Chapter 7: Co-insurance of mortgagees

• General

  In the 2023 revision several clauses in Chapter 7 were amended, and the present introduction to the Chapter was extended to elaborate on its system and rationale.
   
  Chapter 7 concerning co-insurance of mortgagees is a sub-category of the topic co-insurance of third parties, which is more generally explained under the heading General in the Commentaries to Chapter 8. In the Plan, the rules on co-insurance of third parties are governed in two different chapters. Chapter 8 provides the general rules on co-insurance of third parties, whereas the specific regulation of co-insurance of mortgagees are set out in Chapter 7. The specific and rather detailed regulation in Chapter 7 is due to the importance co-insurance of mortgagees serve in loan agreements, which often contain provisions relating to insurance of the interests of the mortgagee.
   
  The essential feature of Chapter 7 concerning co-insurance of mortgagees is set out in Cl. 7-1, sub-clause 1, which reads: «If the interest covered by the insurance is mortgaged, the insurance also covers the mortgagee’s interest …». Hence, the provision entails that the mortgagee’s interest is automatically covered by the insurance (ipso jure). This means that a mortgagee is deemed co-insured, regardless of whether or not the mortgagee is stipulated as a beneficiary under the insurance contract and regardless of whether or not the mortgagee has received any notification thereof. By contrast, there is no automatic cover to other third parties under Chapter 8. The protection of the mortgagees is regulated exhaustively in Chapter 7.
   
  Chapter 7 does however not provide an independent cover for the mortgagee. The automatic cover is, as set out in Cl. 7-1, sub-clause 1 in fine, derived from the assured’s position as assured. This follows from the wording that «… the insurer may invoke the rules relating to identification in Cl. 3-36 to Cl. 3-38.» also towards the co-insured mortgagee. The latter entails that the mortgagee – like the assured – may lose cover due to acts or omissions on the part of the person effecting the insurance or the assured who is responsible for the operation of the vessel.
   
  The parties are free to deviate from Cl. 7-1, sub-clause 1 in fine, for example, by providing the mortgagee a more independent co-insurance. On this basis, the position of the mortgagee is often specifically governed in the insurance contract, typically on the request of the lenders, which then prevails over the regulation in Chapter 7.
   
  The mortgagee may also be provided an entirely independent cover, i.e. cover that is not dependent on the owner’s insurance contract (so-called Mortgagee Interest Insurance, which must be distinguished from co-insurance). It should be noted that Cl. 8-7 allows for the possibility of a more independent cover of a third party’s interest, including a mortgagee, but such cover is limited to the insurance to which it is attached and cannot be a complete substitute for a so-called Mortgagee Interest Insurance (see the Commentaries to Cl. 8-7).
   
  Financing vessels often takes place in an international context. Because it may be important for international banks and lenders to understand the nature of the Plan´s system for automatic co-insurance of mortgagees, it may be useful with a brief comparison with English law and English contract practice. Under the UK regulation, there is no such automatic cover for mortgagees. Hence, to have its interests as mortgagee protected by insurance, the mortgagee must proceed based on one of two alternatives.
   
  First, by taking out a separate policy covering the mortgagees economic interest in the vessel, cf. MIA 1906 Section 14 (1). In practice, this may serve as a more independent variant of the cover under the Plan Cl. 8-7.
   
  Second, by an assignment of a policy covering the shipowner’s interest, cf. MIA 1906 Section 50. Such assignment entails that the assured “pass the beneficial interest in such policy” to the assignee (mortgagee in this context). The assignee “is entitled to sue thereon in his own name”, but the insurer “is entitled to make any defence arising out of the contract which he would have been entitled to make if the action had been brought in the name of the person by or on behalf of whom the policy was effected”, cf. MIA 1906 Section 50 (2). That the mortgagee is entitled to sue in its own name is comparable to co-insurance under the Plan. Similarly, the insurer’s right to invoke any defence arising out of the contract is an equivalent to the regulation on identification in the Plan's Cl. 7-1, sub-clause 1 in fine (referring to Cl. 3-36 to Cl. 3-38).
   
  By contrast to the automatic status of the mortgagee as co-insured under the Plan Chapter 7, the said UK "assignment" system must be made by “endorsement thereon or in other customary manner”, cf. MIA 1906 Section 50 (3). MIA 1906 does not require notice of the assignment to be given to the insurer. It should also be noted that such assignment, according to MIA 1906 Section 50 (1), is subject to contrary provisions in the insurance policy. The insurance conditions often require notice of the assignment; see, for example, ITCH 1/10/83 Cl. 5 or IHC 2003 Cl. 23. There are examples that international banks and syndicates familiar with the UK assignment system requires endorsement of the policy with notice to the insurer also where the vessel is insured under the Plan.
   
