Mortgagee Entitled to Coverage Even if Insured’s Standing is Void

May 29, 2018 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin 

May 29, 2018

The 1st District Appellate Court recently held that the mortgagee on property covered by a homeowner’s policy was entitled to coverage for fire damage, despite the facts that the insured had no insurable interest in the property, the insured had no mortgage on the property and the insured did not reside on the property as required by the policy.

The insurer in State Farm Fire & Casualty Co. v. Dubrovsky, 2018 IL App (1st) 170282 (March 30, 2018), was represented by O’Hagan Meyer LLC. Maurice Wutscher LLP represented the mortgagee, Seterus Inc.

Paul Dubrovsky purchased residential property in Chicago and executed a mortgage on it in 2007. In 2009, Dubrovsky’s father, Jeff, purchased homeowner’s coverage on the property from State Farm. That coverage apparently continued in effect until canceled in December 2012.

The policy contained a so-called standard mortgage clause. The clause stated, among other things, that any loss payable on the policy would be paid to the mortgagee as its interests appeared. It further stated that any denial of a claim as to the insured would not apply to the mortgagee so long as the mortgagee provided notice of any change of ownership or risk, paid any premium due and submitted a timely sworn statement of loss.

Prior to cancellation of the policy, several claims were filed against the policy, and then a fire occurred in November 2012. In response, State Farm sent a reservation of rights letter to Jeff Dubrovsky, and it filed the instant action in early 2013. It asserted that the policy was void because Jeff Dubrovsky never had an insurable interest in the property, he had no mortgage with Seterus, the property was not a residence as required by the policy and for other reasons.

Upon cross-motions for summary judgment, the trial court held for Seterus and awarded stipulated damages. State Farm took this appeal.


In an opinion by Justice Mary L. Mikva, the 1st District affirmed. She initially addressed the nature of the mortgage clause in the policy. Relying on Old Second National Bank v. Indiana Insurance Co., 2015 IL App (1st) 140265, she characterized the standard mortgage clause, as distinguished from the “simple” mortgage clause, as one that shielded the mortgagee from being denied coverage based on the acts or omissions of the insured or the insured’s noncompliance with the policy terms.

She then addressed State Farm’s argument that the named insured under the policy, Jeff Dubrovsky, the property owner’s father, had no insurable interest. She basically said that the lack of such an interest did not matter. It did not because, in her view, under Old Second and other case law, a standard mortgage clause creates a separate and distinct contract between the mortgagee and the insurer.

State Farm further contended that Seterus could not recover under the policy because of the absence of a mortgagor-mortgagee relationship between Jeff Dubrovsky and Seterus.

Mikva acknowledged case law implying that such privity between the mortgagor and mortgagee may be a condition to the creation of a separate contract between the mortgagee and the insurer. But no language to that effect was contained in the State Farm policy. And she ultimately found that coverage for Seterus was not dependent on the named insured having procured the mortgage.

Finally, State Farm argued that use of the property as the insured’s residence was a condition precedent to coverage. As to this point, State Farm itself relied on Old Second, which recognized the importance of an insured’s compliance with conditions precedent to maintain coverage. Mikva, however, focused on language in that case that highlighted the importance of the mortgagee not being refused coverage so long as the loss did not result from its own breach of the policy.

In accordance with the latter proposition, Mikva said the standard mortgage clause should protect the mortgagee even if there is no coverage for the named insured and even if the policy is void as to the named insured. This broad protection, she said, included situations where conditions precedent to coverage have not been met by the named insured.

The court, therefore, affirmed summary judgment in favor of coverage for Seterus.

Key points

  • A standard mortgage clause in a property insurance policy creates a separate and distinct contract between the mortgagee and the insurer.
  • Under a standard mortgage clause in a property insurance policy, the mortgagee is entitled to coverage even if the policy is void as to the named insured.
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