There have been several methods whereby these two interests have been protected and because of their importance considerable space will be devoted to a description of them. While under any method the mortgagee has some protection, its extent is not equal under all circumstances or under all jurisdictions. His status is subject to interpretation by the intermediate courts and the courts of last resort of the fortyeight States besides the Federal courts, although the tendency of all of them is to favor him as much as possible. The following are five principal methods that have been used to insure the mortgagee:

1. Mortgagee's policy covering his own interest.-Here the mortgagee takes out separate insurance for his own benefit, in which the mortgagor has no rights whatsoever. However, since he possesses an insurable interest, the latter may obtain a policy on the same property for his own protection if he chooses to do so.

In case of loss under this method and payment to the mortgagee, the insuring company becomes possessed of the contractual right to collect at the maturity of the mortgage a sum equal to the indemnity paid. To permit otherwise would be to grant the mortgagee double indemnity. He would collect the amount of the loss from the insurance company and his claim on the mortgagor would be undiminished. Therefore the insurance company becomes subrogated to the rights of the mortgagee to the extent of the indemnity paid. An illustration will make this clearer. Let us assume that O possesses a property valued at $10,000 which he has mortgaged to M for a loan of $9,000. M insures his interest in Company J for $9,000 and a loss of $8,000 subsequently occurs. The insurance company, J, pays M $8,000 and by subrogation acquires M's right to collect $8,000 from O at the expiration of the term of the mortgage, M retaining the right to collect at that time the remaining $1,000 due him. The insurance company, if it can ultimately collect the $8,000 from O, loses nothing. If O refuses to pay foreclosure may be had and if the property brings only, say, $8,500, the company loses $500, since it cannot legally in the collection of its claim against O prejudice in any way M's contractual right to $1,000. An alternative settlement is the payment to M by J of $9,000 and the latter's acquisition by subrogation of a

claim for $9,000. This is the law in every State except Massachusetts.

The advantages of this method are few and accrue only to the mortgagee. It gives him double indemnity in one State, Massachusetts, and if he disapproves of the insurer selected by the mortgagor he may secure more satisfactory protection. The disadvantages to the mortgagee are that he must supervise the insurance and also pay the premiums. Such separate insurance is also disadvantageous to the insurance company, since it increases the difficulty of supervision, the moral hazard, and the danger of non-concurrent policies.

2. Assignment of the mortgagor's policy. A second method is the assignment to the mortgagee of a policy held by the mortgagor. The efficacy of this method is doubtful, since the mortgagee acquires by assignment only such rights as the mortgagor possesses at the time of assignment. A fuller explanation of assignment is given at the end of this chapter. These rights depend to some extent upon the nature of the assignment and the jurisdiction. Violations or misrepresentations may have voided the policy and in many States the mortgagee would then obtain a valueless piece of paper. Secondly, the mortgagee often has no legal status as a contracting party and consequently may not be entitled to notice of appraisal, to participate in negotiations after a loss, to redress if the mortgagor agrees to an inadequate settlement of the claim, etc.

3. Indorsement of a "loss payable clause."-A more extensively used method of obtaining insurance of a mortgagee's interest is the indorsement upon the mortgagor's policy of the so-called "loss payable clause," stipulating "loss, if any, payable to 193 as his interest may appear. From the standpoint of the companies this is desirable in some States because of the liability of the mortgagee for the acts of the mortgagor, and in general because of the elimination of separate insurance of interests in the same property and the reduction of the moral hazard. But the desirability of such a method from the mortgagee's standpoint, it is to be strongly emphasized, entirely depends upon the State where it is used; there being two radically different interpretations of his rights. The first of these is that such an indorsement renders the

'See form on p. 195.

'See Appendix XXXVII.

mortgagee an appointee and representative of the mortgagor to receive the insurance money. Where this is the law no method could afford him less protection than the "loss payable clause," since it subjects him to all the defenses available against the mortgagor, without the rights of the latter. Not being legally a party to the contract, an award is binding on him, the election to build or repair may be exercised without notice to him, and he suffers all the disadvantages of the previous method.

In marked contrast are the States which consider the indorsement of a "loss payable clause" the creation of an unconditional, independent contract between the insurance company and the mortgagee. When thus favored, this method cannot be surpassed, since the mortgagee is not bound by the conditions of the policy, the acts of the mortgagor cannot be set up as a defense against him, and yet he possesses all the rights of the mortgagor.

