The Commentary to this Clause was rewritten in 2016.
Sub-clause 1 states that the mortgagee's interest is automatically covered. The mortgagee is co-assured even though notice is not given pursuant to sub-clause 2. The consequence of failure to give such notice is simply that the mortgagee will not have the benefit of the protection provided for in Clauses 7-2 to 7-4. This approach with automatic co-insurance for holders of registered charges is in line with relevant Nordic ICAs.
The Clause applies when the ship 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, his right as a co-assured 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 relevant 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 ship. This means that the mortgagee does not acquire any greater rights than the person who is responsible for the operation of the ship. If the party in charge of the operation of the ship is responsible for a breach of safety regulations or sends the ship 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 ship 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 ship 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-assureds 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 his 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 ship 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 ships, 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 ships trading in American waters, the mortgagee may also need to take out Mortgagee Interest Additional Perils (Pollution) insurance (MAP) to ensure priority for his mortgage in situations where clean-up costs, etc. in relation to the American Oil Pollution Act give maritime liens on the ship priority over charges created by agreement.
The fact that the mortgagee's cover is not independent does not mean that the person effecting the insurance may arbitrarily give up his, and thereby the mortgagee's, rights under the insurance. Several provisions in Clauses 7-2 to 7-4 serve to protect the mortgagee against this eventuality and against the prospect of compensation being paid out by the insurer without it benefiting the mortgagee. To achieve this protection, however, the mortgagee must arrange for the insurer to receive notice of the creation of the charge, see sub-clause 2. If the mortgagee fails to give notice but the insurer learns of the creation of the charge in some other way, this must however be sufficient for the expanded protection to apply.
The rule in sub-clause 3 is not a substantive rule, but only intended for informative purposes: the mortgagee is covered pursuant to Cl. 7-2 to Cl. 7-4 even if the insurer neglects to give the prescribed notice.