Submitted by:

OLAF AUGUSTUS A. BENOSA BLOCK C

Insurance – Insurable Interest in Mortgaged Propety

Section 8: Contract of Insurance with a Loss Payable Mortgage Clause

A "Loss Payable Mortgage Clause" is a significant component within insurance contracts, particularly
those involving mortgaged properties. This clause establishes a legal arrangement between the
mortgagee (lender) and the insurer (insurance company) regarding the distribution of insurance
proceeds in the event of a loss or damage to the insured property. It aims to safeguard the mortgagee's
financial interest in the property, ensuring their loan is protected even if the property is adversely
affected.

Purpose of the Loss Payable Mortgage Clause:

The primary purpose of the Loss Payable Mortgage Clause is to provide a mechanism for the mortgagee
to receive a portion of the insurance payout directly from the insurer in case of damage or loss to the
property. This clause ensures that the mortgagee's financial stake is protected, as the property serves as
collateral for the loan. By having a direct claim to insurance proceeds, the mortgagee can recover the
value necessary to restore or repair the property, thereby safeguarding the value of their collateral.

Contract of Insurance with a Loss Payable Mortgage Clause

The legal principles governing insurance contracts involving mortgaged properties and the interaction
between mortgagors, mortgagees, and insurers. Key concepts include the Loss Payable Mortgage Clause,
insurable interests of mortgagors and mortgagees, and the effects of insurance arrangements.

1. Loss Payable Mortgage Clause:

 This clause establishes arrangements between the mortgagee (lender) and the insurer
regarding insurance proceeds distribution in case of property loss.

 Ensures mortgagee's interest is protected by allowing them to claim insurance payouts

to maintain collateral value.

2. Effects of Insurance by Mortgagor:

 If the mortgagor (property owner) insures property in their name, providing that the loss
shall be payable to the mortgagee or assigns a policy to the mortgagee:

3. Insurance is deemed upon the mortgagor's interest.

 Acts of the mortgagor before loss that could void insurance affect the mortgagee, even if
the property is in mortgagee's possession.

 Acts required of the mortgagor under the insurance contract can be performed by the
mortgagee with the same effect.
  Mortgagee can claim proceeds up to their credit, extinguishing debt upon recovery.

4. Insurable Interest of Mortgagor and Mortgagee:

 The mortgagor and mortgagee have separate insurable interests in the

mortgaged property.

 Insurance taken by one does not benefit the other.

 Separate insurance policies covering their respective interests do not constitute

double insurance.

5. Extent of Insurable Interest:

Mortgagor's insurable interest is up to property value, regardless of mortgage debt.

The mortgagee's insurable interest is limited to the debt secured by the mortgage, continuing until
debt is extinguished.

Recovery Limits:

 Mortgagor can recover up to full loss amount.

 Mortgagee can recover up to debt secured or property value, whichever is lower.

Insurance by Mortgagee:

o Mortgagee can independently insure their interest in the property.

o Subrogation principle applies: insurer steps into mortgagee's rights upon payment of
insurance.

Insurance by Mortgagor:

 Mortgagor can insure their interest for their own benefit.

 Mortgagor can also take out insurance for mortgagee's benefit with specific
arrangements.

Standard vs. Open Clauses:

o Standard clauses protect mortgagee's interests from acts of mortgagor.

o Open clauses make mortgagee a beneficiary, affecting them if mortgagor's acts void
insurance.

"Accessory follows the principal" is a fundamental legal principle that governs rights, contracts, and
obligations, and it states that the existence and validity of a related right or obligation to a main or
principal contract is dependent upon that main or principal contract.
Insurance - Insurable Interest and Inchoate Interest

Sec. 14.:
Insurable Interest Defined: The concept of insurable interest refers to a legally recognized
interest that an individual or entity must possess in the property being insured. Section 14 of the
Insurance Code outlines various forms of insurable interest, including existing interests, inchoate
interests, and expectancies coupled with existing interests.

Existing Interest:

An existing interest in a property can be either a legal title or an equitable title. A legal title is a
recognized ownership right, while an equitable title represents an interest that may not involve
direct legal ownership but carries certain rights or benefits.

Examples of Legal Title Insurable Interest:

Trustee: A trustee, such as a seller of property not yet delivered, has an insurable interest in the
property.

Mortgagor: The owner who mortgaged the property can insure it since they still hold an
insurable interest.

Lessor: The lessor of a leased property can insure it, even if the lessee might also have an
insurable interest.

Assignee of Property for Creditors: When a property is assigned to a creditor as security, the
assignee can insure the property to protect their interest.

Examples of Equitable Title Insurable Interest:

Purchaser Before Delivery: A purchaser who hasn't received the property yet but has a contract
has an insurable interest.

Mortgagee After Foreclosure: After foreclosure but before the end of the redemption period, the
mortgagee can insure the property.

Beneficiary under Deed of Trust: A beneficiary named in a deed of trust (similar to a mortgage)
has an insurable interest.

Judgment Debtor with Seized Property: A debtor whose property is seized under execution until
the right to redeem is lost can insure.
Inchoate Interest:

An inchoate interest refers to an interest that is not yet fully developed but is based on an
existing interest.

Stockholder's Interest: A stockholder has an inchoate interest in the property of a corporation

they hold shares. This interest arises from the value of their shares, and they can insure this
interest to protect their investment.

Partner's Interest: Similarly, a partner in a partnership has an insurable interest in the

partnership's property based on their ownership interest.

Expectancy Coupled with Existing Interest:

An expectancy refers to the anticipation of gaining a future interest. This expectancy must be tied to an
existing interest.

Insuring Future Crops: A farmer can insure future crops that will be grown on land they own or will own
at the time of the policy issuance.

Business Interruption Insurance: Business owners can insure against the loss of profits resulting from
business interruption caused by unforeseen contingencies.

Contracts Affecting Property: Any binding contract that could be harmed by the destruction of specific
property provides insurable interest. For instance, a workman contracted to repair a building has
insurable interest in that building.