Loan Agreements & Mortgagee's Interest
Both a mortgagee and a mortgagor can have an insurable interest in property. In the case of a mortgagee, it will be seeking to insure its security in relation to the debt.
A mortgagee can be noted in a property insurance policy, alongside the named insured owners of the property, and will therefore become a joint policyholder. However, a mortgagee may just be noted elsewhere in the property insurance policy and as such, is unlikely to be deemed a joint policyholder. Alternatively, the mortgagee may take an assignment of the owner’s property insurance policy or take out its own separate policy to insure the property.
Furthermore, a mortgagee may take out a policy to cover its own interest in certain losses that cannot be recovered under the policy arranged by the property owner. Such policies are known as Mortgagee’s Interest Insurances and reimburse losses suffered by the mortgagee as a result of non-payment or reduced payment under the mortgagor’s property insurance policy. The non or reduced payment being due to specified issues such as a breach of a policy warranty, a breach of good faith, omissions and the like. The indemnity under the policy being linked to outstanding indebtedness under the loan.
The recent case of Oceanus Capital Sarl v Lloyd’s Insurance Co SA [2026] EWCA Civ 863 concerned a coverage dispute under a Mortgagee’s Interest Insurance after cargo vessel the “Vyssos” sustained damage due to a mine strike in Ukrainian waters on 27th December 2023.
Amongst other things, in the case of the “Vyssos” the Court of Appeal considered the nature of a mortgagee’s insurable interest. Consideration was given to the insurable interest being in the vessel itself to the extent of the loan. Consideration was also given to an alternative basis for mortgagee’s insurable interest, namely a financial interest in being paid under the vessel’s War Risks Policy. Whilst both types of approach cover the mortgagee’s security interest in the vessel, the claimable loss under the Mortgagee’s Interest Insurance may differ from one approach to another. Hence the importance of clarity in policy terminology.
Oil and gas companies can and will find themselves faced with complex loan agreements. Within the provisions of such loan agreements, mortgagee lenders will often seek to impose specific conditions on the mortgagor oil and gas company in relation to the former’s access to the latter’s property insurance contracts.
So far as oil and gas companies are concerned, it is essential that the implications of the draft insurance provisions, being sought by the mortgagee lenders, are fully understood. For example, if the mortgagee is seeking to take an assignment of the oil and gas company’s policy, what are the implications of the proposed terminology? Could the oil and gas company be losing control of and access to its own policy? Do alternative solutions exist to satisfy lenders? For example, assignment of proceeds provisions in the form of protected policy loss payee clauses, with reference to designated bank accounts.
Is the mortgagee lender demanding that the oil and gas company secures the agreement of its insurers to a specific “non-vitiation” clause negating certain policy warranties? If so, how clear is the terminology of the clause? In seeking to negotiate such a “non-vitiation” clause, what is the affect on the width of cover available under the policy to the oil and gas company? If necessary, are alternative solutions available? For example, could the lender arrange its own Mortgagee’s Interest Insurance?
So far as lenders to the oil and gas industry are concerned, when considering Mortgagee’s Interest Insurance do examples exist within other sectors of the insurance market of clear and effective policy terminology?
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