Ship finance and pollution

Most merchant ships have been acquired by their owners with the assistance of finance provided by banks or other lenders.  Normally a mortgage on the ship provides the lender’s primary security for the loan.

A major pollution incident is a concern to mortgagees if it results in claims against the vessel which remove or impair this security.  This should not be an issue in the normal case where claims are met by the P&I insurer.  However the possibility always exists, however small, that an indemnity under the owner’s P&I cover may be wholly or partially irrecoverable because:

• the P&I insurer is financially unable to meet its obligations, or
• it has a defence to the owner’s claim for indemnity, or
• the established claims against the owner exceed the limit of indemnity under the terms of cover.

In any of these events, attempts may be made by parties with claims for pollution to enforce these against the assets of the owner, or against associated parties.  In this context the principal risks to the lender are the possibilities of a mortgage on the spilling vessel being ‘primed’ by pollution claims (i.e. of these being given priority over the mortgage); or of guarantees by parent companies or beneficial owners proving valueless as a result of them being financially crippled through the enforcement of pollution claims against them.

These risks are commonly insured under specialised cover provided by mortgagees’ interest insurers.

The implications of pollution in the context of ship finance are examined in Chapter 19 of Shipping and the Environment.