i.e., the mortgagor, and thus join the two interests. This will enable the company to maintain a better supervision over the policy, will reduce the possibilities of fraud, and will eliminate the complications which may arise when the two interests are insured in different companies.

Various methods may be used to accomplish this result, but nearly everywhere all have given way to the socalled "mortgagee clause." The mortgagor may, for example, take the policy in his own name, and assign it to the mortgagee on a form similar to that discussed in the preceding chapter under the subject of "Assignment." This method, however, is dangerous to the mortgagee, because the validity of the policy, when an assignment is made without an actual transfer of the property, will depend upon the mortgagor's acts or neglect. In law the mortgagor is still the policyholder, and as such his acts or omissions may cause a forfeiture of the policy. The protection of the mortgagee is thus dependent upon the conduct of the mortgagor, over whom he may not be able to exercise any supervisory control. Again, if the mortgagor has violated the policy and a forfeiture exists at the time of the assignment, the mortgagee's interest is unprotected, because in making the assignment the assignor can give only what he possesses, i.e., in this case an invalid policy. It should also be noted that the mortgagee is not a contracting party to the policy. Accordingly, he enjoys no legal rights with respect to participation in any negotiations after a loss, such as an appraisal or other method of settling a claim. Should the mortgagor and his insurer agree upon an inadequate valuation for settlement purposes, the mortgagee would be helpless under this method to undo the arrangement. Mortgagor's Policy Endorsed "Loss, if any, Payable to Mortgagee as His Interest May Appear."-Under this plan the policy contains the following endorsement:

...

John Doe Mort.

.....

"Loss, if any, payable to gagee, as ... interest may appear, subject nevertheless to all the conditions of this policy." The effectiveness of this clause, commonly called "the loss payable clause," has been variously interpreted by the courts. In one group of states the clause is construed as simply making the mortgagee a representative of the mortgagor to receive the proceeds of the policy. Under this interpretation, the method is, therefore, subject to all the objections already noted in connection with an ordinary assignment. In a limited number of states, however, the endorsement in interpreted as an independent and unconditional agreement between mortgagee and insurer. Under such circumstances the plan proves highly advantageous to the mortgagee, since he is given all of the mortgagor's rights, without being bound by either hist acts or the conditions of the policy.

The "Mortgagee Clause."-To join the two interests in the same policy and be just to the mortgagee, it is essential that he be protected against a forfeiture of the policy through the acts or neglect of the owner of the property. This is done to-day by means of the widely used "mortgagee clause." The mortgagor takes out the policy in his own name, and to protect the mortgagee's interest a special clause is endorsed on the contract, according to which the company agrees to protect his interest as it may appear, regardless of the conduct of the mortgagor as concerns the provisions of the policy. The following is a leading form of the clause:

COPY OF MORTGAGEE CLAUSE

Loss or damage, if any, under this policy, shall be payable to...

.... as

as

mortgagee (or trustee) as interest may appear, and this

insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy. PROVIDED, that in case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee (or trustee) shall, on demand, pay the same.

PROVIDED, also, that the mortgagee (or trustee) shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon, and the mortgagee (or trustee) shall, on demand, pay the premium for such increased hazard for the term of the use thereof; otherwise this policy shall be null and void.

This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for ten days after notice to the mortgagee (or trustee) of such cancellation, and shall then cease, and this company shall have the right, on like notice, to cancel this agreement.

Whenever this company shall pay the mortgagee (or trustee) any sum for loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt, or may, at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and of all such other securities; but no subrogation shall impair the right of the mortgagee

(or trustee) to recover the full amount of

claim.

Dated

This

Attached to and forming part of Policy No. of the (Name of Company).

Signature of the Company.

Reference should be made to the fact that fire policies frequently contain considerable sections of the so-called mortgage clause. Thus the New York standard policy (lines 108 to 125) incorporates those portions of the mortgagee clause which relate to notice of cancellation and to subrogation in the event of the payment of a loss to the mortgagee when the company denies that any liability exists in favor of the mortgagor. The policy makes further provision for the mortgagee's responsibility for proofs of loss, appraisal, and bringing of suit, as provided by the terms of the policy, in the event that the mortgagor fails in these respects, Further provision is made that "other conditions relating to the interest and obligations of such mortgagee may be added hereto by agreement in writing."

Advantages of the Mortgagee Clause.-By endorsing the above clause on the mortgagor's policy, the company specifically agrees that the protection of the mortgagee's interest shall not be invalidated by the acts or neglect of the owner of the property. Such endorsement also results (1) in making the mortgagee a party to the contract and giving him a legal right therein, and (2) in freeing him from those policy provisions which go into effect after a loss has occurred. With respect to such provisions, however, the policy itself, or the clause indorsed thereon, may contain a different provision establishing the liability of the mortgagee. Thus, the New York standard form stipulates: "Upon failure of the insured to render proof of loss such

mortgagee shall, as if named as insured hereunder, but within 60 days after notice of such failure, render proof of loss, and shall be subject to the provisions hereto as to appraisal and times of payment and of bringing suit." Compared with other available methods, the disadvantages of the mortgagee clause are few. In fact, they are chiefly confined to the few states where the "loss payable clause" has been interpreted as an independent and unconditional agreement between mortgagee and insurer.

Analysis of the Clause.-Payment of loss to mortgagee. -In the event of loss most companies follow the practice of making settlement by draft payable both to the mortgagee and the mortgagor, and release from both parties is thus obtained. As an illustration of the method of settlement, let us assume that "X" (the mortgagor) owns a property valued at $12,000 and that "M" (a mortgagee) holds a mortgage against the property for $10,000. Also assume that "X" protects "M" with a standard mortgagee clause indorsed on a $10,000 policy issued by Company "Y." In the event of a $5,000 loss, Company "Y" will pay that amount by a draft payable to both "M" and "X." The mortgagor (the insured), it is clear, should be protected under the policy, since he has in no way violated any of its provisions. Upon receipt of the joint draft, "M" and "X" may arrange either to have "X" receive the $5,000 and continue as mortgagor for the full original mortgage, or to have "M" receive the $5,000 and have him credit "X" with that sum in liquidation of the mortgage debt. The mortgagee, however, is entitled to the loss if no other arrangement can be effected. In that case "X's" mortgage, as already pointed out, will be credited with the $5,000 payment. Or Company "Y" might pay "M's" mortgage of $10,000 and become subrogated to the right to collect the balance over and above the loss (viz., $5,000) from "X" at the maturity of the mortgage.