Texas Property and Casualty License Practice Exam

What effect does dishonesty by the insured have on the mortgagee's ability to collect under the policy?

1. It can prevent the mortgagee from collecting

2. It has no effect on the mortgagee's ability to collect

3. It nullifies the policy altogether

4. It requires a separate claim to be filed

The correct answer is: It has no effect on the mortgagee's ability to collect

The correct answer indicates that dishonesty by the insured has no effect on the mortgagee's ability to collect under the policy. In property insurance, the mortgagee (such as a bank or lender) typically has an interest in the property and is named as a loss payee on the insurance policy. This means that, regardless of the insured's potential dishonesty, the mortgagee's right to collect on the policy remains intact. This principle stems from the idea that the insured's misrepresentations or dishonesty do not affect the separate rights and interests of the mortgagee. The mortgagee's protection is designed to ensure they can recover the outstanding loan amount in the event of a loss, independent of the insured's actions or credibility. The insurance contract's provisions usually stipulate that even if the insured commits fraud, this often affects only the insured's claims and rights under the policy, leaving the mortgagee's claims valid. Thus, the mortgagee can still pursue the claim and receive payment for their interest regardless of any dishonesty exhibited by the insured individual.