Welcome to Liga Asuransi, where you can find trusted guidance on risk management and insurance, especially in the Indonesian maritime industry. This blog is dedicated to professionals—from ship owners, fleet operators, technical managers, to risk advisors—who want to make smart and strategic decisions in protecting their ship assets.
In this article, we will discuss practically and comprehensively about how to effectively assess the risk of a vessel before purchasing a Marine Hull insurance policy. Risk assessment is not just a formality, but the first step that determines whether your policy will work when needed, or leave a gap for loss.
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Ship Financing: Big Potential, Big Risks
In the last few decades, the shipping and ship ownership sector in Indonesia has grown rapidly, driven by the needs of inter-island logistics, export-import, and energy and mining industries. This growth has opened up great opportunities for financing institutions and investors to enter the ship financing sector—either in the form of leasing, investment credit, or new ship construction financing (shipbuilding finance).
However, behind the promising profit potential, there is a very high level of risk. Unlike financing other fixed assets such as property or land vehicles, ships operate in a very unstable environment—exposed to extreme weather, the risk of collision, engine failure, grounding, and sinking. Even a small human error or navigation error can result in a total loss.
In this context, Marine Hull insurance is not just an administrative requirement, but becomes the main protection guarantee that ensures the lender or lessor’s investment remains safe. When an accident or major damage occurs to the ship, the insurance policy will be a source of replacement funds to repair the ship or pay off credit obligations, thereby reducing the potential for default by the lessee.
This article will discuss in full how Marine Hull insurance plays a role in supporting ship financing, the types of clauses that protect the interests of lenders, and the best strategies in developing strong financial protection for both parties.
Why is Marine Hull Insurance Mandatory in Financing Schemes?
In ship financing schemes, whether through leasing, bank loans, or shipbuilding project financing, Marine Hull Insurance is not an option—it is a necessity. Why is that? Because ships as financing objects are very expensive assets, vulnerable to damage, and constantly moving in high-risk environments. For lenders or lessors, any potential damage or loss of a ship means a threat to the continuity of credit payments.
Marine Hull Insurance serves as a primary form of risk mitigation that protects the interests of all parties in a financing transaction:
- Lender (creditor): Protected from the risk of default due to the ship being seriously damaged or lost.
- Lessee (debtor): Not burdened with the full cost of repairing or replacing the ship which could lead to bankruptcy.
- Project owners: Can continue to run operations or execute business plans without major disruptions.
In many cases, the finance company will require a Marine Hull policy with a minimum coverage of the remaining credit value or the market value of the vessel. Usually, the lender will also ask to be listed as a “Loss Payee” in the policy, which means that if a claim occurs, payment will be made directly to the lender up to the amount of the outstanding credit.
More than just a document supplement, this policy provides a guarantee that financing assets remain protected even if force majeure occurs at sea. Even in the project finance structure, lenders often also request additional protection such as War Risk, Strike, or Loss of Hire so that the flow of payments is maintained.
In other words, Marine Hull Insurance is not just about ship protection—but a guarantee of the security of lenders’ investments in the dynamic shipping sector.
Loss Payee Clause and Creditor Interests
One of the most important elements in a ship insurance scheme involving financing is the existence of a Loss Payee Clause in the Marine Hull policy. This clause is a legal mechanism that secures the interests of the creditor or lessor, ensuring that they retain their rights to the financed asset in the event of a loss to the ship.
What is Loss Payee Clause?
The Loss Payee Clause states that if a claim is made on the insured vessel, payment from the insurance company (either in part or in full) will be made to a third party specified in the policy—in this case, the lender or financing institution—until the outstanding loan value is met.
With this clause:
- Creditors do not need to worry that the claim proceeds will be used for other purposes by the debtor.
- Insurance acts as a debt guarantee against the loaned asset.
- In the case of a total loss, the insurance payout can be used to cover the remaining loan obligations directly.
Implementation in Practice
Usually, the Loss Payee Clause is drafted in the form:
“Any payment under this insurance in respect of a claim which exceeds [threshold] shall be paid to [Name of Bank/Lender] as loss payee.”
In more complex transactions, lenders may request additional positions such as:
- Named Insured: The creditor is also named as the insured.
- Notice of Cancellation: Insurance may not be cancelled without written notice to the creditor.
This is a crucial form of legal and financial protection, which not only ensures the continuity of credit payments but also maintains trust between the financing party and the ship owner.
Avoiding Non-Payment Risks Due to Incidents at Sea
In the world of ship financing, one of the biggest risks faced by financing institutions is non-payment—the failure of debtors to fulfill installment obligations due to incidents to the ship. Incidents at sea such as collisions, fires, groundings, or sinkings can make ships inoperable for weeks, even months. As a result, cash flow from ship operations stops, while installment obligations continue.
Without proper protection, this condition can trigger financial failure for the debtor, which ultimately harms the lender. This is where the importance of the Marine Hull policy as the main safeguard against potential non-payment due to force majeure.
