Ship financing loan agreements typically stipulate that in the event of total loss of the vessel or claims exceeding a certain amount, the mortgagee is entitled to insurance compensation under hull insurance and other value-added insurance. Upon notification of assignment, the hull insurer will usually provide a guarantee to the mortgagee based on the loss payment terms. However, the hull insurer may refuse to pay in certain circumstances, typically when the insured breaches the warranty terms or acts with gross negligence. However, hull insurers may refuse to pay in certain circumstances, typically when the insured breaches the warranty terms or acts with gross negligence. These situations can cause the policy to lapse, forcing the mortgagee to face potential loss risks. Without insurance compensation, the shipowner may be tempted to default on or fail to comply with the loan agreement terms.
Therefore, the mortgagee needs additional insurance to protect the loan provided to the shipowner using the vessel as collateral. Mortgage Interest Insurance (MII) and Mortgage Additional Risk (Pollution) Insurance (MAPI) can provide this protection, offering coverage for the outstanding loan amount in the event of the shipowner’s insurance lapse.
This insurance is usually arranged by the mortgagee, with the premium paid by the shipowner, and such arrangements are typically written into the loan contract. MII and MAPI are arranged by banks or mortgagees through brokers designated by the bank, which is crucial. Otherwise, problems may arise. If the insurance is arranged by the shipowner on behalf of the bank, the following situations may cause invalidity:
– Non-disclosure or misrepresentation by the shipowner leading to policy invalidity.
– U.S. court precedents have ruled that when such insurance is arranged by the shipowner, compensation under MII is treated on equal footing with other insurance proceeds. In other words, the court considered MII compensation as part of the shipowner’s assets, even though the insurance was arranged in the mortgagee’s name.
Insurance Amount: Equal to the loan amount
Coverage:
Mortgage Interest Insurance (MII) – This covers cases where the shipowner breaches the insurance contract, violates warranty obligations, or fails to disclose facts, resulting in non-payment under hull insurance, value-added insurance, war risk insurance, and P&I. In such cases, MII can compensate the insured (bank/financial institution) for the outstanding principal and interest of the loan.
Mortgage Additional Risk (Pollution) Insurance (MAPI) – MAPI provides compensation to the insured (bank/financial institution) in cases where the shipowner’s legal liability due to pollution risks exceeds the coverage of P&I. Situations exceeding P&I coverage due to the shipowner’s legal liability include vessel forfeiture, liens, and the seizure of insurance proceeds or sales revenue.
The difference between the two:
MII covers the risk that a claim is invalid or revocable and the insurer will not provide compensation.
MAPI covers the shipowner’s full legal liability to third parties, including any shortfall beyond the scope of P&I coverage.
Mortgagee Additional Risks (All P&I Risks) MAP insurance applies to P&I vessels insured with a fixed-rate insurer, not the IG Association. The terms of MAP (All P&I Risks) insurance are the same as MAPI, but the risks covered extend to all risks covered under P&I.
