Legal Definitions - union mortgage clause

The term union mortgage clause is another name for a standard mortgage clause. This is a crucial provision found in property insurance policies, such as homeowner's or commercial property insurance.

A standard mortgage clause protects the financial interest of a mortgage lender (like a bank or credit union) in an insured property. It essentially creates a separate agreement between the insurance company and the lender. This means that even if the property owner (the borrower) does something that would normally void or invalidate their insurance policy – such as committing fraud, neglecting the property, or engaging in prohibited activities – the insurance company is still obligated to pay the lender for the outstanding mortgage balance, up to the policy limits, if a covered loss occurs.

In essence, the lender's right to receive payment from the insurer is independent of the borrower's actions or omissions. The "union" aspect historically referred to the "union" of interests between the mortgagee and the insurer, or its widespread adoption as a standard protective measure.

Here are some examples illustrating how a union mortgage clause works:

• Example 1 (Residential Property - Policy Violation): Sarah obtains a mortgage from "City Bank" to purchase her home. Her homeowner's insurance policy includes a union mortgage clause. Sarah later decides to convert her basement into an unpermitted, high-risk woodworking shop, which involves storing flammable materials, a clear violation of her insurance policy's terms and local safety codes. A fire subsequently breaks out due to this activity, causing significant damage to her home.

  How it illustrates the term: While Sarah's actions (operating an unpermitted, high-risk business and storing flammable materials) would likely allow her insurance company to deny *her* claim for damages, the union mortgage clause ensures that "City Bank" is still protected. The insurance company must pay "City Bank" the amount of the outstanding mortgage balance, safeguarding the bank's investment in the property, independent of Sarah's policy violations.

• Example 2 (Commercial Property - Fraudulent Misrepresentation): "Global Enterprises Inc." secures a mortgage from "Capital Trust Bank" to acquire a large office building. The property insurance policy for the building contains a union mortgage clause. During the insurance application process, Global Enterprises falsely states that the building has a fully functional, regularly inspected fire suppression system, when in reality, it is outdated and non-operational. A major fire later occurs, causing extensive damage. The insurance company discovers the misrepresentation during its investigation.

  How it illustrates the term: Although "Global Enterprises Inc." would likely have its claim denied due to the fraudulent misrepresentation about the fire suppression system, the union mortgage clause ensures that "Capital Trust Bank" is still protected. The insurance company is obligated to pay "Capital Trust Bank" for the outstanding mortgage balance on the office building, despite Global Enterprises's deceptive actions.

• Example 3 (Rental Property - Tenant's Illegal Activity): Maria owns a rental property with a mortgage from "Community Savings & Loan." Her landlord's insurance policy includes a union mortgage clause. Unbeknownst to Maria, her tenant begins illegally manufacturing controlled substances in the garage, an activity explicitly excluded and voiding coverage under Maria's insurance policy. An explosion occurs, severely damaging the garage and part of the house.

  How it illustrates the term: Even though the tenant's illegal activity would typically void Maria's insurance coverage for the damage, the union mortgage clause protects "Community Savings & Loan." The credit union can still make a claim to the insurer for the outstanding mortgage balance, ensuring their loan is secured, regardless of the tenant's actions or Maria's lack of knowledge about them.