  On this basis, the main difference between the system of the Plan and the UK regulation is that co-insurance according to the Plan applies automatically if the insured vessel is mortgaged, whereas the UK regulation requires that the policy is (actively) endorsed and often also that the insurer is notified of the endorsement. Furthermore, under the UK regulation the mortgagee must take out a separate policy to be granted better protection than the assured. Under the Plan Chapter 7, however, Cl. 7-1, sub-clause 2 entails that the mortgagee may be granted better protection than the assured with regard to amendments or cancellation of the insurance (Cl. 7-2), handling of claims (Cl. 7-3) and payment of compensation, merely by serving a notice to the insurer about the mortgage. These additional rights of the mortgagee apply automatically upon such notification of the insurer, even though such effects are not set out in the relevant insurance policy.  However, if the relevant policy sets out specific clauses concerning coverage of mortgagees, such specific provisions in the contract will prevail over the regulation in Chapter 7. If the contractual regulation of the position of the mortgagee is incomplete, the rules of Chapter 7 may nevertheless supplement the contractual regulation.

• Clause 7-1. Rights of a mortgagee against the insurer

  The Commentary to this Clause was rewritten in 2016.

  In the 2023 revision, sub-clauses 2 and 3 were amended, new sub-clauses 4 and 5 were added, and the Commentary to sub-clause 1 was amended.

  Sub-clause 1 states that the mortgagee's interest is automatically covered. As explained above in the General introduction to Chapter 7, the mortgagee is automatically co-insured, also where no notice is provided pursuant to sub-clause 2. The only consequence of no such notice is that the mortgagee will not have the benefit of the additional rights set out in Cl. 7-2 to Cl. 7-4. This approach with automatic co-insurance for holders of registered charges is in line with Nordic ICAs.

  The concept of “interest” has long traditions in Nordic insurance law and is frequently used in the Plan. The term “interest” points out that different economical interests related to an insured object may be covered by insurance(s). For example, the economic interest in a vessel is not necessarily limited to the capital value of the hull. It may also include, for example, future income from the operation of the vessel. Furthermore, Chapter 7 is illustrative that the “interest” may also concern a co-insured, typically a mortgagee, not only the assured. By contrast, the narrower term “vessel” essentially points to the hull as such. Hence, the term “vessel” cannot in the same manner as the broader term “interest” serve as a reference to the different economical interests that may be related to an insured object.

  The Clause applies when the vessel is "mortgaged", that is when a charge is created by agreement. Chapter 7 does not protect maritime liens and similar liens. It is not necessary that the charge is registered, but if the mortgagee's right is not legally protected, the mortgagee’s right as a co-insured will not be protected against the creditors of the shipowner, cf. Rt. 1939.343 NH.

  Sub-clause 1 also establishes the principle that the co-insurance is not independent. This is achieved by way of a reference to the general rules governing identification in Cl. 3-36 to Cl. 3-38. On this point the Plan deviates from the solution in the Nordic ICAs.

  The rule in Cl. 3-37 implies that the mortgagee must be identified with the assured or co-owner who has decision-making authority for the operation of the vessel. This means that the mortgagee does not acquire any greater rights than the person who is responsible for the operation of the vessel. If the party in charge of the operation of the vessel is responsible for a breach of safety regulations or sends the vessel into excluded trading areas without the insurer’s consent, the mortgagee will thus have to accept a loss of cover under Cl. 3-25 or Cl. 3-15, sub-clause 5, provided that the other conditions for applying sanctions against the assured are met.

  If the vessel sails into a conditional trading area without prior notice to the insurer, the sanction is that the assured, in the event of damage, only receives compensation subject to a deductible of one fourth, however, up to a maximum of USD 200,000, cf. Cl. 3-15, sub-clause 3. This will also apply in relation to the mortgagee.

  If the responsible assured has delegated decision-making authority which is of material significance for the insurance to another organisation or person, Cl. 3-36, sub-clause 2, cf. Cl. 3-37, entails that the mortgagee must also be identified with that person or organisation. If responsibility for the operation of the vessel has been delegated to several parties, the mortgagee must be identified with all of those responsible parties. Nor does the mortgagee acquire any greater rights than the assured if the insurer has paid out compensation to which it subsequently turns out the assured was not entitled. If the condictio indebiti rules lead to the assured having to pay the compensation back to the insurance company, the mortgagee must do so as well, cf. ND 1985.126 NH BIRGO and Rt. 1995.1641 TORSON.

