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A homeowners policy is voided because the insured intentionally set fire to the dwelling. The mortgage lender holds a Standard Mortgage Clause endorsement on the policy. Which statement is correct?
AThe mortgagee's claim is also voided, because its rights flow derivatively through the insured's own compliance with policy terms
BThe mortgagee must sue the insured directly to recover, because the insurer has no obligation to the lender
The Standard Mortgage Clause is a separate contract; the mortgagee may collect up to its interest despite the misconduct
DCoverage is merely suspended rather than void, so the mortgagee shares pro-rata with the insured's other creditors
Why this is the answer
A Standard (or Union) Mortgage Clause creates an independent contract between the insurer and the mortgagee. The mortgagee's right to payment is not derivative of the insured's compliance with the policy; the mortgagee may collect up to its insurable interest even when the insured forfeits coverage by arson, fraud, or other acts. In exchange, the mortgagee accepts duties to give the insurer notice of increase-in-hazard, pay any premium the insured fails to pay, and provide proof of loss. A Loss Payable Clause, by contrast, gives the loss payee only derivative rights; the insured's misconduct defeats the payee's claim.
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