Chapter 7 of the Plan contains provisions regarding the co-insurance of the mortgagee's interests under the owner’s insurances.
Cl. 7-1 provides that the mortgagee be automatically co-insured "if the interest covered by the insurance is mortgaged". This means that the mortgagee is automatically co-insured under the loss of hire insurance only if the earnings of the vessel are assigned or pledged to the mortgagee. Thus, in theory, there is no need to notify the insurer about the assignment/pledge of the earnings, but this is nevertheless still done as a matter of routine so that the mortgagee obtains the further protection pursuant to Cl. 7-2 to 7-4.
Cl. 7-2 requires that the insurer give the mortgagee a specific prior notice of not less than fourteen days if the terms of the insurance policy are amended during the currency of the insurance or if the insurance is prematurely terminated (e.g. in the case of non-payment of premium, see Cl. 6-2).
Cl. 7-3 deals with claims handling and has been written with hull insurance in mind. However, neither the wording nor the Commentary suggest that Cl. 7-3 shall not apply to protection of the mortgagee’s interests under a loss of hire insurance, so the claims handling and adjustment under the loss of hire insurance is done by the loss of hire insurer (in co-operation with the owner as required) without any interference by the mortgagee. Likewise, sub-clause 2 of Cl. 7-3 should be applied by analogy to loss of hire insurance so that the owner cannot waive his claim for loss of hire compensation without the consent of the mortgagee. This solution is consistent with Cl. 7-4, sub-clause 4 see further on this sub-clause below under 10.2.2.3.2. The combined effect of Cl. 7-3, sub-clause 2 and Cl. 7-4 is that any cash payments not covering repair of the vessel may not be made to the owner without the consent of the mortgagee as such cash payments from the insurer should primarily be paid to the mortgagee as down payment of the loan. Exception is made for smaller amount defined as up to 5% of the sum insured, cf. Cl. 7-4, sub-clause 2. Total loss compensation is, of course, the most relevant example of cash payment that must be secured for the mortgagee, as the security for the loan by way of mortgage in the vessel literally is lost. Cash payments for unrepaired damage according to Cl. 12-1, sub-clause 4 and Cl. 12-2 may not be paid to the owner without the consent of the mortgagee, cf. Cl. 7-4, sub-clause 3. The same goes for any payments under the loss of hire insurance, cf. Cl. 7-4, sub-clause 4 provided the mortgagee has actually secured a pledge or mortgage on the freight income of the vessel, see further under 10.2.2.3.2. It would be inconsistent if the owner could waive his claim for payment in advance under the loss of hire insurance to the detriment of the mortgagee. Hence, Cl. 7-3, sub-clause 2 must be applied by analogy to payments under the loss of hire insurance.