  The cover is, however, independent in relation to other co-insureds who are not responsible for organising the operation of the ship, for example co-owners without such responsibility or other mortgagees. If they make a mistake, the cover of that mortgagee remains intact.

  It also follows from the reference to Cl. 3-38 that the mortgagee must be fully identified with the person effecting the insurance. If the person effecting the insurance breaches the obligation to give correct and complete information or to pay the premium, the mortgagee will not have any rights against the insurer, either. General principles of contract law dictate that the mortgagee must also be identified with any agents or sub-contractors the person effecting the insurance may use, for example, if the contract is entered into through a broker.

  Naturally, the mortgagee does not acquire any greater rights than the assured in relation to limitations of the scope of cover that are not linked to the issue of breach of obligations for the assured, for example, the war risk exclusion in an insurance against marine perils or the exclusion for insolvency. This is true even though the limitation of cover may seem like a reaction to negligence on the part of the assured, but is drawn up completely objectively, e.g., the limitation of liability for damage caused by inadequate maintenance in Cl. 12-3. It is unnecessary to spell this out explicitly in the Plan text.

  The principle of dependent co-insurance creates a degree of uncertainty for the mortgagee. If, for example, the vessel is lost due to a breach of a safety regulation for which the assured must be blamed, the mortgagee risks being left without cover. For insurance of ocean-going vessels, this "subjective risk" is extremely small. It is, however, conceivable that the mortgagees may wish to insure themselves against this risk as well. This can be done through independent mortgagee cover in connection with the shipowner's insurance, cf. Cl. 8-7. For vessels trading in American waters, the mortgagee may also need to take out Mortgagee Interest Additional Perils (Pollution) insurance (MAP) to ensure priority for the mortgage in situations where clean-up costs, etc. in relation to the American Oil Pollution Act give maritime liens on the vessel priority over charges created by agreement.

  According to sub-clause 2, first sentence, certain additional rights is triggered for the mortgagee in its capacity as co-insured under Chapter 7, provided that the mortgage is notified to the insurer (or the claims leader as per Cl. 9-2, sub-clause 3 (a)). The aim is to protect the mortgagee against certain acts and omissions by the assured or the person effecting the insurance, for example, concerning amendments and termination of the insurance policy.

  There are no requirements as to form of such notice of mortgage and the additional rights of the mortgagee will take effect as per second sentence without any assignment or endorsement of the policy.

  The reference to the claims leader in sub-clause 2 second sentence was added in the 2023 revision, and entails that it is sufficient that such a notice of mortgage is provided to the claims leader as per Cl. 9-2, sub-clause 3 (a).

  Sub-clause 2 second sentence was amended in the 2023 revision by adding that the notice of mortgage takes effect from the time it reaches the insurer “or the claims leader as per Cl. 9-2, sub-clause 3 (a)”.

  If the mortgagee fails to give notice but the insurer or claims leader learns of the creation of the charge in some other way, this must however be sufficient to trigger the additional rights for the co-insured mortgagee.

  It is important to note that merely notifying the claims leader does not as such ensure perfection towards third parties under Norwegian law, for example, concerning the priority referred to in Cl. 7-4, sub-clause 1 (as further explained in the Commentaries to Cl. 9-2).

  The rule in sub-clause 3 concerning notice to the mortgagee is not a substantive rule, but only intended for informative purposes. The mortgagee is provided the additional rights under Cl. 7-2 to Cl. 7-4 even if the insurer neglects to give such notice to the mortgagee. In the 2023 revision, the provision was amended to include a reference to the claims leader as per Cl. 9-2, sub-clause 4.

  Sub-clause 4 was added in the 2023 revision and states that “Any special requirements of the mortgagee to be included in the insurance contract other than the rules contained in Cl. 7-2 to Cl. 7-4 shall not take effect unless and until they are specifically agreed by the insurer. If the co-insurers are represented by a claims leader, the claims leader is authorized to accept such special requirements on behalf of the co-insurers, provided that the special requirements are within customary market practice according to Cl. 9-2, sub-clause 3 (b)”.

