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by Alexander Masotto

When a hailstorm, fire, or other natural disaster strikes, it is not just the property owner who has something to lose. That is why most insurance policies, commercial and residential alike, contain a mortgagee or loss payee clause that ensures lenders are protected when property is damaged. The purpose of a mortgagee loss payable clause in an insurance policy is to “protect the security interest of the mortgagee who has advanced money to others for the purchase of property, and who has taken a note and deed of trust, or mortgage on the subject property.” Smith v. Tex. Farmers Ins. Co., 82 S.W.3d 580, 584 (Tex. App.—San Antonio 2002, pet. denied).

Mortgagee/loss-payee clauses in insurance policies typically fall into two categories. One is a simple or “open” clause, which provides that any loss is payable to the mortgagee “as its interest may appear.” See Old Am. Mut. Fire Ins. Co. v. Gulf States Fin. Co., 73 S.W.3d 394, 396 (Tex. App.—Houston [1st Dist.] 2002, pet. denied). Under an open clause, the mortgagee stands in the shoes of the policyholder, enjoying the same rights as the policyholder enjoys—no more, no less. If coverage is defeated because of an act of the policyholder, the mortgagee is likewise denied recovery. See, e.g., Ingersoll–Rand Fin. Corp. v. Employers Ins. of Wausau, 771 F.2d 910, 913 n. 3 (5th Cir.1985). 

The other type of clause, usually referred to as a “New York”, “standard”, or “union” clause, provides contract rights to the lender loss payee that are independent of the insured’s actions. While wording between policies may vary, the additional rights afforded typically provide that “insurance, as to the interest of the mortgagee only, shall not be invalidated by any act or neglect of the mortgagor or the owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership [of] the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy, provided, that in case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee shall, on demand, pay the same. See, e.g., Don Chapman Motor Sales, Inc. v. Nat'l Sav. Ins. Co., 626 S.W.2d 592, 595 (Tex. App. 1981, writ ref’d n.r.e.). Under a “standard” mortgage clause the provision that “this insurance . . . shall not be invalidated by any act or neglect of the mortgagor,” means that a mortgagee can have rights to recover even when the insured does not. See Ennis State Bank v. United States Liab. Ins. Co., No. 3:15-CV-2087-B, 2016 WL 560367, at *5 (N.D. Tex. Feb. 12, 2016) (citing SWE Homes, LP v. Wellington Ins. CO., 436 S.W.3d 86, 90 (Tex. App.—Houston [14th Dist.] 2014, no pet.). Here, “[i]t is sometimes said that the standard mortgage clause creates a separate contract between the insurer and the mortgagee.” SWE Homes, LP, 436 S.W.3d at 90.

If a foreclosure occurs at the subject property, Texas courts have held that a “mortgagee’s [insurable] interest under an insurance policy containing a mortgagee loss-payable clause is limited to the indebtedness which the mortgagor owes under the note and [deed of trust.]” Smith, 82 S.W.3d at 584; see also Peacock Hosp., Inc. v. Ass’n Cas. Ins. Co., 419 S.W.3d 649, 653 (Tex. App.—San Antonio 2013, no pet.). A foreclosure under a deed of trust has the effect of reducing the indebtedness owed by the mortgagor by the amount paid for the property at foreclosure. See Campagna v. Underwriters at Lloyd's London, 549 S.W.2d 17, 19 (Tex. App.—Dallas 1977, writ ref'd n.r.e.). However, where a “foreclosure fully satisfies the mortgage debt or the mortgage debt is otherwise released as a result of the foreclosure, the mortgagee no longer has a right to any of the insurance proceeds paid for a pre-foreclosure loss.” Peacock Hosp., Inc., 419 S.W.3d at 653–54 (citing CWCapital Asset Mgmt. LLC v. Wausau Bus. Ins. Co., No. 04–08–00457–CV, 2009 WL 1900413, at *4 (Tex. App.—San Antonio July 1, 2009, no pet.); Helmer v. Tex. Farmers Ins. Co., 632 S.W.2d 194, 196 (Tex. App.—Fort Worth 1982, no writ); Campagna, 549 S.W.2d at 18.).

