MII covers ship mortgagees against the risk of claims under the Hull & Machinery and/or War Risks policies and/or protection and indemnity coverage being rejected or declared void, in whole or in part. This can be caused by a breach of any warranty or condition under the shipowner mortgagor’s insurance policies, or because of a policy having been automatically terminated for any reason of which the assured named in the MII policy had no control nor any prior knowledge or privity.
Claims under Mortgagees Interest Insurance policies indemnify named assureds to the extent of their security interest under a mortgage on an insured vessel for claims that are unrecoverable through their assignments of that vessel’s hull policies.
In respect of liabilities not paid by protection and indemnity insurers, claims under MII policies indemnify the mortgagee assured to the extent of a loss realised from the subordination of the mortgage caused by the imposition of a maritime, or priority, lien in favour of plaintiffs.
In all cases, claims are subject to the sum insured.
Lessor’s or Innocent Owner’s Insurance is the leasing equivalent of Mortgagees Interest Insurance. In other words, the Lessor’s Interest or Innocent Owner’s policy must indemnity lessors for claims unrecoverable from hull insurers or the P&I club but only up to the sum insured on the Lessor’s Interest policy.
Some lessors also purchase policies to protect themselves from claims made directly against them by third parties in the event that the P&I club does not respond or the P&I cover limits are insufficient. Passive Investor’s Insurance is similar to Lessors or Innocent Owners’ insurance.
MAP insures Mortgagees against the risk of a shipowner being unable to meet the liabilities awarded by a court against a responsible vessel, mortgaged to the assured, caused as a direct result of the amount of the liability awarded by a court exceeding the applicable limit insured under the shipowner’s marine liability insurances, usually insured by an International Group P&I club.
Failure to pay liabilities will result in Maritime Liens attaching to the responsible vessel in favour of plaintiffs, which will cause the arrest of the vessel and may also, under many jurisdictions, precipitate the arrest of sister vessels under the same ownership and control.
The risks insured under MAP are assessed by examining the cover limits insured under a vessel’s protection and indemnity insurances, and are either limited to oil pollution or extended to cover all limitations of P&I club cover.
Due to the international nature of the shipping business, lenders are frequently asked to become involved in projects or proposals which are seen as attractive for reasons other than their exposure to country risk.
As with other ventures that feature politically unstable, over-indebted or underdeveloped countries with unfavourable legal systems, the insurance markets will assist ship financiers by providing country risk transfer by way of a class of coverage for ship lenders known as Mortgage Rights Insurance (MRI).
MRI is required coverage if a bank considers that there may be a risk of a foreign government acting against their legitimate interests. This may either occur through government action against the vessel by way of confiscation, etc. or following a default under the loan agreement where after the bank seeks to repossess the vessel(s).
A common misconception is that an owner’s war policy adequately provides Mortgagees with the country risk coverage required.
In buying and mortgaging second-hand vessels, there is always the risk of there being outstanding liabilities, incurred by former owners, having the status of a maritime or statutory lien on the vessel. In many jurisdictions, such liens rank ahead of the mortgage.
Though every MOA states the seller’s responsibility for and provides a full indemnity against any maritime or statutory liens, when the seller is a single shipowning company that is usually dissolved following completion of the sale, there is rarely any recourse against sellers.
Lawyers acting for the buyers will have researched the most likely jurisdictions for liens against the vessel, but no investigation can be guaranteed to be absolute. This insurance covers this risk of liens unknown to the buyer at the time of purchase being enforced against the vessel under new ownership.
Shipbuilding contracts require payment for a vessel in stages, with an agreed percentage being paid on signing of the contract and subsequent payments following on steel cutting, keel laying, launching and delivery. To secure return of those instalments in the event that the shipbuilder breaches the terms of the building contract and does not deliver the vessel, refund guarantees are obtained. These guarantees undertake to return to the buyer the instalments paid, plus interest at the agreed contractual rate, in the event that a shipbuilder is in default and does not pay what is due. Building contracts will determine disputes by way of arbitration and guarantors will require an arbitration award in favour of the buyer before they pay what is due under the guarantee.
Guarantors are usually state export credit agencies or banks, for example KEXIM, Korean Development Bank, Bank for Investment and Development of Vietnam, and China Exim Bank. However, there is the risk of these guarantors failure to honour their obligations following a valid claim; consequently buyers of vessels and their financiers seek insurance in the commercial markets to protect against such guarantor defaults.