A mortgagee clause, also known as a mortgage clause, loss payable clause or lenders loss payable endorsement, is a contract between the buyer, the financing bank and the property insurer, according to the International Risk Management Institute. It ensures that if the property is destroyed, the financing bank receives insurance compensation.
The word "mortgagee" is used to refer to the bank providing financing for the property, so the phrase mortgagee clause means "financing bank clause" or "clause for the bank that is providing financing." It is really a contract between the bank and the insurance company, which is agreed upon by the buyer. Mortgagee clauses allow the bank, not the buyer, to receive insurance money paid on a loss, explains the International Risk Management Institute. The property insurer must give the bank financing the property written notice in advance if the insurer decides to cancel the insurance coverage on the property.
The mortgagee agreement also promises that, if the buyer does something that voids the insurance policy such as purposely damaging the property, the bank still has coverage on the property as long as the bank does certain things. This includes paying the insurance premium and keeping the insurance company notified of changes in ownership, occupancy and insurance risks involving the property. If necessary, the bank also provides a sworn statement of loss to the insurance company within a reasonable time period, notes the International Risk Management Institute.