BankServe’s top tips for navigating marine insurance policies

Mortgagee's interest insurance and innocent owner policies offer a second line of defence for marine businesses, explains BankServe's Peter Mellet

October 12, 2015

Peter Mellet, Managing Director of BankServe Insurance Services, explains how to navigate through the paperwork of mortgagee’s interest insurance and innocent owners insurance, and gives his top tips for potential buyers.

World Finance: Insurance can be complicated and getting the right one to fit your company is paramount, especially when it comes to niche industries such as marine, oil and gas.

With me now is Peter Mellet from Bankserve Insurance Services the market leader in a number of insurance markets, to explain how to navigate through the paperwork and various services.

Well Peter I want to start with mortgagee’s interest insurance and innocent owners insurance. What exactly are these?

Peter Mellet: What they are, are contingent covers to protect lenders and investors in the event that owners’ policies don’t pay. When a loan starts, during the life of that loan the owner would buy insurance for hull and war liabilities.

Now sometimes those policies don’t respond and the mortgagee’s interest covers and the innocent owners policies are a second line of defence. And they will step in when the underwriter of the owners policies say: ‘No, we are not going to pay, and we don’t think we have a liability.’ That’s what they do.

World Finance: And are there claims?

Peter Mellet: Yeah, there a lot – people don’t think they are. With any insurance it’s a piece of paper until you make a claim. Maybe it will help you sleep better at nights, but you’ve got to make sure it works. They aren’t as many claims on mortgagee’s interest insurance or innocent owners as there is another forms of cover.

Marine policies get claims all the time. But we have done 80 claims in the last 15 years. Now it doesn’t sound a lot, but that is. And we collected nearly all of the claims in the market during that period of time. Aggregate total is about $160m and we just collected the biggest one ever at just over $64m.

World Finance: What are the differences between the policy forms?

Peter Mellet: I think the differences in the policy forms you can buy are some of the most extreme in the market. Marine policies are fairly concentrated in the middle. But mortgagee’s interest insurance particularly varies. There are two ends of the spectrum: there is a market wording, which is written by underwriters for underwriters. And at the other end of the spectrum, we’ve got a very user-friendly form, which is as wide as we can get it, and also very user-friendly for the borrowers. So it helps everyone during the process.

And it is important to remember that. You are going out, you are not just buying a product from a shelf. You are not buying some hull insurance or war insurance or liability cover. You are buying a product, which has got varieties of form available. And it is important to buy the right one.

World Finance: And policy wording, how has that evolved during the years?

Peter Mellet: It has evolved through claims. I think insurance is a product which does evolve through the claims process. It’s only when you have claims and someone looking at the liability end, lawyers looking at policy wordings and asking themselves: well, does this work? What these words say? What does this do? Is this what we intended the policy to cover? And by people examining those issues you get to a position where suddenly you says: ‘Right, well maybe this is a problem now.’ And you settle and you compromise but next time you look at the wording and you change it to make sure that problem doesn’t come up again. And that is the way it evolves through the claims process.

And mortgagee’s interest insurance hasn’t evolved as quickly because there haven’t been a lot of claims. I said 80. That isn’t many compared to other types of cover. But at the same time, each claim we’ve learned from, and changed the wording to make it more user-friendly the next time.

World Finance: Why should financiers and investors use their own broker to arrange cover rather than let the owner buy it for them?

Peter Mellet: Privity, basically. If they use the owner or the owner’s broker, they will be fixed with the knowledge that the owner or the broker has. And the whole idea of these policies is to protect an innocent mortgagee or investor.

Now they go and buy their own cover, the have to disclose things to underwriters and the covers will work provided they are not aware of the problem which is invalidating the owner’s policy.

Now the owner will know what he is doing wrong – his broker will have information about the owner. Now if the bank doesn’t have that and they place their own cover – they are clean – their policy is untainted. If they use the owner, then they have problems. And I think if they use the owner or the owner’s broker the policy is devalued in its effectiveness by more than 50 percent.

World Finance: Well finally, are there things that people should look out for when they are buying mortgagee’s interest insurance or innocent owners insurance cover?

Peter Mellet: The main thing, one of the main words, is disclosure. You’ve got to tell people the right things; you’ve got to disclose to underwriters any information you have.

Now I know that sounds simple but I think in mortgagee’s interest insurance, it becomes more complicated. And, as soon as you have a claim, the first thing that happens is the underwriters will instruct a lawyer. He will ask for the loan repayment history. If underwriters haven’t been told that maybe the loan is in default; the owner’s missed payments: they will scream non-disclosure.

They’ll say we should have hard worn liability been told this, this is information we should have been provided. And non-disclosure is one of the hardest defences to overcome, to marine claims; it is a very subjective issue.

What would have influenced an underwriter’s decision-making process and that is something which immediately put you into compromise territory. So I think disclosure – and then I think; look at the policy forms. And going back to one of your previous questions, to look at who’s doing it.

Make sure the bank is buying their own cover. The owner buys his cover, the bank should buy theirs; and if you keep the two separate, then you should give yourself the best chance of making policies work when you need them.

World Finance: Peter, thank you.

Peter Mellet: A pleasure.