Thursday, March 26, 2015

FYI: Ill App Ct Holds Mortgagee Has Hazard Insurance Coverage Claim Independent Of Mortgagor

The Appellate Court of Illinois, First District, recently affirmed a lower court’s judgment finding coverage for a mortgagee’s property damage claim despite the insurer’s position that the loss was not covered. 


The Appellate Court held that the standard mortgagee clause contained in the insurance policy was a separate and distinct contract between the mortgagee and insurer that shields the mortgagee from coverage defenses arising from the acts of the named insured.


In sum, the Appellate Court opined – for the first time in Illinois – that where an insurance policy contains a standard mortgagee clause, the acts of the named insured, while potentially defeating coverage as to the named insured’s claim, cannot defeat coverage for a mortgagee’s claim so long as the terms of the mortgagee provision are complied with. 


The Appellate Court also held that pre-judgement interest begins to run on the date of the insurers’ denial of claim, and that post-judgment interest begins to accrue on the date that pre-judgment interest stops accruing.


A copy of this opinion is available at:


By way of background, the named insured purchased a commercial warehouse in 2007 (the “risk”).  Shortly thereafter, one of the partners in the named insured died, and no business operations were ever conducted on the property.  The mortgagee obtained the existing mortgage in August of 2007. The building was entirely vacant at all times material to the litigation.


In June of 2008, the named insured applied for insurance through its insurance broker.  The insurance broker had binding authority with the insurer who ultimately wrote the risk.  The insurance broker handled the application personally, and transmitted it to the insurer electronically.  However, the application contained incorrect information, including but not limited to listing a much smaller size for the building, and stating that the property was owner-occupied.  It was undisputed in the litigation that the named insured had no involvement in preparing the electronic application.  The mortgagee was not named in the policy at the time it was initially issued.


In 2009, after the policy had been automatically renewed, the mortgagee contacted the insurance broker and requested that they add it to the insurance policy as a mortgage holder. In response the insurance broker returned proof of insurance indicating that the mortgagee had been added to the policy.


As a mortgage holder, the mortgagee then became the beneficiary of a “standard mortgage clause” rather than a “simple mortgage clause.”  Per the appellate court’s opinion, a standard mortgage clause “forms a separate and distinct contract between the insurer and the mortgagee, the effect of which is to shield the mortgagee from being denied coverage based upon the acts or omissions of the insured or the insured’s noncompliance with the terms of the policy.” 


In December of 2009, vandals broke into the risk, damaging the building and stealing wires, copper pipes and other equipment.  In response, both the named insured and the mortgagee provided timely notice of claim to the insurer.  However, the insurer informed them that because the property was vacant for more than sixty days prior to the loss, it denied coverage.


Thereafter, the named insureds and the mortgagee sued the insurer seeking to recover the value of their claim.  The trial court ultimately granted summary judgment in favor of the mortgagee, “concluding that, as a matter of law, [the mortgagee] was entitled to coverage under the mortgagee clause[.]” The trial court then entered final judgment in the mortgagee’s favor, awarding $816,833.13, which also included pre-judgment interest.  In contrast, the trial court agreed with the insurer and found the named insured’s claim was not covered due to the vacancy.


On appeal, the Appellate Court first opined, as the policy contained a standard mortgagee clause, that “the mortgagee must not be refused coverage as long as the loss did not result from its own breach of the policy.”  Because the insurer’s policy generally covers vandalism, and only “relieves [the insurer] of the obligation of pay the named insured for … covered losses” where the property is vacant more than sixty days prior to a loss, the appellate court held that the named insured’s failure to occupy the building as required did not affect the mortgagee’s rights under the policy.


Second, the Appellate Court addressed the insurer’s objections to the trial court’s award of prejudgment interest.  The insurer originally objected to the award as calculated, arguing that interest began to run on December 12, 2013 (the date of the court’s judgment), rather than on July 15, 2010, which was the date it denied the claim. 


The policy unambiguously states that it was to pay a covered loss within thirty days of the submission of a sworn statement in proof of loss, so long as the loss payee has complied with the terms of the policy.


Here, the mortgagee submitted its proof of loss on June 25, 2010, and it otherwise complied with the terms of the policy.  As such, the appellate court rejected the insurers’ argument and affirmed the trial court’s award of pre-judgment interest.  In doing so, it opined that “[w]hen an insurance carrier breaches its policy by denying coverage, the amount due under the policy is payable within the time fixed after the tender of the proof of loss and will bear interest from that date.”


Finally, the Appellate Court clarified that “the beginning date for the accrual of post-judgment interest marks the ending date for the accrual of pre-judgment interest.”  As such, it concluded that July 23, 2013 was the date that post-judgment interest began to accrue, and held that July 23, 2013 was also the correct date to terminate the accrual of pre-judgment interest.


Accordingly, the Appellate Court affirmed the trial court’s rulings in favor of the mortgagee and against the insurer.





Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois



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