Marine insurance in ship finance transactions is often discussed in broad terms of coverage types, premiums or exposure to geopolitical concerns in high-risk trading regions. While these issues are important, a set of technical insurance mechanics that can materially affect lenders, shipowners, operators and other transaction parties also need to be considered as part of the story.

Misunderstanding how marine insurance actually works—how coverage attaches, who is insured, how proceeds are allocated, and how security is perfected—can result in uninsured exposure, delayed claims or impaired lender security. This third article in our series focuses on those mechanics, including vessel classification, policy exclusions, insured status, insurance assignments, claims allocation and insurance continuity during ownership transitions.

We continue our discussion with Molly McCafferty, Senior Vice President of the American P&I Club, whose more than 25 years of experience in marine insurance provides practical insight into how these issues arise in ship finance transactions and how they are addressed in practice.

Classification as the Foundation of Insurability

A vessel’s classification status is the starting point for both insurability and financeability. Classification societies establish and monitor the technical standards governing a vessel’s design, construction and ongoing maintenance through regular inspections and surveys, confirming whether a vessel continues to meet those standards.

For insurers, classification is a core risk indicator and a prerequisite to coverage as Hull & Machinery underwriters rely heavily on class to assess seaworthiness and reliability. Failure to maintain class, or loss of class altogether, may lead to exclusions, cancellation of coverage or denial of claims.

For lenders, classification is equally fundamental with loss of class potentially triggering breaches of loan covenants and accelerate default remedies, often at a time when the vessel’s value is already impaired. Maintaining class is not just a technical requirement; it is a critical insurance and financing safeguard that underpins asset value and, accordingly, lender security.

What Marine Insurance Is—and Is Not—Designed to Cover

Even where a vessel is properly classed, marine insurance is designed to cover fortuitous events and unforeseen casualties but does not typically protect against losses that are predictable, avoidable or within the control of the insured.

Standard Hull & Machinery policies typically exclude losses arising from routine wear and tear, poor maintenance, intentional damage, illegal acts or breaches of maritime regulations. War risks, terrorism, nuclear or radioactive damage and cyber-related losses are also commonly excluded unless separately insured.

These exclusions are particularly important for lenders because they can leave gaps in protection. If a casualty occurs as a result of inadequate maintenance or regulatory non-compliance, insurance may not respond. This explains why loan documentation places such strong emphasis on technical management standards, maintenance regimes and compliance obligations.

Who Is Insured: Loss Payee, Additional Insured and Co-Assured

Marine insurance policies often name more than one party, but the capacity in which a party is insured has significant legal and financial implications.

A loss payee is entitled to receive insurance proceeds following a covered loss. Lenders are typically named as loss payees so that proceeds are paid directly to them in the event of a total loss or significant damage.

An additional insured benefits from limited protection under the policy, usually for specified risks, but does not automatically receive insurance proceeds.

A co-assured shares full rights and obligations under the policy with the shipowner. In mutual insurance arrangements, such as P&I Clubs, this can include responsibility for premiums, supplementary calls or claims contributions.

For this reason, lenders typically seek to be named as loss payees or, in some cases, additional insureds, while avoiding co-assured status. Financing documents typically include “no loss / no liability” language to ensure the lender’s interest is protected without exposing it to operational or financial obligations associated with vessel ownership.

Insurance Assignments and Perfection of Lender Security

Naming a lender in the policy is only part of the security package with lenders normally requiring a collateral assignment of the vessel’s insurance. This assignment gives the lender enforceable rights to insurance proceeds if the vessel is damaged or lost.

However, an assignment is only effective if it is properly perfected. Perfection typically requires written notice of the assignment to insurers, preferably with written acknowledgment from insurers, and policy endorsements expressly noting the lender’s interest. In some jurisdictions, additional filings may also be required.

Without proper perfection, a lender’s entitlement to insurance proceeds may be challenged, particularly in an insolvency scenario or where competing creditors assert claims. 

Allocation of Insurance Proceeds Following a Casualty

Where multiple parties are insured under a marine policy, entitlement to insurance proceeds must be clearly defined. 

Loan agreements typically address this by providing that, in the event of a total loss, insurance proceeds are paid to the lender up to the outstanding loan amount. In the case of a partial loss, proceeds are usually paid to the owner to fund repairs, subject to lender consent and agreed thresholds.

Insurance During Vessel Sales, Charters and Transfers at Sea

Insurance risk increases during periods of transition, particularly when a vessel is sold, chartered or transferred while at sea. These events introduce uncertainty regarding responsibility, coverage attachment and timing.

Buyers and charterers must ensure that insurance is in place at the precise moment ownership or risk transfers. Sellers, meanwhile, must maintain coverage until delivery is complete. Charter arrangements further complicate matters, as responsibility for insurance depends on whether the charter is bareboat, time or voyage based.

The Protocol of Delivery and Acceptance (PDA) plays a critical role in this process. By recording the exact date and time of delivery, the PDA establishes when control and responsibility change hands. Insurers rely on this document to determine which policy responds if a casualty occurs.

Even where technical management remains unchanged, insurance policies should always be reviewed to ensure they accurately reflect ownership or charter changes.

Fleet Policies: Portfolio-Level Risk Considerations

Fleet insurance policies, covering multiple vessels under a single program, can offer administrative efficiencies and cost savings. From a lender’s perspective, they may also simplify risk assessment across a portfolio.

However, fleet policies can introduce shared risk. A major claim involving one vessel may affect premiums, deductibles, or coverage terms for the entire fleet. Lenders should therefore understand how fleet policies operate and consider whether cross-exposure among vessels aligns with their risk appetite and security expectations.

Insurance as a Core Pillar of Ship Finance

Marine insurance is not merely a compliance requirement in ship finance transactions. It is a central tool for allocating risk and protecting vessels, cash flow, and lender security.

Seemingly technical details—classification status, policy exclusions, insured roles, perfected insurance assignments, ownership timing and claims allocation—often determine whether insurance responds when a loss occurs. As shipping risks continue to evolve, careful attention to these insurance mechanics remains essential for shipowners, lenders and operators seeking to preserve asset value, maintain revenue continuity and safeguard financial security.