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30 April 2014
A financing bank will usually secure a loan by obtaining a mortgage on a vessel and seek to protect its interests in the mortgaged vessel by way of insurance. This update considers the protection afforded to mortgagees pursuant to co-insurance under the Nordic Marine Insurance Plan 2013 and assignment of insurance.
A vessel is exposed to a variety of risks that may diminish the value of the mortgage. Without adequate insurance protection, the bank's mortgage will be of no value if, for example, the vessel becomes a total loss.
The bank has several options to ensure that its interests are protected by insurance, depending on the conditions on which the owner's insurances are placed (eg, English or Nordic conditions), the degree of risk that is acceptable and the cost of taking out various insurance covers.
When it comes to protection of the mortgagee's interests against loss of, or damage to, the vessel, there are three main options. The bank can:
This update considers the two first alternatives.
The Nordic Plan provides for automatic co-insurance of the mortgagee's interests through the rules in Chapter 7.
Pursuant to Clause 7-1, the mortgagee obtains a separate claim against the insurer in respect of its mortgagee interests. The automatic cover applies irrespective of whether the mortgage is registered in a ship registry. However, if the mortgagee's rights are not legally protected (ie, registered under Norwegian law), the mortgagee's claim will not be protected against the creditors of the shipowner.
The mortgagee's rights under the co-insurance are subject to the insurer's right to invoke the rules relating to identification under Clauses 3-36 to 3-38 of the Nordic Plan. This means that the mortgagee acquires no greater rights against the insurer than the assured itself. The mortgagee can lose its protection due to acts or omissions by the assured – for example, if the vessel is lost due to safety breaches for which the assured is to blame. In practice, this subjective risk is relatively small, but mortgagees may insure against such risks by taking out extended co-insurance under Clause 8-4 of the Nordic Plan.
If the insurer is notified of the mortgage, the mortgagee obtains additional protection, as set out in Clauses 7-2 to 7-4. As brokers are usually considered to act on behalf of the owners, it is generally not sufficient that the notice is sent to the broker – the notice must actually reach the insurer. When there are several co-insurers, all co-insurers must receive the notice, unless a leading insurer is acting on their behalf in respect of such notices. However, the commentary to the Nordic Plan states that extended protection will be triggered if the insurer has obtained actual knowledge of the mortgage, even though it has not received the notice.
The extended protection under Clause 7-2 provides that the mortgagee shall not be affected by amendments or cancellation of the insurance without having been notified at least 14 days in advance. Clause 7-3 grants the assured the right to make decisions concerning the handling of claims without the participation of the mortgagee, but also provides that the assured cannot waive the right to compensation for total loss. In practice, Clause 7-4 is the most important provision. It protects the mortgagee in relation to payment of the compensation. In the case of total loss, the mortgagee's interests take priority. Compensation for damage of less than 5% of the sum insured may be paid to the assured, but compensation exceeding 5% shall be paid only against a receipted invoice of repairs carried out, unless the mortgagee gives its consent. Furthermore, the mortgagee must give its consent in order for compensation to be paid for unrepaired damage or depreciation in value when complete repairs are not possible. The provision also has rules to protect the mortgagee in other respects, including limitations on the insurer's right to offset claims for premium and disbursed advances.
An assignment of insurance gives the mortgagee a derivative interest in the policy by assigning the assured's rights to the mortgagee. An assignment consists of:
Under an assignment, the mortgagee's position is dependent on the assured's position. This means that the mortgagee will obtain the same rights to the insurance compensations as the assured, and that the insurer will be entitled to invoke the same defences as it would have been entitled to invoke against the assured.
The letter of undertaking and loss payable clause provide for a protection of the mortgagee's interests which are parallel, but not identical, to the protection under the co-insurance under Chapter 7 of the Nordic Plan.
Sometimes the mortgagee is protected as co-insured under the shipowner's hull and machinery insurance according to the Nordic Plan in addition to having obtained an assignment of insurance. There can be various reasons for this. For example, foreign banks are more used to obtaining an assignment of insurance, since they are more familiar with that protection than with co-insurance under the Nordic Plan.
When the mortgagee is co-insured and also has obtained an assignment of insurances, there will be two different sets of rules regulating the relationship between the mortgagee and the insurer: Chapter 7 of the Nordic Plan and the assignment. Since the protection afforded by these two sets of rules is not identical, having both types of protection can therefore create uncertainty as to which rules shall apply to a given situation.
When an insurer issues the letter of undertaking and confirms that it is bound by the loss payable clause, it effectively amends the insurance contract with regard to the mortgagee's rights towards the insurer. In principle, the amendment must be viewed as any other amendment to the insurance contract and the legal effect depends on the specific wording used.
Dependent on the wording, there are three ways to look at the legal effects of the letter of undertaking and loss payable clause:
If the mortgagee wishes to obtain an assignment in addition to the protection under Chapter 7 of the Nordic Plan, the specific wording of the assignment should therefore be carefully considered so as to ensure that the desired result is achieved.
For further information on this topic please contact Herman Steen at Wikborg Rein's Oslo office by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (email@example.com). Alternatively, contact Geir Ove Røberg, Linn Hertwig Eidsheim or Astrid Pleym Løseth at Wikborg Rein's Bergen office by telephone (+47 55 21 52 00), fax (+47 55 21 52 01) or email (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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