Charlie Buss (WFW): “Lenders expect MII coverage if borrowers’ policies fail to respond to a total loss claim” (source: WFW)
Mortgage indemnity insurance is seen as the backstop for lenders when deals go wrong, but as Watson, Farley & Williams partner, Charlie Buss explains, The ZouZou shows the limitations of MII
The courts have confirmed that the function of Mortgage Indemnity Insurance (MII) cover is essentially to protect the lender against any losses which he may suffer as a result of the insurances taken out by the borrower proving ineffective. The recent decision in Piraeus Bank AE v Antares Underwriting Limited & Ors (The ZouZou) has shown that this cannot always be taken for granted.
The ZouZou was detained in Venezuela in late August 2015, after suspicions were raised that the crew had attempted to smuggle part of a cargo of high-sulphur diesel oil by diverting it from the cargo tanks nominated for loading to other tanks through the cargo lines. The ship was detained for about 14 months. A mere fortnight before the ship’s release, the owner tendered notice of abandonment (NOA) and claimed an indemnity for a constructive total loss (CTL) under its war risks policy.
“Suspicions were raised that the crew had attempted to smuggle part of a cargo of high-sulphur diesel oil”
The owner was insured for war risks by the Hellenic Club, a mutual war risks insurer. The war risks policy covered the owner for loss caused by “detainment” (rule 2A.2.2) but excluded loss arising out of action taken “under the criminal law of any state” (rule 3.5). The Club therefore rejected the owner’s deemed CTL claim as excluded under rule 3.5 and also relied on the owner’s non-disclosure of the ship’s calls into an area requiring additional premium. The mortgagee bank then claimed under its MII policy, whose terms adopted a widely used market form. MII insurers declined the bank’s claim on grounds that there was no prima facie coverage under the owner’s policy, given the exclusion under rule 3.5 of the war risks policy. The court dismissed the bank’s claim.
Comment
Whilst MII insurers may be pleased with a reported authority that restricts the scope of MII coverage, this is not necessarily a positive development for them in terms of the coverage the market will demand in response. Ship financiers expect MII coverage if their borrowers’ policies fail to respond to a total loss claim. In The ZouZou, the judge held that “the MII policy is intended to operate as a secondary source of indemnity to the Owner’s Policies”, but the fact is that the MII policy also contained ‘stand-alone’ cover for ‘casting away’ and ‘deliberate damage’ (Clause 1(ii)). If an owner scuttles his ship, he will clearly not be covered, but his mortgagee’s MII policy will at least respond. In The ZouZou, the judge was not persuaded that clause 1(ii), that clearly contained an element of stand-alone cover, also provided stand-alone cover for a CTL. That reading of this wording will now be followed, unless successfully appealed or overturned.
