Loss payable clauses

  1. Assignment

    Regardless of whether the mortgagee is co-insured under the owner's insurances or whether the insurances are assigned to him, it is necessary to determine when the mortgagee is entitled to payment under the policies. This is normally done by the so-called “loss payable clause” included in the assignment of the insurances.  Where the insurance is assigned to the mortgagee, it follows logically that the mortgagee is the only one entitled to payment under the insurances. However, this conclusion may go too far in two ways:

    1. Third parties may be entitled to a direct action against insurer in conflict with the rights of the mortgagee.

    2. The owner may need the insurance money to carry out repairs.

    The first point is very often overlooked by the standard loss payable clauses in use, while the second point may be taken care of by allowing the insurer to pay out minor amounts in order to facilitate matters for all three parties to the assignment.  The amount is usually fixed or expressed as a small percentage of the sum insured.

    The two issues raised above will not be a problem in relation to loss of hire insurance because third parties will hardly have any right of direct action under a loss of hire insurance and the vessel's hull insurer is the one, who provides the means for repair of the vessel. Therefore, it is justified to make an assignment of payments under the loss of hire insurance without limitations. This is, of course, clear in cases where the earnings of the vessel are pledged in favour of the mortgagee, but the same should apply in cases of a simple assignment of the loss of hire insurance to the mortgagee.

    Another important point, especially under English law, is the result of The Angel Bell award,[28] which states:

    A loss payable clause gives no rights to the loss payee unless it also constitutes or evidences an assignment of the assured’s rights under the policy or evidences the fact the designated person is an original assured.

    A loss payable clause is therefore not valid unless there is an assignment, and the assignment is not valid unless there is a notice of assignment. In the practical world the notice of assignment is often considered as an unimportant formality, but as The Angel Bell Award proves, the notice of assignment is a condition for all the other documents to be valid, and may even constitute a breach of the loan agreement.

    [28] The Angel Bell [1979] Lloyd’s Rep. 491, quote from page 497.

  2. Co-insurance

    Special loss payable clauses, similar or identical to those used in relation to an assignment of insurances, will be used when the mortgagee is co-insured under the owner's insurances.  Such clauses are not necessary if the vessel is insured based on the Plan because Cl. 7-4 contains the provisions necessary both to protect third party interests and to enable the owner and insurer to deal smoothly with minor repairs up to 5% of the sum insured. 

    Cl.7-4, sub-clause 4, provides that compensation for loss of time may not be paid out without the consent of the mortgagee "who has a mortgage on the ship's freight income".  This is consistent with Cl. 7-1, which provides that the mortgagee will not be automatically co-insured under the loss of hire insurance if he does not have a pledge in the income of the vessel. The reason for this limitation is that the loss of hire insurance is irrelevant for a mortgagee who has no interest in the earnings of the vessel.  However, the parties may agree to give the mortgagee the same benefits also in cases where he has not obtained a pledge on the income of the vessel, in which case the mortgagee must either have the loss of hire insurance assigned to him or be expressly included as a co-assured under the loss of hire insurance.