  The backdrop of this new sub-clause 4 is that mortgagees often require special terms deviating from the Plan: Longer periods of notice of amendments and cancellation, different threshold amount for payment of claims without the consent of the mortgagee etc. Such special requirements typically emerge from loan agreements or a Notice of Assignment and/or Loss Payable Clause put forward by the mortgagee to be included in the insurance contract. The term “specifically agreed” aim to ensure clarity whether or not such special requirements are accepted by the insurer (or the claims leader) and to avoid subsequent discussions whether or not the special requirements were “tacitly accepted” etc. The second sentence of sub-clause 4, referring to the claims leader, serves as a cross-reference to the new sub-clause 3 (a) in Cl. 9-2 clarifying the claims leader’s authority to receive notice of mortgage on behalf of the co-insurers (see the Commentaries to Cl. 9-2, which also elaborates on the limits of the claims leader’s authority to accept such special requirements; that the special requirements are “within customary market practice”).

  Sub-clause 5 was new in the 2023 revision and provides that “If a vessel is insured as part of a fleet, each of the vessels thereunder shall be deemed to be separately insured in respect of: (i) amendment or cancellation (cf. Cl. 7-2), and (ii) set-off (cf. Cl. 7-4, sub-clause 6)”. Traditionally, the Plan has not explicitly governed the particular issues that might arise concerning insurance of “fleets”, and the present provision merely applies to co-insured mortgagees, and it is not intended to have any general bearing on “fleet” issues. The aim of the provision is to provide a default rule that essentially reflects market practice, and the regulation is intended to facilitate the use of Chapter 7 in international loan agreements. That the provision is a default rule entails that, unless otherwise agreed, the provision applies where an insurance policy covers more than one vessel, and there is no requirement that the policy is named a “fleet insurance”, “fleet placement” etc. The references to Cl. 7-2 and Cl. 7-4, sub-clause 6, entails, however, that Cl. 7-1, sub-clause 5, only applies if the insurer is served a notice of mortgage as per Cl. 7-1, sub-clause 2, or the claims leader is served such notice according to Cl. 9-2, sub-clause 3 (a).

  Item (i) entails that amendments or termination concerning vessels in the fleet that are not mortgaged, will not apply to a vessel (under the same policy) that is mortgaged (and for which there is submitted a notice of mortgage). Item (ii) entails that Cl. 7-4, sub-clause 6 applies mutatis mutandis in the sense that the insurer is not entitled to set-off towards such mortgagee with counterclaims related to other vessels covered by the policy. The term “each” of the objects shall be “separately insured” entails for example, that the insurer is prevented from set-off with a counterclaim related to vessel A (typically a due premium) towards a settlement concerning vessel B where vessel A and vessel B are mortgaged to the same mortgagee.

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  Clause 7-1. Rights of a mortgagee against the insurer

  If the interest covered by the insurance is mortgaged, the insurance also covers the mortgagee’s interest, but the insurer may invoke the rules relating to identification in Cl. 3-36 to Cl. 3-38. If the insurer has been notified of the mortgage, the rules contained in Cl. 7-2 to Cl. 7-4 shall...

• Clause 7-2. Amendments and cancellation of the insurance

  The Commentary to this Clause was rewritten in 2016.

  The first sentence of the provision states that amendments to or cancellation of the insurance contract may not be invoked against the mortgagee unless the mortgagee has been notified by the insurer. This expands somewhat the mortgagee's protection in relation to the general rule in Cl. 7-1, and is in conformity with the principles laid down in the Nordic ICAs. In the 2002 revision, however, it was emphasized that, upon cancellation of a war risk insurance contract, the position of the mortgagee is no better than that of the person effecting the insurance himself, see the reference in the provision to Cl. 15-8, sub-clause 1, second sentence.

  The mortgagee is entitled to be notified in the event of amendments to the insurance contract during the insurance period and in the event of renewal of the insurance. The mortgagee does not need to be notified, however, if the insurance expires because it is not renewed, cf. below. The duty to notify rests with both the leading insurer (claims leader) and the co-insurers. The notice period is 14 days.

  In marine insurance it is not considered expedient to require the insurer to notify the mortgagee when the insurance expires. A marine insurance contract signed on the terms of the Plan lapses automatically upon expiry of the insurance unless it is renewed by the person effecting the insurance, cf. Cl. 1-5, sub-clause 3, and a duty to notify would have required the insurer to keep track of failures to renew. Furthermore, the Plan contains a number of rules to the effect that the insurance expires automatically or is suspended without the insurer having to be aware of this, cf. Cl. 3-14 on loss of the main class, Cl. 3-15 on trading area and Cl. 3-21 on change of ownership. In such cases, it will not be possible for the insurer to give notice before the insurer has received notice himself of the reason for the expiry, which can take a long time. The issue of expanded protection of the mortgagee's interest upon sale of the vessel is usually resolved by the purchaser always taking out new insurance as of the time of take-over.

