Mortgagee’s interest insurance: mind the gap!

Charles Buss, of Watson Farley & Williams, reports on The Zouzou case, which heralds a warning for those relying on insurance when it comes to protecting their ship finance investments

A ship financier’s primary security is the mortgaged ship. If the ship becomes a total loss, the mortgage will provide no valuable security, leaving the financier to rely on its rights as assignee and loss payee (and occasionally as co-assured) under the shipowner’s marine insurance policies. However, the owner’s insurers may decline a claim, for example on grounds of breach of warranty or material non-disclosure, or because the loss is not covered by the policy, such as where the owner scuttles the mortgaged ship. To fill this gap, mortgage interest insurance (MII) policies have become an important part of the ship financier’s security package.