The Arkansas Supreme Court held that a property insurer must honor policy obligations to a mortgagee notwithstanding its right to rescind the policy coverage due to the insured’s fraud in obtaining the policy. Nationwide Mut. Fire. Ins. Co. v. Citizens Bank & Trust Co., 2014 WL 272685 (Ark. Jan. 23, 2014). 

An insurer issued a property policy for a dwelling, identifying the mortgagee and containing a standard mortgage clause that entitled the mortgagee to make a claim under the policy. After the insured property was destroyed by fire, the insurer learned that the insured’s application failed to disclose two prior fire losses. The insurer voided the policy ab initio and refunded the insured’s premium. The mortgagee presented a claim for the fire loss with respect to its mortgage interest, which the insurer denied on the basis of the rescission. Suit was filed and the parties filed cross-motions for summary judgment. The trial court ruled in favor of the mortgagee and the insurer appealed. 

The Arkansas Supreme Court affirmed, holding that the “standard mortgage clause” (left unquoted by the opinion) constituted a separate contract between the mortgagee and the insurer and therefore the rescission of the policy based on the acts of the insured did not affect the “independent contract.”