Mortgagees’ interest insurers

A major pollution incident involves risks for banks and other lenders which provide ship finance.  Among them is the risk that their primary security for the loan, normally a mortgage on the vessel, may be lost or impaired if pollution claims can be enforced against the ship with priority over the mortgage: see Ship finance and pollution.

For some time it has been the practice for this risk to be insured partly by appropriate terms in conventional mortgagee’s interest insurance policies (MII), and partly by Mortgagee’s Additional Perils (Pollution) Insurance (MAP) designed specifically for cases where claims exceed the limit of P&I cover.

Whilst the structure of these policies is in theory straightforward, detailed provisions have had to be worked out to make them operate satisfactorily in practice.

One particular issue concerns the proof required to establish a claim.  In practice lenders have a commercial need for policies to respond as soon as possible after an event affecting the borrower’s ability to service the loan.  However, several years may pass before it is clear that claims will be established for amounts exceeding the limit of P&I cover, or that they will be irrecoverable from P&I insurers for some other reason.  To avoid the need for lenders to carry bad debts in their books for protracted periods, formulae have devised to accelerate payment by underwriters, on the basis that they may recoup by subrogation any recoveries actually made under P&I cover.

Another issue concerns the net loss which the lender is able to recover, taking into account other forms of security which he may be able to realise.  These commonly include personal guarantees from the beneficial owner.  Lenders typically regard these as security of last resort, and some forms of policy expressly exclude them from the designated forms of security from which MII or MAP underwriters may recover by subrogation.

This subject is discussed further in Chapter 19 of Shipping and the Environment, ‘Ship Financiers’.