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In this article, we will discuss practically and thoroughly how to effectively assess vessel risks before purchasing a policy Marine Hull insurance. A risk assessment is not just a formality, but the first step in determining whether your policy will work when needed, or leave a gap in losses.
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Ship Financing: Big Potential, Big Risk
In the last few decades, the shipping sector and ship ownership in Indonesia have developed rapidly, driven by the need for inter-island logistics, export-import, and energy and mining industry activities. This growth opens up great opportunities for financing institutions and investors to enter the ship financing sector—both in the form of leasing, investment credit, and new ship construction financing (shipbuilding finance).
However, behind the promising potential profits, there is a very high level of risk. In contrast to financing other fixed assets such as property or land vehicles, ships operate in a very unstable environment—exposed to extreme weather, risk of collision, engine failure, grounding, and even sinking. Even small human error or navigation errors can result in total loss.
In this context, Marine Hull insurance is not just an administrative requirement, but is the main protection guarantee that ensures the lender’s 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 the role of Marine Hull insurance in supporting ship financing, the types of clauses that protect lenders’ interests, as well as the best strategy for arranging strong financial protection for both parties.
Why is Marine Hull Insurance Mandatory in the Financing Scheme?
In ship financing schemes, whether through leasing, bank loans, or shipbuilding project financing, Marine Hull Insurance is not an option—but rather a necessity. Why is that? Because ships as objects of financing are very expensive assets, vulnerable to damage, and continue to move in a high-risk environment. For lenders or lessors, any potential damage or loss of the vessel means a threat to the continuity of credit payments.
Marine Hull Insurance functions as the main form of risk mitigation that protects the interests of all parties in a financing transaction:
- Lenders (creditors): 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 owner: Can still run operations or execute business plans without major disruption.
In many cases, the financing company will require a Marine Hull policy with a minimum coverage value of the remaining credit value or market value of the ship. Usually, lenders will also ask to be listed as “Loss Payee” in the policy, which means that if a claim occurs, payment will be made directly to the lender up to the outstanding credit amount.
More than just a complementary document, this policy provides a guarantee that financing assets remain protected even if force majeure occurs at sea. Even in project finance structures, lenders often ask for 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 protecting ships—but guaranteeing 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 that involves financing is the existence of a Loss Payee Clause in the Marine Hull policy. This clause is a legal mechanism that safeguards the interests of the creditor or lessor, ensuring that they retain their rights to the financing assets in the event of a loss to the vessel.
What is Loss Payee Clause?
The Loss Payee Clause states that if a claim occurs on the insured ship, payment from the insurance party (either partial or full) will be made to the third party specified in the policy—in this case, the lender or financing institution—until the value of the outstanding loan is met.
With this clause:
- Creditors do not need to worry that the proceeds of the claim will be used for other purposes by the debtor.
- Insurance acts as collateral for debt against loaned assets.
- In the case of total loss, insurance payments can be used to cover the remaining loan obligations directly.
Application 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 canceled without written notification to the creditor
This is a crucial form of legal and financial protection, which not only guarantees continuity of credit payments but also maintains trust between the financing party and the ship owner.
Avoid the Risk of Non-Payment due to Incidents at Sea
In the world of ship financing, one of the biggest risks faced by financing institutions is non-payment—failure by debtors to fulfill installment obligations due to incidents involving ships. Incidents at sea such as collisions, fires, groundings or sinkings can put ships out of service for weeks, even months. As a result, cash flow from ship operations stopped, while installment obligations continued.
Without proper protection, this condition can trigger financial failure for the debtor, which will ultimately be detrimental to the lender. This is where the importance of having a 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 experiences damage or total loss, insurance will pay for repairs or replace the value of the ship up to the coverage limit. These funds can be used to continue paying installments or replacing assets.
- Through the Loss of Payee Clause
As explained previously, claim funds can be transferred directly to lenders, so that they continue to receive payments even if the ship is damaged.
- Extension with Loss of Hire Insurance
This insurance provides compensation for lost income while the ship is unable to operate. This money can be used to continue paying installments during the repair period.
- Prevent a decrease in asset value
With quick repairs covered by insurance, the ship returns to service more quickly, maintaining its economic value in the eyes of lenders.
With the right safeguards, lenders not only finance assets, but also have a strong mitigation system against the possibility of default.
The Role of Brokers in Guaranteeing the Interests of Lenders & Owners
In complex ship financing schemes, 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). The broker becomes a neutral party and expert who ensures that the entire insurance protection structure supports the smooth running of the financing contract.
The following are several strategic roles of brokers in the context of Marine Hull Insurance for financed vessels:
- Arrange 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 safe and ship owners remain flexible.
- Negotiate Premiums & Coverage
Through relationships with various insurance companies, brokers can negotiate the best premiums without sacrificing coverage, as well as ensuring the extension of coverage such as War Risk, Loss of Hire and Strikes Clause according to the vessel’s risk profile.
- Transparent Claim 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 lender.
- Legal & Operational Risk Mitigation
By understanding financing contracts and maritime law, brokers can help align policy provisions with financing agreements, so that conflicts do not occur in the future.
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.
Example of a Ship Financing + Protection Project Case Study
To clarify how Marine Hull insurance plays a role in supporting ship financing, here is a real example of a project involving bank financing, ship operators and well-integrated insurance coverage.
Case: Tug & Barge Ship Financing for Coal Operations
A domestic shipping company secured a multi-year contract from a mining company to transport coal from a river port to an offshore loading terminal. To support this project, the company applied for financing from the bank to purchase one tugboat and one barge unit, with a total value of IDR 25 billion.
As part of the financing requirements, the bank requires:
- There is Marine Hull Insurance with a coverage 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 while the contract is running
- 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 could not operate for 45 days and required repair costs of around IDR 2.5 billion.
Insurance Coverage Results:
- Marine Hull Insurance pay the full repair costs to the designated shipyard
- The Loss of Hire policy provides compensation of IDR 350 million to cover potential income losses during non-operational periods
- The claims process is facilitated by the broker, and all documentation complies 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 to a vessel 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 cruise industry is a sector with great potential, yet also full of uncertainty. For the funding board, these risks cannot be ignored. Here it is Marine Hull insurance plays a central role as a strategic risk mitigation tool—not just 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 arranging the right protection structure from the start, such as implementing a Loss Payee Clause, additional protection such as Loss of Hire, and selecting a credible insurance company, ship financing can be carried out more safely and efficiently.
As a professional broker, L&G Insurance Broker ready to be your partner in preparing an insurance program that not only protects assets, but also maintains smooth investment and growth in the Indonesian 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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