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  Clause 7-2. Amendments and cancellation of the insurance

  If the insurance contract has been amended or cancelled, the rights of the mortgagee shall not be affected unless the insurer has given the mortgagee specific notice of not less than fourteen days. However, this shall not apply to war risks insurance, cf. Cl. 15-8, sub-clause 1, second sentence.

• Clause 7-3. Handling of claims, claims adjustments, etc.

  Sub-clause 1 was amended in the 2023 revision.

  The common practice in marine insurance is that handling of claims etc. is carried out by the person effecting the insurance or the assured who operates the vessel. It would be inefficient and administrative burdensome to involve the mortgagee in every single adjustment and settlement of a claim. The latter explains the starting point in sub-clause 1, which provides that handling of claims, claims adjustments etc. can be made without the participation of the mortgagee automatically co-insured under Chapter 7. The starting point is, however, not mandatory, and hence it may be agreed with the insurer by way of “special requirements” as per Cl. 7-1, sub-clause 3, that the mortgagee shall be involved in the settlement. Such agreement can be entered into until the time of insurer’s payment of the compensation. It should be noted that Cl. 7-4 ensures that the mortgagee in any case has reasonable control over the payment of compensation.

  As a part of the 2023 revision, it was expressly and generally stated in sub-clause 1 that also “provision of security for loss or liability covered under the insurance” may be made without the participation of the mortgagee. The amendment clarifies, inter alia, that the assured, without the participation of the mortgagee, is vested with an authority to provide security to third parties concerning loss or liability covered under the insurance.

  Under sub-clause 2, the right to compensation for total loss may not be waived, in full or in part, to the detriment of the mortgagee. It could be argued that the protection of the mortgagee should be expanded to apply to every payment of cash compensation (including compromised total loss), cf. Cl. 12-1, sub-clause 4 and Cl. 12-2, but this was deemed unnecessary. The mortgagee will in such cases have the protection afforded by Cl. 7-4, sub-clause 3.

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  Clause 7-3. Handling of claims, claims adjustments, etc.

  Decisions required in respect of casualties, adjustments , claims against third parties or provision of security for loss or liability covered under the insurance may be made without the participation of the mortgagee. The right to compensation for a total loss may not be waived, wholly or in par...

• Clause 7-4. Payment of compensation

  The Clause was amended in the 2023 revision.

  Sub-clause 1 gives the mortgagee «priority» in the event of total loss of a vessel, provided that the insurer is notified about the mortgage cf. Cl. 7-1, sub-clause 2. According to Cl. 7-1, sub-clause 2, the provision applies regardless who made the notification of the insurer. Who made the notification might, however, be an issue with regard to perfection (No. “rettsvern”) for the priority towards third parties, for example the bankruptcy estate of the assured. According to the principle in Norwegian Debt Act Section 29, perfection for such an assigned claim (priority) is subject to notification of the so-called debtor cessus by the assignor (owner/assured) or the assignee (mortgagee). As pointed out in the Commentaries to Cl. 9-2 concerning co-insurance and claims leaders, such notice cannot be given to the claims leader, because the claims leader is neither assignor nor assignee.

  Sub-clause 2 regulates the settlement of partial losses, i.e. where the object insured (typically the vessel) has been damaged without the rules relating to total loss being applicable. If the compensation is used to cover the cost of repairs, the mortgagee's interest will normally be protected, since the value of the mortgaged object (typically the vessel) is usually restored in such cases. Consequently, the mortgagee should not be able to object to such a payment and hence there is reason to require consent from the mortgagee. The threshold for payment is 5% of the sum insured, which as a starting point is applicable for each individual interest. However, for certain interests such as loss of hire insurance and liability insurance other provisions apply, cf. sub-clauses 4 and 5. For the hull insurance, this is a combined threshold for both damage repairs and costs of measures to avert or minimise loss, whilst collision liability covered by the hull insurance is regulated by sub-clause 5 below. If a lower or higher threshold than 5% is needed, a separate agreement must be reached for that purpose. In practice, loan agreements normally require other threshold amounts than 5% of the sum insured, typically nominated as a specific amount for 100% claim. This requires specific agreement with the insurer and is referred to on a general basis in the amended wording of sub-clause 2 (cf. also Cl. 7-1, sub-clause 3, and the Commentary on this Clause).

