Ship Insurance Policy

Ship Insurance Policy

In shipping business, ship related insurance is used by

  • ship owners
  • ship operators
  • cargo shippers

Financial institutions (banks or lenders) who either have financial security in a ship or have arranged lending to a company with significant ship assets. Financial institutions give importance to the insurance that is placed by ship owners or ship operators. Marine insurance is protecting financial interests of all parties. ‘

Ship financier (lender, mortgagee, financial institution) have an insurable interest in a ship and hold a valid mortgage. Ship financier (lender, mortgagee, financial institution) can procure insurance directly to protect its interest in the ship and to insure against damage to the ship or loss of the ship.

Generally, ship financier (lender, mortgagee, financial institution) arrange contractually to be protected under the marine insurance coverage arranged by a ship owner or operator. Lender’s (mortgagee) interest in the ship is protected by being listed as an additional assured in the insurance entries of the ship owner’s or ship operator’s coverage. Nevertheless, as an additional assured, Lender’s (mortgagee) insurance coverage is only as good as the coverage of ship owner or ship operator.

Assignment of Insurances

Most prudent ship financier (lender, mortgagee, financial institution) will require ship owners or ship operators to enter into an Assignment of Insurances as part of the loan documentation. Purpose of the Assignment of Insurances is to give ship financier (lender, mortgagee, financial institution) the broadest possible rights in connection with the insurance.

Assignments of Insurances may be made in a range of forms, from very basic agreements to designate a lender (mortgagee) as an additional insured to very detailed agreements. Most Assignment of Insurances have certain key terms:

  • Identification of the insurance parties
  • Description of loan agreement:
  • Statement of the consideration for the Assignment
  • Express statement of the Assignment
  • Representations, Warranties, and Covenants that the insurance is in full force, and will be maintained in full force, and that it is in compliance with the requirements of the Assignment
  • Grant of power of attorney to lender (mortgagee) to take actions under the insurances
  • Statement of conditions on the assignment, clarifying that the assignor is permitted to exercise rights under the insurances unless and until a default under the loan agreement
  • Agreed notice to all underwriters of the Assignment
  • An agreed form of a Letter of Undertaking by the underwriters or brokers confirming the insurance and undertaking to take certain actions to protect the lender’s interests
  • Agreed Loss Payable clauses to be attached to the insurance policies clarifying how payments under the insurances are to be paid
  • Customary miscellaneous contract provisions, including choice of law, choice of forum, severability, termination, and interpretation clauses.

Typically, prudent ship financer (lender, mortgagee, financial institution) will seek confirmation that the insurances protecting its investment are in place with reputable underwriters.

What is Ship Insurance Policy?

Ship Insurance Policy provides the coverage borrower (mortgagor, ship owner) has promised, and that the lender (mortgagee, financial institution) will be notified of any changes that could impact the insurance protection.

Usually, insurance policy confirmation is given through Insurance Broker’s (Underwriter’s) Letter of Undertaking. Terms of Insurance Broker’s Letter of Undertaking:

  • Statement of consideration to make the Letter of Undertaking an enforceable contract
  • List of the insurances placed on the ship and protecting the ship owner, ship operator and the lender (mortgagee, financial institution)
  • Confirmation that the insurances have been affected
  • Confirmation that the insurance will be on an occurrence basis (covering all claims arising from occurrences during the effective period of the insurance)
  • Confirmation that the lender’s rights may be further assigned by the lender (mortgagee, financial institution)
  • Agreement to hold the insurance policies on behalf of the lender (mortgagee, financial institution)
  • Agreement to arrange for the agreed loss payable clauses to be included on the policies
  • Agreement that the policies will provide no recourse against the lender (mortgagee, financial institution) for the payment of premiums (or P&I Club calls)
  • Agreement that the policies will provide for notice to the lender (mortgagee, financial institution) of any non-payment of premiums or cancellation
  • Agreement that all policies will have an acknowledgment of the Assignment of Insurances
  • Provisions addressing procedures in the event of a notice of default under the loan agreement
  • Provisions concerning procedures unless and until a default occurs

Generally, commercial Marine Loan Agreements require borrower (mortgagor, ship owner) to enter in an Assignment of Insurances in accordance with the lender’s (mortgagee, financial institution) Standard Form. Nevertheless, before standard form can be finalized, borrower (mortgagor, ship owner) will need to consult with its insurance broker or underwriter to confirm the underwriter’s agreement to the provisions of the Assignment of Insurances and the Insurance Broker’s Letter of Undertaking, and to confirm the wording of the loss payable clauses.

