The issue in this case was whether the mortgage clause in a policy was an open loss payable mortgage clause, where the rights of the mortgagee (lender) depended on the rights of the mortgagor (borrower), or was a standard mortgage clause creating a separate contract between the mortgagee and the insurer.

Briefly, the mortgagee foreclosed on the mortgagor and purchased the property at a court-ordered sheriff's sale. A district court confirmed the sale and ordered delivery of the deed. The house was destroyed in a fire a week later. A deed was issued by the sheriff and recorded two months later, following procedural requirements.

Upon denial of claim made by the mortgagee, the insurer appealed from a trial court judgment finding coverage for the lender, which had brought an action against the insurer.

The appeal court said that the insurance company could not deny coverage in the circumstances, regardless of whether the mortgage clause was considered an open or standard mortgage clause. It found that the mortgagee had complied with three conditions for recovery spelled out in the mortgage clause, namely:

... Notification to the insurer of change in ownership (actually done prior to the explosion).

... Payment of any premium due under the policy.

... Submission of a signed, sworn statement of loss within 60 days.

The judgment of the trial court was affirmed in favor of the mortgagee (lender) and against the insurance company.

Editor's Note: It is of interest that the court observed that a so-called "standard" mortgage clause, creating a contractual relationship between insurer and mortgagee, protects the mortgagee during foreclosure. The mortgagor's rights end with foreclosure.

(STANDARD FEDERAL SAVINGS BANK, Appellee v. STATE FARM FIRE & CASUALTY COMPANY, Appellant. Nebraska Supreme Court. No. S-93-970. September 22, 1995. CCH 1996 Fire and Casualty Cases, Paragraph 5482.)