Mortgagee’s Interest Insurance (MII) and Mortgagee’s Additional Perils Coverage (MAP)
Example
The Borrower agrees to pay to the Mortgagee the cost (as conclusively certified by the Mortgagee) of any mortgagee’s interest insurance (“MII”) (including, if the Mortgagee shall so require, mortgagee’s additional perils (including all P&I risks) coverage (“MAP”)) which the Mortgagee may from time to time effect in respect of the Ship upon such terms and in such amounts (not exceeding one hundred and twenty per cent (120%), in each case, of (a) the Loan and (b) the Swap Exposure) as it shall deem desirable.
What is it and what does it do?
An MII policy is a separate additional insurance that covers the mortgagee’s interest in the vessel when the underlying hull insurance policy does not cover the loss in the event of, for example, any breach on the part of the vessel owner of the terms of the underlying insurance coverage.
Similarly, an MAP policy insures the mortgagee in the event of the mortgagee’s financial loss following a situation where the mortgaged vessel has insufficient protection and indemnity insurance to meet the liability claims awarded against it, the most likely instance of insufficient coverage being in the event of a pollution event.
Why is it there and how is it relevant to shipping?
In a typical ship financing transaction, the mortgagee of a vessel almost always requires all insurance policies in respect of the vessel taken out by the vessel owner to be assigned to the mortgagee for the benefit of the lenders and other financing parties. Previous Simply Speaking articles have covered this topic generally here and here. However, as is typically the case with virtually all forms of insurance, vessel insurance policies include defenses available to the insurer against a claim by the vessel owner. Those may include any negligence, breach of policy condition or warranty, or misrepresentation (or non-disclosure) on the part of the vessel owner. Further, in the case of an P&I policy, if the vessel is insured on a fixed premium basis for P&I exposure, the vessel owner’s liability limit may prove inadequate, and consequently, the mortgagee may suffer a financial loss.
Therefore, a mortgagee who was not involved in taking out the original insurance policy and has no involvement in the running of the vessel may find itself without adequate recourse when such scenarios occur in respect of vessel insurance policies that the mortgagee thought protected it against a catastrophe involving a vessel. MII and MAP policies provide the mortgagee with additional protection in case of such scenarios.
MII policies are important to lenders because they help protect the lenders’ interest in the hull insurance policies. MAP policies are also important to lenders because they cover tort claims that under the laws of many jurisdictions would have a higher priority lien claim than that of a ship mortgage.
MII and MAP policies protect the mortgagee and the lenders, and not the vessel owner. The vessel owner’s position with respect to MII and MAP policies is limited to a contractual obligation under the vessel financing agreement to reimburse premiums incurred by the mortgagee when placing such policies. MII and MAP policies are taken out by the mortgagee, and not the vessel owner, because the vessel owner cannot insure against its own malfeasance with respect to the policy terms.
How is it negotiated?
Whereas insurance provisions included in a vessel financing agreement generally follow industry standard form boilerplate language, because MII and MAP policies are purchased by the mortgagee itself (as opposed to the vessel owner) and involve additional cost and extra steps to be taken by the mortgagee, there may be some room for negotiation on the scope and amount of MII and MAP insurance that are required to be reimbursed for by the vessel owner. Vessel financing agreements will often provide that MII and MAP policies may be purchased at any time during the term of the financing at the discretion of the mortgagee, subject to any pre-agreed limitations on reimbursement.
As to the amount, 110-120% of the secured obligation is not atypical (the uplift is to cover additional cost and interest on the loan). When it comes to MAP policies, it can take the form of MAP (all P&I), which covers all P&I liabilities, or MAP (Pollution), which only protects the mortgagee against liabilities arising from pollution.