  A particular issue arises when the shipowner goes bankrupt after the repairs have been carried out but before the shipyard has received payment. If the vessel is still at the shipyard, the shipyard may retain the vessel to enforce payment of the entire repair invoice. The insurer will, in relation to the mortgagee, not be able to pay out the amount to the bankrupt estate unless the shipyard has been paid in full, cf. the wording "upon presentation of a receipted invoice for repairs carried out". The natural course of events may then be that the insurer pays the shipyard directly. If, however, the shipyard has not exercised its possessory lien and has let the vessel sail, it is difficult to see why it should be in a better position than an ordinary creditor. In these types of situations, it is better to fall back on general rules of bankruptcy law, which entail that the insurance compensation goes into the bankrupt estate and that the shipyard only has a claim for a dividend. This approach should not create particular problems for the mortgagee.

  Sub-clause 3 states that compensation under Cl. 12-1, sub-clause 4, and Cl. 12-2 may not be paid without the consent of the mortgagee. The provision is general so that the mortgagee's right to give consent applies in relation to everyone, cf. the comments above under sub-clause 1. Since the compensation in such a case is a substitute for the reduction in the value of the mortgage, the mortgagee must be entitled to have the compensation paid to the mortgagee against a corresponding reduction of the mortgage.

  The provisions in sub-clauses 1 to 3 only apply in relation to mortgagees holding security in the capital value of the vessel. Sub-clause 4 gives a mortgagee holding security in the vessel’s freight income the same security in the event of loss-of-hire as other mortgagees have in relation to payments under the hull cover. However, mortgagees holding security in the value of the vessel or other security have no claim for protection in relation to payment under the loss of hire insurance.

  Sub-clause 5, first sentence, states that liability to a third party (collision liability, etc.) may only be paid by the insurer upon presentation of a receipt. The clause uses the general term «liability» and not «liability to pay damages», and therefore it applies both where the assured is held liable for a loss caused to a third party as well as where a third party makes a claim for a salvage award, see the Commentary to Cl. 5-9. Under some legal systems, like the Norwegian, the rule is, strictly speaking, superfluous, since the insurer is liable towards third parties if the insurer pays compensation to others without having ascertained whether the claims of the third parties have been covered. The rule has nonetheless been retained out of consideration for the international market.

  A second sentence has been added to this sub-clause for the situation where the claims leader has provided security (cf. Cl. 7-3, sub-clause 1). The reference to Cl. 9-7, sub-clause 2, clearly sets out that the claims leader’s interest takes priority under these circumstances, see the Commentary to this provision. Thus, if the security has become effective the co-insurer will have a duty to pay directly to the claims leader, and not to the assured or any other co-insured parties (like the mortgagee).

  Sub-clause 6 relates to the insurer's right to set-off. Since set-off may be relevant to amounts due to the insurer other than the premium, for example, for disbursed advances for previous damage which exceed the repair invoice, the right to set-off is stated in general terms. However, the right to set-off is limited to claims which arise from the insurance contract for the vessel in question, since it is not possible to require the mortgagee to keep abreast of premium arrears or other amounts due to the insurer which arise for the assured's other vessels. Furthermore, it is reasonable to apply a certain time frame. The rule therefore states that set-off against premium arrears and other amounts due to the insurer may only be made for claims which have fallen due during the last two years.

  The time limit is linked to payment of the compensation. This may entail some inconveniences if there are two years of premium arrears at the time of the casualty. In that case, the insurer will not simply be able to deduct these arrears in the compensation to be subsequently paid. The insurer must, however, have the opportunity to draw up an advance calculation as soon as the extent of the casualty has been established, and set off two years' arrears in that calculation. It is furthermore a condition that the right of set-off may only be used once per casualty. The insurer may not, in the middle of a dragged-out settlement of claim, prepare successive advance calculations and compensate more than two years' premium arrears altogether.

  The limitation on the right of set-off applies not only to payment of total loss compensation when the mortgagee is to be paid in full, but also to payment of compensation for damage. From the point of the view of the mortgagee, it is of fundamental importance that the insurance ensures at all times that the shipowner has the necessary funds to carry out repairs so that the vessel may be kept in operation.

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  Clause 7-4. Payment of compensation

  In the event of a total loss, the mortgagee's interests take priority.  Compensation for loss from a single casualty exceeding 5 % of the sum insured , or as otherwise agreed, shall, in the absence of consent from the mortgagee, only be paid by the insurer upon presentation of a receipted invoice...