Stated differently:

Once the mortgage debt is satisfied or released, the mortgagee no longer has an interest under the insurance policy and the insurer is not liable to pay the mortgagee for any loss-claims paid under the policy after the mortgage debt is satisfied. Pak-Petro, Inc. v. Am. W. Home Ins. Co., No. 1:12-CV-247, 2013 WL 5356898, at *6 (E.D. Tex. Sept. 9, 2013).

Only where “a deficiency remains following the foreclosure [does] the mortgagee retain[] a right, but only to the amount of the insurance proceeds necessary to satisfy the deficiency.” Peacock Hosp., Inc., 419 S.W.3d at 653 (citing Campagna, 549 S.W.2d at 18; CWCapital Asset Mgmt. LLC, 2009 WL 1900413, at *4) (emphasis supplied).

* * *

Recently, the United States District Court for the Northern District of Texas in Lakeview Loan Service v. American Risk Insurance Company, No. 3:24-cv-1638-N, 2025 WL 2880812 (N.D. Tex. Oct. 9, 2025) analyzed a mortgagee’s rights under a “standard” loss payee clause.

In 2021, the insured purchased her residence and initially secured a mortgage approved by Lakeview Loan Services’ predecessor. Eventually, the insured’s deed of trust was assigned to Lakeview as the lender.

The insurer, American Risk Insurance Company, issued an insurance policy to the insured, that listed Lakeview as an additional loss payee and mortgagee. After the insured defaulted on her mortgage payments, Lakeview foreclosed on the property and purchased the same in September 2022 for $220,000. About one month later, in November 2022, the property burned down (resulting in a total loss) on the insured’s scheduled eviction day.

Thereafter, Lakeview submitted a claim for fire damage to the residence, but the claim was denied. Lakeview no longer had an insurable interest under the policy’s standard loss payee clause. A lawsuit ensued, and Lakeview moved for partial summary judgment arguing that it was entitled to the insurance proceeds because the insured assigned the policy to Lakeview.

Under the policy at issue, Lakewood’s right to receive insurance proceeds were contingent upon: (1) the insurer denying the insured’s insurance claim; and (2) Lakeview’s compliance with the standard mortgage clause conditions. Specifically, Lakeview was required to notify the insurer of “any change in ownership, occupancy or substantial change in risk known to the mortgagee. Failure of the mortgagee to comply with [the conditions of the mortgage clause] shall void this policy as to the interest of the mortgagee.” Here, Lakeview failed to notify the insurer that it took ownership of the property through the foreclosure proceedings. Moreover, the insured never filed an insurance claim at the time of November 2022 fire loss as she lost her insurable interest in the property on the date of the September 2022 foreclosure sale.

Lastly, the record revealed that Lakeview purchased the property at the foreclosure sale for $220,000, while the insured’s unpaid balance on the note totaled $201,014.50 at the time of foreclosure. Because Lakeview purchased the subject property at foreclosure for more than the original note, the Court found that there was no longer a deficiency, and Lakeview was made whole through the foreclosure. Thus, Lakeview was not entitled to any insurance proceeds under the policy.

Takeaways:

It is imperative for insurers to recognize that mortgagee or loss-payable clauses create distinct rights for lenders, which may survive certain actions or inactions of the property owner, particularly under a standard mortgage clause. Careful attention to the type of clause, along with clear documentation of mortgage debt and foreclosure status, is essential to accurately assess exposure and determine who may ultimately have an interest in insurance proceeds. Requesting underlying loan documentation can also help insurers evaluate whether a mortgagee has an interest, regardless of whether a foreclosure has occurred. Insurers should also verify mortgagee interests before paying claims, and proactively manage potential conflicts between insureds and mortgagees to minimize dispute and litigation risk.

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.