Recent Media Coverage on the mortgage indemnity guarantee (MIG) issue has discussed whether the MIG policy insures the borrower against financial loss arising from negative equity.

A lot of the discussion has centred around a company, X Ltd, not solicitors, which has claimed to have found a 'loophole' in the MIG policies.

X Ltd advises its clients with negative equity to cede interest in the mortgaged property, post the keys to the lender and tell the lender to claim for all losses under the MIG policy.

X Ltd also tells the borrower that if he or she follows its advice he or she can apply for a new mortgage, free of debt.

Doubtless many solicitors will be somewhat aghast at this advice but it is just what borrowers in the negative equity trap want to hear.During the summer of 1994 we were asked to contribute our thoughts on the MIG issue to a local newspaper.

As a result we have had many enquiries from clients asking us to look into their MIG policies and advise.

We have also been contacted by many people who were about to hand in their keys on the advice of X Ltd.

Some had exchanged contracts on a new house purchase with a new lender and then run into problems because it was a condition of the new mortgage offer that all existing mortgages were redeemed.

We have, however, spoken to a number of borrowers who have obtained new mortgages ( without obvious misrepresentation) leaving their debts behind them in accordance with X Ltd's advice.

We expect that there are many more and this must be causing the lenders some considerable concern.When investigating the MIG issue the obvious starting point is to obtain a copy of the MIG policy.

Many of our clients have first tried to obtain this themselves but in all cases were refused by the lender because it was a contract to which the borrower was not a party and therefore the borrower had no right to see it.

Some borrowers were not so lucky in getting this blanket response.

One had been told that the person who could release it had gone away on a long holiday, another was told his file had gone missing, and even more alarming was the reply to one borrower telling him that although he had paid a substantial premium, no policy in fact existed.When we took the matter up with lenders we were often at first refused a copy because, to quote a typical lender, the MIG '...inured for the benefit of the borrower...' and this contention '...is not one we are going to concede...' Why, we wonder, is it not the insurers' problem rather than that of the lenders?Several questions are raised by the lenders' stance.

Does not the lender owe at least a contractual duty to the borrower, its client, to disclose everything that may or may not be relevant to the mortgage contract? Are not the lenders, by refusing to disclose the MIG, protecting the interests of the insurer and thereby placing themselves in a conflict of interests? Does not the borrower, as the person who paid the premium for the MIG, have the inalienable right to seek independent advice on it so as to determine what risks are covered by the insurance policy?It is important to remember that the borrowers and the lender are not contracting on an equal basis because the borrowers had no choice in the matter; without a MIG there would be no mortgage.What reasons can a lender then have for not disclosing this policy? We suggest some possibilities: the MIG policy covers the borrower; there is no policy; or the policy is not in accordance with the mortgage offer.

Let us explore each option in a little more detail.From the MIG policies that we have seen, it is evident that the policy is 'triggered' when a borrower is in arrears.

In this situation the lender can claim under the MIG for the amount insured and the insurer by subrogation pursues the borrower for the sum paid out to the lender.

The lender may be liable for an 'excess' amount.

There is a growing body of legal opinion which submits that the right of subrogation should not apply to the MIG situation because essentially the borrower has paid the premium for the policy and the insured event has not been caused by his or her negligence.

This is greatly simplifying the argument but the purpose of this article is to examine the overall MIG scenario.

As Professor Ivamy states: 'The right of subrogation cannot be exercised against a co-insured nor against a person for whose joint benefit the subject-matter has been insured.'The MIG shield has not been tested in the courts probably because the insurers have not considered it worth pursuing a borrower when the lender has repossessed.

However, they do have 12 years within which to do so and with X Ltd's advice this may radically change, especially as many borrowers who have walked away from their properties will be financially buoyant.Whether the MIG can be used as a sword rather than a shield is a little more problematic.

From the policies that we have seen the risks do incl ude those other than a forced sale but do not extend to a voluntary sale on the open market with the lender's permission unless the borrowers are in arrears.

Why then do the lenders not disclose the MIG? Can it be that they think by disclosing it they will encourage claims under the MIG? Surely this cannot be the reason because a borrower is not more likely intentionally to bring about arrears to trigger a claim under the MIG than is a comprehensively insured motorist likely intentionally to crash the car.

In any event, why should the lender protect the insurer? It is time that the insurance ombudsman came off the fence and took a more positive role on the issue.We have evidence that at least two building societies during the 1988/92 period took MIG premium payments from the borrower but did not take out the MIG insurance.

