Malcolm Obtained a Mortgage from the Big Bank on a Building

Malcolm obtained a mortgage from the Big Bank on a building that he owned. The loan agreement with the Bank required him to obtain insurance to protect the Bank's interest in the event of fire. Malcolm then obtained a policy of insurance, which named him as the owner and the Bank as mortgagee. Loss was payable to the Bank first to the extent of its loan and the remainder of the insured value to Malcolm. A standard clause in the policy stated that the policy would remain in force even in the event of misrepresentation of the insured.
After the building was destroyed by fire the insurance company refused to pay the Bank or Malcolm. The refusal was based on what the insurance company believed was a incorrect appraisal of the building's worth at the time the policy was taken out. It felt that the overstated value of the property resulted in the insured value having been set too high, which would result in a financial gain for Malcolm from the fire. Because it held that the amount of the insurance coverage was obtained by incorrect statements, the insurance company maintained that the contract of insurance was void ab initio and it was not required to indemnify any of the loss payees. The Bank decided to take legal action against the insurance company. Discuss the legal issues that will be raised by the parties and indicate how the situation is likely to be resolved.