial building, mortgaged by "Regional Lending Group," and her property insurance policy contains a simple mortgage clause. Maria initially insures the building as a low-risk office space. However, she later converts a significant portion of it into a high-risk chemical storage facility without notifying the insurer, which is a clear violation of the policy's terms regarding changes in property use. A fire then breaks out in the storage area, causing extensive damage. Maria's unauthorized change in the property's use increased the risk and violated a condition of her insurance policy. Because of the simple mortgage clause, this violation by Maria could allow the insurance company to deny the claim entirely, leaving Regional Lending Group without insurance coverage for the damage to the property it holds a mortgage on.

• Example 3: Fraudulent Misrepresentation

  Sarah purchases a vacation home with a mortgage from "Coastal Credit Union." Her insurance policy for the home includes a simple mortgage clause. When applying for the insurance, Sarah falsely states that the home is occupied year-round, when in fact it is vacant for nine months of the year (vacant properties often have higher premiums or different coverage terms). A pipe bursts during a cold snap while the home is vacant, causing significant water damage. The insurance company investigates and discovers Sarah's fraudulent misrepresentation. Because Sarah made a material misrepresentation that would have altered the policy terms or premium, the insurance company may void the policy from its inception. Due to the simple mortgage clause, Coastal Credit Union's interest in the property is also jeopardized, and their claim for the water damage may be denied because the borrower's fraudulent act invalidated the policy.