The lenders describe this practice as 'self insurance' but we think this is too generous a description.The building society ombudsman looked into the position and wondered whether the practice was 'desirable' but did nothing more.

In any event, as he considered that the MIG policy did not exist for the benefit of the borrower in his opinion it was not really relevant what happened to the MIG premium.

With respect to the building society ombudsman we consider his complacency misplaced.Quite apart from it being a somewhat unsatisfactory way of obtaining money from borrowers, if only one society completed as many as 100,000 mortgages each year and if each borrower pays an average premium of, say, £700 then over four years the lender would have acquired no less than £280 million.This may explain why some lenders when pressed are more able to release the MIG policy than others and may, during the recession, also have made some lendersThe stance of both lenders and insurers in not disclosing the mortgage indemnity guarantee cannot be justified more eager to exercise their power of sale for relatively low arrears if they were not covered for negative equity.

We are sure the borrower would like to know whether undisclosed commissions have been received by the building societies for the placing of the MIG policies and we note that we are still awaiting the comments of the insurance ombudsman on this point raised some months ago.

We expect that we will wait in vain.One could be forgiven for wondering whether the refusal to disclose the MIG on the basis that it does not affect the borrower is a diversionary tactic employed by the lenders to steer the more perceptive lawyer away from the main issue that the MIG policy as placed was not that as contracted for.

Applying basic principles of contract law we see that consideration for the MIG is provided by the borrower paying the premium and the offer by the lender is to take out mortgage indemnity insurance, although often referred to in the offer as a mortgage indemnity guarantee.

As we are dealing with the ordinary person we must give these words their ordinary meaning.

The Oxford dictionary defines indemnity as 'a security against damage or loss'; insurance as 'securing payment of sum of money in the event of loss/damage'; and guarantee as a 'thing given or existing as security for fulfilment of a condition'; the condition in this context obviously being the repayment of the loan.A typical mortgage offer (although there are many variations on this theme) will state that the mortgage must be supported by '...a mortgage indemnity insurance policy arranged by the lender.

The premium is ...a once only payment...deducted from the gross mortgage advance...payable by t he borrower.' If the MIG does not benefit the borrower then the lender has failed to place the correct form of policy as contracted for.

If you ask a MIG client what was his or her understanding of the MIG from the mortgage offer (and from the representations made to him or her) then he or she will almost certainly say that he or she understood it to be an insurance policy that the lender required him or her to take out to cover the (impossible) event of the house being worth less than the mortgage.

Like all insurance if you pay the premium for the policy it is inconceivable that you will be excluded from obtaining some sort of benefit from it.

The client's intention and understanding when paying the premium was that mortgage indemnity insurance was being placed as a condition of the mortgage loan.It was an insurance against the impossible, a fall in the property market - if this happened then there was a guarantee in place for a certain amount (determined by the lender) of the loan, which although was not cash in his or her pocket, was an indirect protection or insurance.What the lender's intention was when placing the MIG is less clear.

If it was to place the type of MIG that we have seen then we would submit this cannot be in accordance with the majority of the mortgage offers unless it was expressly stated as such in those offers.

If it was not so stated then the lenders have not placed the type of insurance that it was implied in the mortgage offer they would place.The insurers' intention is clear: they would only insure against foreclosure or compulsory purchase where there was a chance of recovering some of the payout or where the chances of paying out at all were extremely small.

And even then we would contend that without an express right of subrogation in the MIG policy and without an express directive to the borrower of the consequences of the MIG, this right is both in contract and in equity extremely questionable.Whichever of the above possibilities apply the present stance of both lenders and insurers in not disclosing the MIG policy cannot be justified, legally or morally.

It has resulted in advice such as that given by X Ltd and this will ironically end up causing both borrower and lender greater financial loss in the long run.

As a public relations exercise non-disclosure will have quite far-reaching effects as many borrowers are very angered at the way in which they were treated when they requested the MIG in good faith, so that they may seek independent advice as to where they stand.

The floodgates argument to prevent contractual claims is inappropriate because this is not making new law but giving efficacy to a contract which has, through MIG, over the years amassed huge sums for both lenders and insurers.The solicitors who work for these lending institutions should also advise their clients that the present policy decision of MIG non-disclosure places the institution in a serious conflict of interest which cannot realistically be justified under the guise of privity of contract.