Under a standard Mortgage Clause, what happens if the insured intentionally sets fire to their home?

The standard Mortgage Clause (IBC 1051) creates a separate contract between the insurer and the mortgagee (the lender). This clause protects the mortgagee's financial interest even if the insured (the homeowner) breaches a policy condition, such as by committing arson. The insurer will deny the claim for the insured due to their criminal act, but is obligated to pay the outstanding balance of the mortgage to the mortgagee. The insurer then acquires the mortgagee's rights against the insured through subrogation and can seek to recover the amount paid from the insured.

A. The mortgagee's interest is protected by the Mortgage Clause, so their claim is not denied alongside the insured's.

B. The insurer would never pay the insured who committed arson; the claim is paid directly to the mortgagee.

D. The insured's act of arson voids their coverage, regardless of the mortgage status; only the mortgagee is protected.

1. Insurance Institute of Canada. (2017). C130: Essential Skills for the Insurance Broker and Agent. Chapter 6, The Insurance Contract, Section: Additional Interests - Mortgagees.

2. Insurance Bureau of Canada. (2005). Standard Mortgage Clause IBC 1051. "It is hereby provided and agreed that this insurance, as to the interest of the Mortgagee only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property..."