Insurance and Real Estate Taxes

Both mortgagor and mortgagee have insurable interests with respect to loss suffered by the mortgaged premises.  The insurable interest of the mortgagor is the value of the premises and the mortgagee’s insurable interest is the amount of the mortgage debt.  Of course, a mortgagee is not allowed to collect both the proceeds of its casualty insurance policy and the full debt; doing so would result in a windfall and unjust enrichment.

1.  Typically, the mortgagee requires the mortgagor to buy insurance and name the lender
as an additional insured.
2.  A standard mortgage clause is typically included stating that the lender gets the
benefit of the policy regardless of the actions of the borrower.  TX does not require this clause because the lender is already statutorily protected.
–    There is a 30 day right to notice to the lender if the borrower fails to pay the premiums.
–    Mortgage document stipulates:
1.    If the lender is not named as an additional ID, in TX, the lender has an equitable lien on any proceeds.
2.    Policy should be for full replacement costs or the amount of the loan, typically whichever is greater.
3.    Standard mortgage clause and non-cancellation notice language.
4.    How the insurance proceeds will be used in the event of casualty – to paydown the mortgage or restore the real estate?
3.  Starkman v. Stigmond (NJ 1982): Mortgagors are entitled to fire insurance
proceeds and need not apply such to reduce the mortgage where the remaining land exceeds the value of the debt and the mortgage is current.
–    The courts are split on this issue and the analysis in this case is the minority view.
–    Case cites a line of cases and commentators that state that a mortgagee can recover the insurance proceeds regardless of the value of the remaining security once a fire loss occurs.
–    Court relies on another line that state that the purpose of insurance is to maintain the security for the mortgage debt – if the property is restored, the security has not been impaired.  The mortgagee’s interests have been fulfilled and the mortgagor recovers the proceeds.
–    In Schoolcraft, the California court refused to enforce the language of the mortgage giving the mortgagee the right to capture the proceeds (imposing a duty of good faith and fair dealings on the mortgagee when applying insurance proceeds to the balance of the note).  In this case, the mortgage was silent as to insurance proceeds.
–    MAJORITY: If the mortgagor promised the mortgagee to insure the premises, most of the cases give the mortgagee the option of applying the insurance proceeds to the mortgage debt or rebuilding the mortgaged premises, if there is no mortgage language to the contrary.  This right of the mortgagee is normally not conditioned on a finding that rebuilding will jeopardize the mortgage security.