A growing number of shipowners are driven towards financing and mortgage this day as the shipping industry becoming more capital-intensive with bigger and newer ships being built. A security assignment of the shipowner’s rights under the ship’s insurance will generally be demanded by the financer for the protection of his interest.

I.     Reasons for insurance assignment

After a ship mortgage is established, the assured is still the shipowner, not the mortgagee who may find himself with little recourse when suffering from property damages and losses. As Marine Insurance Act 1906 provides that a marine policy is assignable unless it contains terms expressly prohibiting assignment.

Therefore, to obtain control over cash flow and to demand payment directly from the insurer without being interfered by the shipowner or any third party in the event of shipowner default, the mortgagee will normally require an assignment of insurance transferring the right of claiming insurance proceeds. Such assignment allows the mortgagee to safeguard his interest without actually paying the insurance premium or shifting the insurance contractor.

II.  How do assignments work?

The practice is more common in the case of hull and machinery insurance than in P&I insurance, as P&I Clubs provide cover to shipowners for third-party liabilities and liability to the mortgagee is not one of them. Usually, only an assignment of payment is acceptable for P&I insurers and it is completed through the following steps.

First, the mortgagee and his lawyer will draft and issue a Notice of Insurance Assignment (see Part III.) to inform the P&I Club of the established ship mortgage and the transfer of interest.

Second, the Club will issue a draft Letter of Undertaking (LOU, see Part III.) and a Loss Payable Clause attached to the policy after confirming that cover on the entered vessel will not be terminated due to the mortgage.

Upon receipt of the draft LOU, some mortgagees will request modification as per their requirements. A formal LOU with a Loss Payable Clause incorporated in the policy will then be signed upon agreement of both parties, giving the mortgagee entitlement to payment when the owner is in default.

III.   Document templates involved in an assignment of insurance

1.        Notice of Insurance Assignment

We, (Owners Name) of (Owners address), the owner of (Ship’s Name) Hereby GIVE NOTICE that by a security deed dated (the date / month / year) and entered into by us with (the lenders name), there has been assigned by us to the lender as mortgagee of the said ship all insurances in respect thereof, including the insurances constituted by the Policy whereon this notice is endorsed. This notice to you may not be withdrawn or revoked without the prior consent of the lender.

2.        Loss Payable Clause

Payment of any recovery the Owner is entitled to make out of the funds of the Association in respect of any liability, costs or expenses incurred by it shall be made to the Owner or to its order unless and until the Association receives notice from (the “Mortgagee”) that the Owner is in default under the mortgage of the vessel in favor of the mortgagee, in which event all recoveries shall thereafter be paid to the Mortgagee for distribution by it to itself and/or to Mortgagee’s order provided always that no liability whatsoever shall attach to the Association, its Managers or their agents for failure to comply with the latter obligation until after the expiry of two clear business days from the receipt of such notice.

The Association shall, unless it receives from Mortgagee notice to the contrary, be at liberty at the request of the Owner to provide bail or other security to prevent the arrest or obtain the release of the vessel, without liability to the Mortgagee.

3.        Letter of Undertaking

We note you have taken an assignment of the insurance on the above vessel. So far as this Association is concerned, the Managers do not consent to such assignment, other than to give efficacy to the Loss Payable Clause set out below;

We do confirm however that such vessel is entered in this Association for Protection and Indemnity risks on the terms and conditions set out or to be set out in the Certificate of Entry. Furthermore, in consideration of your agreeing to the entry or continuing entry of the vessel in this Association, the Managers agree:

(a) that the Owner, i.e. the captioned Assured shall not cease to be insured by the Association in respect of that vessel by reason of such assignment; and

(b) that, notwithstanding that the vessel has been mortgaged to you and that no undertaking or guarantee has been given to the Association to pay all contributions due in respect of such vessel, the Owner does not cease to be insured.

The Association undertakes:

(a) to inform you if the Association gives the Owner of the above vessel notice that its insurance in the Association in respect of such vessel is to cease;

(b) to give 14 days’ notice of the Association intention to cancel the insurance of the Owner by reason of his failure to pay when due and demanded any sum due from him to the Association; and

(c) to advise you promptly if the vessel ceases to be entered in the Association.

IV.   Important considerations

Not all rights of the shipowner under P&I insurance is assignable. The Club has expressly stated in the LOU that it does not consent to such assignment as it covers mainly third-party liabilities – namely risks of oil spills and pollution, cargo damage, personal safety and wreck removal. The Club will reimburse the shipowner for the payment he has made in accordance with the Club Rule. For a mortgagee, he will not benefit directly from the assignment in most cases, but will be guaranteed of the vessel’s normal operation.

The mortgagee shall provide prompt notice to the Club. Despite the anti-assignment clause in insurance policies, the Club, following proper procedures, will not prevent the mortgagee from its entitled compensation if the owner fails to comply with its obligations. As stipulated in the Loss Payable Clause, the Club will make payment to the mortgagee only if it is notified in written form.

Not all ship financers need the assignment. For a mortgagee, he is not required to pay the premium because the mortgagor is still the legal owner of the entered vessel and the assured recognized by the Club. Then he will need the assignment to secure his right and benefits. But under the finance lease scenario where the leasing company is the legal owner and the bareboat charterer is the operator, it will be more reasonable for the lessor and the lessee to share the premium as co-insurers. They will both be provided with coverage and an assignment will not be necessary.

References:

Pan Zhanjun. (2015). Ship Financing

Marine Insurance Act 1906

Yang Liangyi. (2003). Ship Financing and Mortgage

The views and opinions expressed here are those of the authors and do not necessarily reflect CPI’s position. For further consultation, please contact your manager at the Club.