4. The "standard mortgagee clause."-Of all the methods of protecting the mortgagee's interest the most prevalent, because of its general effectiveness, is the indorsement on the mortgagor's policy of a "standard mortgagee clause." form of such clause is here given:*

as.

MORTGAGEE CLAUSE

Loss or damage, if any, under this policy, shall be payable to..

One

.......mortgagee (or trustee), as interest may appear, and this insurance as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or 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 (or trustee) shall, on demand, pay the same.

PROVIDED, also, that the mortgagee (or trustee) shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon and the mortgagee (or trustee) shall on demand pay the premium for such increased hazard for the term of the use thereof; otherwise this policy shall be null and void.

This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for ten days after notice to the mortgagee (or trustee) of such cancellation and shall then cease, and this company shall have the right, on like notice, to cancel this agreement.

Whenever this company shall pay the mortgagee (or trustee) any sum for

See also Appendices XXXII and XXXIII.

loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt, or may at its option pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and of all such other securities; but no subrogation shall impair the right of the mortgagee (or trustee) to recover the full amount of... ...claim.

Such favorable treatment as is outlined in the clause is accorded mortgagees by insurance companies because of the former's inability to control the acts of their debtors, their recognized right to protection, and their usual excellence as moral risks. By such a clause, it will furthermore be noticed, the right to subrogation is reiterated and acknowledged in the contract. An indorsement of this nature creates what is substantially an independent contract between the insurer and the mortgagee. The word "independent" is thus qualified because two lines of decisions are existent on the liability of the mortgagee for his debtor's acts. In four States he has been declared entirely unaffected by such acts, whether committed prior or subsequent to the indorsement on the policy of the "mortgagee clause." In four other States he has been held exempt from the consequences of acts occurring after its indorsement. In one of these States, the provisions of the standard policy after line 59 (which refer to conditions after a loss) were held to be inapplicable and not binding on the mortgagee. He is privileged to submit proofs of loss, to receive notice of appraisal and to be exempt from the "rebuild or repair" provision.

Illustrations will serve to define distinctly the nature of the settlement of claims under the "mortgagee clause." Let us suppose that the value of O's property is $10,000, that the same is mortgaged to M for $4,000, and that O obtains a fire insurance policy for $4,000 from Company J on which a "standard mortgagee clause" is indorsed for M's protection. A loss of $3,000 occurs. Company J will pay to M, the mortgagee, $3,000. O, the owner, having an interest in the policy,

however, is entitled to protection, and therefore is credited by M with $3,000 in liquidation of the debt, being thus reimbursed for the $3,000 damage to his property. An equivalent settlement would have been for J to pay M $4,000, then to take over M's claim against O of $4,000, and credit O with $3,000 toward payment of the same.

A situation may exist, however, where O has violated the terms of the insurance contract and J disclaims all liability to him. In this contingency, when M receives $3,000 from the insurance company, instead of O receiving $3,000 toward the payment of the debt, the insurance company is subrogated to $3,000 of M's claim against O at the expiration of the mortgage. Thus O loses $3,000 because his policy was void, and the settlement is made as though O has never had an interest in the insurance.

For the ordinary mortgagee the indorsement of the "mortgagee clause" affords the best protection in most States. Its advantages may be summarized as follows:

a. The prejudicial effect of the mortgagor's acts on the mortgagee's rights is considerably diminished in some States and entirely eliminated in others.

b. The mortgagee acquires legal rights as a party to the insurance contract.

c. The mortgagee is exempt in some States from certain provisions of the standard policy, such as the "repair and rebuild clause" and the provisions applying after a loss.

It has disadvantages, in comparison with other methods, in only a few jurisdictions. It is inferior to the "loss payable clause" in a limited number of States and is not as profitable as the separate insurance of the mortgagee's interest in Massachusetts.

5. Special contracts.-An even more satisfactory method of completely protecting the mortgagee is the formation of a special contract between insurer and mortgagee, embracing exceptional features for the latter's benefit. This, however, is chiefly used by trust companies and large lenders who place a great deal of insurance of this nature.

Assignment of fire policies.-When property is transferred or pledged as collateral it is often necessarily accompanied by protection. Usually the property is insured, and for transfer it is not always necessary to secure a new policy, but merely the proper assignment of the old one. This avoids a can