Here are some ways Marine Hull insurance helps avoid the risk of non-payment:
- Guarantee Repair or Replacement Costs
If the ship is damaged or total loss, insurance will finance repairs or replace the value of the ship up to the coverage limit. This fund can be used to continue paying installments or replace assets.
- Through the Loss Payee Clause
As explained earlier, claim funds can be transferred directly to lenders, so they still receive payment even if the ship is damaged.
- Extension with Loss of Hire Insurance
This insurance provides compensation for lost income while the ship is out of service. The money can be used to continue paying installments during the repair period.
- Prevent Asset Depreciation
With quick repairs covered by insurance, the vessel is back in service more quickly, maintaining its economic value in the eyes of lenders.
With proper protection, lenders not only finance assets, but also have a strong mitigation system against potential default.
The Role of Brokers in Ensuring the Interests of Lenders & Owners
In a complex ship financing scheme, the presence of a professional insurance broker not only helps ship owners in purchasing policies, but also plays an important role in bridging the interests between lenders (creditors) and lessees (debtors). Brokers become neutral parties and experts who ensure that the entire insurance protection structure supports the smooth running of financing contracts.
Following are some of the strategic roles of brokers in the context of Marine Hull Insurance for financed vessels:
- Arranging a Police Structure that Benefits All Parties
Brokers ensure that Marine Hull policies include important clauses such as Loss Payee, Additional Insured, and Notice of Cancellation to Lender, so that lenders feel secure and shipowners remain flexible.
- Premium & Coverage Negotiation
Through relationships with multiple insurance companies, brokers can negotiate the best premiums without compromising on coverage, as well as ensuring the extension of coverage such as War Risk, Loss of Hire, and Strikes Clause according to the risk profile of the vessel.
- Transparent Claims Assistance
If a large claim occurs, the broker will accompany all processes starting from documentation, coordination with the adjuster, to settlement of claim payments—both to the ship owner and the lender.
- Legal & Operational Risk Mitigation
With an understanding of financing contracts and maritime law, brokers can help align policy provisions with financing agreements, so that there are no conflicts later on.
With the right experience, a broker like L&G Insurance Broker not only provides insurance, but becomes a strategic partner in maintaining the continuity of your ship’s financing and operations.
Case Study Example of Ship Financing + Protection Project
To clarify how Marine Hull insurance plays a role in supporting ship financing, here is a real-life example of a project involving well-integrated bank financing, ship operators and insurance coverage.
Case: Tug & Barge Financing for Coal Operations
A domestic shipping company has secured a multi-year contract from a mining company to transport coal from a river port to an offshore loading terminal. To support the project, the company has applied for financing from a bank to purchase one tugboat and one barge, with a total value of Rp25 billion.
As part of the financing requirements, the bank requires:
- There is Marine Hull Insurance with an insured value according to the purchase price of the ship.
- Loss Payee Clause which lists the name of the bank as the recipient of the claim
- Loss of Hire Policy to maintain cash flow during the contract period
- Insurance certificates are issued directly to the bank
Several months after the ship was operational, an incident occurred: the barge ran aground and suffered serious damage to the hull due to extreme weather. The ship was unable to operate for 45 days and required repair costs of around Rp 2.5 billion.
Insurance Protection Results:
- Marine Hull Insurance pays the full cost of repairs to the nominated shipyard.
- The Loss of Hire Policy provides compensation of IDR 350 million to cover potential loss of income during the period of non-operational activity.
- The claims process is facilitated by the broker, and all documentation is in accordance with claims standards.
- Banks as lenders continue to receive credit payments on time, and ship operators do not experience significant cash flow shocks.
Important Lessons:
This case shows that with properly designed safeguards, all parties in a ship financing are protected: the operator remains operational, the bank is protected from default, and the project proceeds without a hitch.
Collaboration of Insurance & Financial Institutions for Maritime
The shipping industry is a sector with great potential, but also full of uncertainties. For financing institutions, these risks cannot be ignored. This is where Marine Hull insurance plays a central role as a strategic risk mitigation tool—not only for shipowners, but also for lenders and investors.
Collaboration between insurance providers, brokers, and financial institutions will create a strong and sustainable financing ecosystem. By establishing the right protection structure from the start, such as the application of Loss Payee Clause, additional protection such as Loss of Hire, and the selection of a credible insurance company, ship financing can be carried out more safely and efficiently.
As a professional broker, L&G Insurance Brokerready to be your partner in developing an insurance program that not only protects assets, but also maintains the smooth investment and growth of Indonesia’s maritime sector.
Looking for insurance products? Don’t waste your time and contact us now
HOTLINE L&G 24 JAM: 0811-8507-773 (CALL – WHATSAPP – SMS)
Website: lngrisk.co.id
Email: oktoyar.meli@lngrisk.co.id
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