Mortgage insurance guarantee (MIG) policies have become a regular feature of lenders' litigation to recover money lost on property lending.

Borrowers and negligent third parties like conveyancing solicitors have claimed that they are entitled to offset money paid out to lenders by MIG insurers against their own liabilities.

The most recent decisions have strongly supported lenders by ignoring the proceeds of MIGs when assessing quantum.Two weeks ago, in Europe Mortgage Ltd v Halifax Estate Agencies [1996] 2 May (unreported), May J struck out a surveyor's attempt to rely on a MIG defence and refused to follow Alliance & Leicester v Edgestop [1994] 13 June, unreported, which was one of the few cases in which credit was given for the proceeds of a MIG.Solicitors who find themselves unwittingly caught in mortgage frauds involving sham purchases at inflated prices, are often the target of lenders eager to recoup their losses.

Similarly, claims can arise if a conveyancer acting for a lender fails to ensure that good title passes, or a surveyor is negligent.

Such third parties have repeatedly attempted to lay claim to the proceeds of the insurance.The arguments of borrowers and third parties that they are entitled to the benefit of MIGs run contrary to the established rule that the proceeds of insurance are res inter alios acta and should be ignored when assessing damages.

Insurers who have paid out under MIGs can then make subrogated claims in the name of the paid-out lender against such third parties in circumstances where the lender would have had such a claim himself.

This is clear from an unreported portion of the first instance decision of Phillips J in the negligent valuation case BBL v Eagle Star [1995] 2 All ER 769, which was not appealed on this point.In BBL, valuers attempted to offset the benefits of a MIG policy against any award of damages.

As Eagle Star was not liable under the terms of the MIG policy to pay compensation in respect of losses attributable to negligent over-valuation, it was claimed that payments made by Eagle Star were in respect of losses attributable to the collapse in the property market for which the valuers could not be liable.

Phillips J firmly rejected this reasoning as falling foul of the doctrine of res inter alios acta.Although BBL was not followed by Knox J in Edgestop, when the society's application for an interim payment against a solicitor caught up in a mortgage fraud was refused, Knox J had not seen the terms of the solicitor's contract, nor the relevant transcript of the BBL decision.

Matters became further confused by a few first instance interlocutory decisions in which it was not accepted that the proceeds of MIG policies should be ignored in third party cases.

In the wake of Europe Mortgage it is unlikely that Edgestop is good law.

Further authority on this point is expected this summer when judgment is eventually given in John D Wood v Arab Bank, heard in the High Court earlier this year.After the c ollapse in property prices, some borrowers faced with a negative equity position were advised by their lawyers to send the keys of their home to their lender and walk away.

It was argued that the proceeds of the MIG were for the benefit of the borrower who had paid for the policy and that, if the lender had not lost money on the loan because of the insurance, then the borrower had no remaining payment obligations.When refusing a borrower leave to appeal on this issue, Staughton LJ said it seemed 'inconceivable that any insurance company would be stupid enough to provide insurance in favour of individuals in the event of their not paying their debts.

It would be a licence to claim money,' (Mortgage Corporation v McNicholas [1992] 22 September, unreported).

More recently, other first instance judges have agreed that it would be unfair to the insurer if the borrower could fail to keep up payments, have the property sold and rely on the MIG proceeds to reduce any liability.As a result of the uncertainty, Woolwich Building Society v Brown [1996] The Independent, 22 January, was taken to the Commercial Court as a test case to clarify the position.

Waller J found that there was no arguable case for the borrower benefiting from the proceeds of the MIG policy and granted summary judgment for the building society.

This is now the leading authority.Despite lenders' initial hopes, Woolwich may not prove to be the last word on this, as it could be readily distinguished if the borrower had evidence of reliance on a clear representation from the lender that the MIG was for the borrower's benefit.

If any lender had been foolish enough to explain that MIGs were insurance for the borrower, then the lender would be likely to fail in any application for summary judgment.

The lender would be exposed to arguments of misrepresentation and estoppel and would have serious difficulties at trial.Despite the strength of the analysis in Woolwich the possibility of some third parties and even borrowers taking advantage of MIG policies cannot be ruled out.

However, the combination of Woolwich and Europe Mortgage means that in the overwhelming majority of cases only the lender benefits from a MIG.