Lender "Mortgagee Clause" vs. "Additional Insured" on Insurance Policy to Property a

[Rogelio M.]

Ref: Lender "Mortgagee Clause" vs. "Additional Insured" on Insurance Policy to Property as Collateral

How specifically should a private lender be mentioned on the owner's insurance policy to a property used as collateral to a loan. I want to assure that I, as the Lender, get paid FIRST if there is an insurance payout. I also want to avoid the insurance company issuing out a payment in both the names of the Lender and property owner .... which could lead to a dispute.

For context, I lent money privately to another investor, who put up their non-homestead property as collateral. At closing a Note was issued and a Mortgage/Deed of Trust were issued showing the Borrower (Investor's) indebtedness to me, with a Mortgage/Deed of Trust showing my rights as Lender over the Borrower's property.
I have received mixed recommendations on this topic and am looking for guidance that is consistent.

Specifically, I lent money and had the investor/borrower/property owner place me as "Mortgagee" on their property's insurance policy. My assumption was that if, let's say, the structure burnt down, the property's insurance would then pay me out FIRST as the lender and NOT issue a check in both the Lender's and Property Owner's name. Am I correct in this assumption? If not, how do I avoid this?

Other advice I received was that I should have also placed myself as "Additional Insured" on the Borrower's insurance policy, in addition to the Mortgagee clause. What role does being named "Additional Insured" play within the context of a Lender?

What is the optimal way to proceed?!

Any advice would be welcome!  Thank you all kindly!

[Jeff S.]

Insurance is easily the most confusing topic in private lending, @Rogelio M.  If you speak to 10 insurance agents, you will receive at least 12 opinions. What’s worse is that there is no consistency among the insurance companies.

The ACORD forms and other Evidence of Insurance documents are notoriously cryptic and difficult to read. Insurance companies all seem to have different names for the same coverage terms, so it's hard to know what you have. I've read hundreds of these and usually call the agent for an explanation to ensure we're protected. You should do the same.

At a minimum, you want to be named as the Mortgagee on your borrower’s property and liability insurance policies. Alternatively, some insurers will use the term Loss Payee. This is a more general term used by some insurers to cover all lenders. For example, if you were making car loans, you would still be a lender but without a mortgage. Thus, the broader term. To cover ourselves, our insurance criteria require us to be named as the Mortgagee and the Loss Payee. Some companies will do this. Mortgagee is preferred, but either term is acceptable.

Additional Insured puts you at the same payoff level as the borrower. You want to get paid in your name only, as the Mortgagee or Loss Payee.

With the huge range in costs, and dramatic price increases, borrowers are notorious for skimping on insurance. For example, many will obtain a homeowner’s policy for a vacant flip – at about 1/3 the cost. No one is covered here even though the insurance company will write the policy and take the premium. It’s similar if a landlord or another specialized policy is required. If there is any question about the type of policy and the coverage, call the insurance agent to confirm. Never rely on what others have seen. You have too much to lose here.

Lastly, make sure the policy guarantees the insurance company will notify you of a cancellation within 30 days, at most. This might involve a separate endorsement, so ask.

You didn’t mention the owner and lender’s title insurance policy. A different topic, but equally important.

Ironclad docs, indeed. I hope you require more than a Note and Mortgage to protect yourself, Rogelio.