Do the Acts of the Mortgagor Affect the Rights of a Mortgagee Under the Texas Insurance Code When the Mortgagor’s Acts or Omissions Invalidate His Insurance Contract?

Let’s say you’re a bank and you loan a customer money to develop a commercial property. As part of your normal business practices, you require the developer to purchase insurance and list you as a “loss mortgagee,” which means you have a right to the insurance proceeds as an additional insured. Last, assume that the borrower/developer committed some act that would invalidate his rights and benefits under the insurance policy. Does that also affect your rights as the “loss mortgagee?” Well, if the underlying insurance contract was a fire or marine insurance policy, Texas law states that your rights are unaffected by the acts of the borrower/developer.

With respect to a mortgagee’s interests, The Texas Insurance Code states the following:

Chapter 862. Fire and Marine Insurance Companies

* * *
(a) The interest of a mortgagee or trustee under a fire insurance contract covering property located in this state may not be invalidated by:

(1) an act or neglect of the mortgagor or owner of the property; or

(2) the occurrence of a condition beyond the mortgagor’s or owner’s control.

(b) A provision of a contract that conflicts with Subsection (a) is void.

Tex. Ins. Code § 862.055 (formerly article 6.15)(emphasis added).

As the Fifth Circuit Court of Appeals noted:

The purpose of article 6.15 is to protect mortgagees from mortgagor derelictions with respect to insurance policies on mortgaged properties. The statute immunizes the mortgagee against the legal consequences of any act done by the mortgagor or owner either prior to or subsequent to issuance of the policy in question. The effect of the statute is to free the mortgagee from the burden of micro-managing its mortgagor’s fire insurance policies by immunizing the mortgagee from the legal consequences of the mortgagor’s acts or omissions in procuring or maintaining an insurance policy. Article 6.15 achieves this effect by creating a new and independent contract between the mortgagee and the insurer. Therefore, when the mortgagor’s acts or omissions invalidate his fire insurance contract, the mortgagee’s independent contract survives just as any other independent contract would.

Morris County Nat’l Bank v. John Deere Ins. Co., 254 F.3d 538 (5th Cir. 2001) (internal citations and quotations removed) (emphasis added).

Therefore, if you are a mortgagee under a mortgagor’s fire or marine insurance policy in Texas, the mortgagor’s acts and omissions do not affect your rights under an insurance policy.