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21 February 2007
The system for the protection of mortgagee interest under the Marine Insurance Plan has remained largely unchanged since the 1964 edition of the plan because it has proved to function to the full satisfaction of banks. This update describes the system for protecting mortgagee interest.
Under the Marine Insurance Plan 1996, the interest of mortgagees is automatically co-assured under the owner's (mortgagor's) insurances (Section 7(1), Paragraph 1). The mortgagee stands in the shoes of the owner; if the owner forfeits its insurance cover, the same will be the case for the mortgagee's co-insurance.
In order to remedy this potential weakness, the protection of the mortgagee interest can be extended under Section 8(4). Therefore, the mortgagee interest is protected even if the owner has forfeited cover under the insurance pursuant to Chapter 3 of the plan (eg, see Section 3(22) on violation of safety regulations). Thus, protection is comparable to independent mortgagee interest insurance.
Notification of the mortgage by the mortgagee to the insurer is not required in order for automatic co-insurance to take effect; however, notification is highly recommended in order to obtain the further protection provided by Sections 7(2) to (4).
One effect of notification of the mortgage to the insurer is to prevent the insurer from terminating the insurance (eg, due to lack of payment of a premium) unless the mortgagee has been separately and specifically notified of the early termination at least 14 days beforehand (Section 7(2)). Section 7(2) does not apply to termination of the policy according to its own terms. Thus, the mortgagee must establish strict routines to ensure that the time policy is renewed at the end of the insurance period.
In war risk insurance, there is an express exemption from the specific 14-day notice (Section 15(8)). In the event of a relevant change of risk, the war risk insurer or the owner will be entitled to cancel the insurance by giving seven days' notice. The relevant changes of risk are (i) outbreak of war between the five major powers defined in Section 15(5) (ie, Great Britain, the United States, France, the Russian Federation and the People's Republic of China), and (ii) use of nuclear arms for war purposes and other hostilities, including terrorist attacks. Such termination also applies to the rights of the mortgagee, but the latter is entitled to immediate notification of such cancellation .
A further consequence of notification of the mortgage to the insurer is that, in accordance with Section 7(3), decisions required in respect of casualties, adjustments or claims against third parties may be made without the participation of the mortgagee. In this regard, the mortgagee's interest is protected by Section 7(4), which is the standard loss payable clause in the plan.
The plan's standard loss payable clause in Section 7(4), Paragraph 1 provides that "in the event of a total loss, the mortgagee interest takes priority". The corresponding provision in the 1964 plan applied only in relation to the owner. The background of the amendment was - as is stated in the commentary to Section 7(4) - that parties other than the owner may also be entitled to compensation. Accordingly, the rule was made more general. Priority is given to the mortgagee over all other interests, including the interests of co-assureds pursuant to Chapter 8. Thus, the original assured and the co-assureds are entitled to no payment under the hull policy until the mortgagee is satisfied. The same applies to any hull interest policy and/or freight interest policy.
Compensation for a single casualty exceeding 5% of the sum insured shall, in the absence of consent from the mortgagee, be paid by the insurer only on presentation of a receipted invoice for repairs carried out (Section 7(4), Paragraph 2). The purpose of this provision is to ensure that payment from the insurer for partial damage to a vessel shall be used for the actual repair of the vessel, restoring the ship to the same state as it was in before the damage. Smaller repairs (ie, costing less than 5% of the sum insured) may be settled with the owner with no particular formalities in relation to the mortgagee.
Where the insurer pays compensation without repairs being carried out, consent of the mortgagee must be obtained (Section 7(4), Paragraph 3). Under the 2007 version of the plan, the right of the owner to receive cash compensation with no obligation to repair the vessel has been extended considerably, but no such payment can be made without the consent of the mortgagee. Thus, the mortgagee will remain in full control of the cash flow and may ask that the cash amount paid by the insurer be secured for later repairs to the vessel or used for an extraordinary down-payment of the outstanding loan under the mortgage, among other things.
Payments under a loss-of-hire insurance cannot be done without the consent of the mortgagee, provided that the mortgagee has also secured a mortgage on the ship's freight income (Section 7(4), Paragraph 4).
Compensation from the insurer to cover the owner's liability towards third parties for collision liability, salvage awards or other liability covered under the insurance can be paid only on presentation of a receipt from the third party (Section 7(4), Paragraph 5). This ensures that the third party is compensated and prevents any maritime lien from securing such claim. Even though the purpose of the provision is to prevent any maritime lien from having priority over the mortgage, Paragraph 5 is general and there is no need to examine whether the third party's claim is equipped with a maritime lien.
Consent of the mortgagee is required for the insurer to offset claims against the owner, except where the counterclaim has arisen out of the insurance contract relating to the ship in question and has fallen due in the two years preceding the settlement of the claim (Section 7(4), Paragraph 6). A practical example is the insurer's potential set-off of an unpaid premium against the owner's claim under the insurance.
For further information please contact Haakon Stang-Lund, Gaute Gjelsten or Trond Eilertsen at Wikborg, Rein & Co by telephone (+47 22 82 75 00) or by fax (+47 22 82 75 01) or by email (firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
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