Loss Payee on Mortgage

My client sold a business holding back a mortgage. The mortgagee's insurance acknowledged in writing that my client had a first mortgage on the property. When the property was later damaged the insurance issued the check to the mortgagee without naming my client as a payee. The mortgagee cashed the check but did not make repairs. Is my client a 3d party beneficiary to the insurance contract and can I sue the insurer for bad faith?

Answer: There are two kinds of mortgage or loss payable clauses. Most real estate policies will have a "standard" or "union" mortgage clause. Under the terms of this clause, the mortgage holder or loss payee will be a separate insured from the named insured/mortgagor. The other is a "as interest may appear" clause which will simply provide that losses will be paid to the insured/mortgagor "as their interest may appear." The biggest difference, probably not material to your case, is that the loss is payable to the mortgagee even if the insured has in some way violated the terms of the policy so that the insurance company doesn't owe the named insured. However, you are in a little better shape if your client has a union or standard mortgage clause because of your status as a separate insured. It is as if the insurance company didn't pay the claim.
However, under either type of mortgage clause, it sounds like the insurance company breached its contract to pay your client. I think you will be able to make them pay your claim. If nothing else, the insurance company should be estopped to deny the mortgage holder's claim.
I don't know of any law on whether the loss payee has a bad faith claim but I suspect under the standard or union mortgage clause he does because it is as if it were a separate policy.