Mortgagee Subject to Policy Provisions

If the insured is in violation of the policy's coinsurance clause and his loss settlement is being reduced as a result, how does that affect a mortgagee listed on the policy? Here is an example: the value of the building at the time of loss is $1,000,000; coinsurance required is 80 percent; the amount actually carried at the time of loss is $400,000; amount of loss to building is $600,000. In this case, the insured would be 50 percent underinsured and would receive $300,000 But, the bank, which is named on the policy as mortgagee, has a $400,000 outstanding loan. How much will the bank be paid?

Michigan Subscriber

Typically, both the insured's and the bank's names will be on the check, and the bank will take its share first. But, the bank is bound by the terms of the policy, including the coinsurance clause. So, the most the bank could be paid is the $300,000 available.