Lender (mortgagee, financial institution) and borrower (mortgagor, ship owner) need to be careful not to get ahead of insurance broker and underwriters, to ensure that insurance coverage will be available to protect the lender’s (mortgagee, financial institution) investment.

Financial institutions’ (banks or lenders) insurance coverage is subsidiary to ship owner’s or ship operator’s coverage when it is listed as an additional assured, its coverage is at risk if the ship owner or ship operator voids the insurance policy because of a breach of warranty (like warranty of ship seaworthiness) or other causes.

Generally, additional assured has all the rights that the named assured has, in contrast to the situation where a banker might be denominated a “loss payee” and have no such rights except being designated to receive insurance payments.

Financial institutions (banks or lenders) can protect their interests in a ship by procuring insurance directly designed to cover the risk that ship owner or ship operator might void its insurance coverage. Breach of Warranty coverage, insurance market currently makes available mortgagee’s (lender, financial institution) interest and innocent ship owner’s interest insurance. In the latter case, the insurance is designed for a lease finance owner that is not in control of the ship’s operations.

Generally, mortgagee’s (lender, financial institution) interest and ship owner’s interest insurance covers the insured party in the event the provider of the ship insurance coverage (hull and machinery, increased value and war risk coverage) has a valid defense against payment. However, most insurance policies do not provide for payment to the insured unless and until a final judgment of non-payment has been rendered.

In shipping, marine insurance market also provides coverage in the event that a ship causes pollution and pollution claims come ahead of the ship mortgage and thereby impair the mortgagee’s (lender, financial institution) security in the ship. This type insurance is usually referred to as additional perils (pollution) coverage and is usually offered as an add-on to mortgagee’s (lender, financial institution) interest insurance. Additional perils insurance also may cover potential confiscation of the ship.


Builder’s Risks Policy

Financial institutions (banks or lenders) can also protect their interest in a Ship Under Construction. Financial institutions (banks or lenders) obtain whatever security protections are available under the local law where the shipyard is located.

Financial institutions (banks or lenders) provide construction period financing can be listed as an additional assured under Builder’s Risks Policy that protects against the possibility of physical loss or damage to the ship and other losses during construction, testing and sea trials. Financial institutions’ (banks or lenders) coverage under builder’s risk policy will only be as good as the coverage obtained by the person who procured the insurance.

Generally, pay to be paid nature of marine insurance presents complications when the insured becomes insolvent. Such an entity may not have the funds to pay a claim so as to then obtain its contracted for insurance recovery. Generally, United States courts have honored pay to be paid claims in insolvency situations. Hence, requiring the insolvent to pay claims first pursuant to the terms of the applicable insurance policies. On the other hand, with regard to insurance policies subject to English law, a third-party claimant may be able to proceed against the insurance through English Third Parties Act 2010 (Rights Against Insurers).

Lender (mortgagee, financial institution) contemplating the purchase of an existing loan package secured by a ship will want to be sure that the previous lender’s (mortgagee, financial institution) rights under the ship owner’s or ship operator’s insurances transfer smoothly to the new lender (mortgagee, financial institution). Even if the assignment of the loan is documented with provisions that the assignment includes related loan documents, including the Assignment of Insurances, the new lender would be wise to arrange for separate documentation of the assignment from the previous lender to the new lender of the Assignment of Insurances, and to arrange for notice from the ship owner or ship operator to insurance broker and underwriters of the assignment and updating of the loss payable clauses.

In the event of a subsequent claim, some underwriters may be hesitant to make a payment to a third-party lender (mortgagee, financial institution) with whom underwriters may have a very weakened (attenuated) connection, through insurance broker to ship owner to a lender to another lender.