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18 December 2013
Assignment of insurances
Mortgagee interest insurance
Nordic Plan's automatic co-insurance
Nordic Plan's extended co-insurance
Mortgagee's additional perils insurance
Insurances against foreclosure problems and liens
A bank financing the purchase of a vessel will normally obtain security for the loan by way of a mortgage in the vessel. However, the bank's interests are exposed to a variety of risks that must be addressed by obtaining adequate insurance cover. Without adequate insurance protection, the bank's mortgage will be of no value if, for example, the ship becomes a total loss or is subject to a maritime lien exceeding the ship's value with priority ahead of the mortgage.
Therefore, the bank will always request to see copies of all of a shipowner's marine insurance policies, including the hull and machinery, protection and indemnity and war risks insurances, and will have in-house experts consider the coverage and solidity of the underwriters. Even if the shipowner has adequate insurance protection, the bank will consider whether its rights as mortgagee are sufficiently protected by insurance.
The bank has several options to ensure that its interests are protected, depending on:
This update considers the most common options.
It is customary for banks, especially when the owner's insurances are placed in the English market, to secure their mortgagee interests by requiring the owner to assign all rights under the insurances to the bank, and have the insurer issue a letter of undertaking to the bank and nominate the bank as the loss payee under the insurances. However, such assignment is not without pitfalls. The bank is placed in the same position as the owner under the insurances, and leaves it exposed to the same risks as the owner in relation to insurance claims being rejected by the insurer on the basis of the owner's conduct being outside the control of the mortgagee – which, for example, might include:
The risk of the insurer refusing to cover a claim on the basis of such conduct by the shipowner may be reduced by a mortgagee interest insurance (MII). This is a separate insurance cover taken out by the mortgagee to cover the mortgagee's economic interest independent of the owner's hull insurance. The MII is often required by financing banks and is taken out at the shipowner's expense as a pre-condition for the financing.
In the Nordic markets, the Nordic Marine Insurance Plan Chapter 7 provides for automatic protection of the mortgagee's interest under the owner's hull insurance. The mortgagee will obtain extended protection and a similar status as loss payee under an assignment of hull insurances, simply by notifying the insurer about the mortgage. However, with respect to conduct by the owner barring claims under the insurance, the position for the bank is similar under the Nordic Plan's automatic co-insurance to that under an assignment of insurances. In order to obtain more comprehensive protection, the bank may take out an extended co-insurance under the plan.
The Nordic Plan Clause 8-4 provides for an extended co-insurance under the assured's hull insurance which is independent from the assured's hull insurance in the sense that the mortgagee does not lose its protection due to acts or omissions on the part of the owner. Under this cover, the insurer is prevented from invoking a breach of duty of disclosure on the part of the person effecting the insurance. Furthermore, if the ship is lost due to breaches of safety regulations for which the assured is to blame, the mortgagee will be covered. However, there are some limitations to the cover and some banks may prefer to arrange for an independent direct insurance (eg, MII).
A mortgagee might further require the owner to bear the costs of an additional cover, the mortgagee additional perils (pollution) insurance (MAPI). This type of cover evolved after the Exxon Valdez incident, following which the laws in some jurisdictions (including the American Oil Pollution Act 1990) allowed third-party claimants to acquire a priority maritime lien on a vessel held responsible for oil pollution. If the lien is enforced and the vessel is sold by way of forced sale, and the proceeds are insufficient to cover the mortgage, the bank will not recover anything under the mortgage and will have no security for the loan. In such situations MAPI will indemnify the mortgagee for any losses resulting thereof. All protection and indemnity clubs in the International Group provide cover for oil pollution up to $1 billion, so MAPI is more common and economically sensible in cases where the limit is not as high – for example, where the vessel is insured under a fixed premium protection and indemnity insurance or is insured by a protection and indemnity club which is not a member of the International Group.
Two other covers for mortgagee interests are available, but are less frequently used or necessary:
Financing banks should take great care to consider whether they have adequate insurance protection against the risks that their interests are exposed to. In order to ensure full disclosure and avoid conflict of interests with owners when placing insurances, it is generally recommended that the bank appoint their own brokers independent of the shipowner's brokers.
For further information on this topic please contact Gaute Gjelsten, Hendrik Hagberg, Herman Steen or Yannis Litinas at Wikborg Rein by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
The Wikborg Rein website can be accessed at www.wr.no.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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