§ 3.5 Insurable Interest - Mortgagor, Mortgagee, and Lost Payees

• Library: Guide to South Carolina Liability and Property Insurance Law (SCBar) (2019 Ed.)

§ 3.5 Insurable Interest - Mortgagor, Mortgagee, and Lost Payees

The South Carolina Supreme Court has "held that a mortgagor and mortgagee have separate and distinct interests in the same property which they may insure."³⁹ The mortgagee has an insurable interest as a result of the mortgage to the extent of the balance due by the mortgagor.⁴⁰ The rights of the mortgagee to insurance proceeds are determined at the time of the loss and are extinguished when the note underlying the mortgage is satisfied.⁴¹ The Supreme Court has stated that "'[a] mortgagee's rights under a fire insurance policy are dependent upon the existence of a secured debt owed the mortgagee by the mortgagor-insured; to this extent the mortgagee cannot be independent of the insured.'"⁴²

The South Carolina Supreme Court addressed the operation of a standard mortgagee clause in a fire insurance policy in Nationwide Mutual Insurance Co. v. Hunt.⁴³ The clause provided:

If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be same as the order of precedence of the mortgages.
If we deny your claim, that denial will not apply to a valid claim of the mortgagee, if the mortgagee:

a. notifies us of any change in ownership, occupancy or substantial change in risk of which the mortgagee is aware;
b. pays any premium due under this policy on demand if you have neglected to pay the premium; and
c. submits a signed, sworn statement of loss within 60 days after receiving notice from us of your failure to do so. Policy conditions relating to Appraisal, Suit Against US and Loss Payment apply to the mortgagee.

If we decide to cancel or not to renew this policy, the mortgagee will be notified at least 10 days before the date cancellation or nonrenewal takes effect.⁴⁴

In Hunt, the Court determined that despite the insured's fraud, intentional concealment, and misrepresentations, which voided the policy as to the insured, the mortgagee could still recover. The Court explained:

The law is well settled on the question of whether a mortgagee may recover on an insurance policy where there has been misconduct by the insured. A mortgagee's ability to recover largely depends on the type of mortgagee clause used in the insurance contract. There are two major categories of mortgagee clauses: (1) loss-payable and (2) standard clauses. A loss-payable (or open mortgage) clause typically declares that the loss, if any, is payable to a mortgagee as its interest might appear.⁴⁵ The standard (or union or New York mortgage) clause uses language similar to the loss-payable, but further stipulates that, as to the interest of the mortgagee, the Insurance shall not be invalidated by

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