In Oceanus Capital SARL v Lloyd’s Insurance Company S.A. (M/V “Vyssos”) [2025] EWHC 3293 (Comm), the Commercial Court held that a mortgagee lender was entitled to claim under a Mortgagee’s Interest Insurance (commonly known as “MII”) policy where owners had forged additional insurance cover, leading to the non-payment under the existing insurance cover following the constructive total loss of a vessel.
The decision underscores the importance of maintaining MII cover as a distinct layer of protection, separate from and additional to the assignment of the owners’ insurance policies. Importantly, the decision confirms that MII cover can protect mortgagees against the risk of owners’ insurance not responding due to the owners’ own misconduct.
Background
The Vyssos was a cargo ship owned by Lyra Mare Limited and managed by Nava Shipping Limited. The Claimant, Oceanus Capital SARL, provided financing to Lyra Mare under a term loan facility secured by a first preference mortgage over the vessel, amongst other things.
Lyra Mare’s interest in the vessel was insured under a marine war risks policy which contained trading warranties that the vessel would not enter, sail for or deviate towards Ukrainian territorial waters unless otherwise agreed by the underwriters of the war risks policy in return for additional premium payments. As part of the security package for the financing arrangement, Oceanus also took an assignment of all rights and interests under Lyra Mare’s insurance policies, which was supplemented by an MII policy Oceanus separately took, underwritten by Lloyd’s Insurance Company S.A..
In 2023, the sub-charterers of the vessel intended to operate the vessel in Ukrainian waters. Oceanus insisted on additional war risks insurance being put in place before the vessel entered the conflict zone, and received what appeared to be a valid cover note the day before the voyage. The following day, the Vessel was damaged by a mine strike and ultimately became a constructive total loss. It subsequently transpired that the additional cover was a forgery, and that no additional war risks insurance existed.
Oceanus’ claim under the war risks policy was declined due to a breach of the warranties. Lloyd’s further declined the claim under the MII policy on the basis that forged insurance cover is not a risk assumed under the policy.
The parties’ arguments
Oceanus issued proceedings against Lloyd’s seeking an indemnity under the MII policy, formulating its arguments on two alternative bases:
- Oceanus had lost the payment it would have received as mortgagee (Lyra Mare having defaulted on the loan and the vessel being the primary security for the loan); or
- Oceanus had lost the payment it would have received as endorsee of the war risks policy.
Either way, Oceanus argued its loss resulted from the damage to the vessel which, absent the breach of the trading warranties, would have been covered by the Lyra Mare’s war risks policy. The non-payment under the war risks policy was a result of an insured peril (arising from the breach of the trading warranties) under the MII policy and should accordingly be covered.
Lloyd’s asserted that Oceanus’ loss was proximately caused by the invalid additional cover, on account of it being a forgery. Forged insurance cover was not an insured peril under the MII policy. Further, even if Oceanus could establish that the proximate cause for its loss was the breach of the trading warranties, Oceanus was privy to that breach in any event. As a result, the loss suffered was not fortuitous, with the non-payment under the war risks policy being an inevitable consequence of Oceanus’ voluntary conduct.
Decision
The Court found in favour of Oceanus on all issues and held that Oceanus was entitled to recover under the MII policy.
In reaching this conclusion, the Court held that the proximate cause of Oceanus’ loss was the mine strike leading to constructive total loss of the vessel, rather than the inability to recover under the forged additional cover. Specifically, the MII policy was engaged where: (i) Oceanus incurs a loss resulting from loss of or damage to the vessel and (ii) the war risks policy did not pay out as a result of an insured peril (here the breach of the trading warranties). The Court noted that the purpose of the MII policy was to protect a mortgagee against a loss reasonably expected to be covered by the owner’s insurances, but which ultimately was not covered due to the owner’s misconduct. Moreover, as the additional cover was a forgery, it could not be treated as part of Lyra Mare’s covered policies for the purposes of the MII policy.
It is worth noting that the Court chose not to decide whether the Oceanus’ protected interest was in the ship itself (as the lender holding security over it) or in the insurance payouts (as the party entitled to receive those payments), stating it was not necessary in this context.
The Court further clarified that, whilst Oceanus’ privity to the breach of the trading warranties was material, privity in this context requires both knowledge and consent. In this case, any consent obtained from Oceanus was vitiated by the fact that the additional cover was fraudulently produced. Consequently, the Court was satisfied that the loss suffered by Oceanus was fortuitous. The loss of the vessel was not an inevitability and did not result from conduct voluntarily entered into by Oceanus’s choice, Oceanus had been deceived by the forged additional cover, and had no genuine choice to prevent the vessel from sailing to Ukraine.
The Court granted Lloyd’s permission to appeal, expressly acknowledging that this is the first judicial consideration of the standard London MII wording.
Key takeaways
The decision is notable for being the first occasion the Court has had to construe and interpret the standard London MII wording, and provides several important points for shipping finance practitioners and marine insurers.
- MII responds to physical loss, not merely policy failure
In construing the wording of the MII policy, the Court held that the mortgagee’s right to indemnity did not depend on the existence of valid cover. Rather, the MII policy was engaged due to the occurrence of a loss caused by an insured event (here, a mine strike) which was ultimately not covered due to misconduct on the part of the owner. This demonstrates that the fundamental purpose of MII cover is not to guarantee the owners’ existing policies, but a separate contract of insurance that protects the mortgagee’s interest.
- The mortgagee’s knowledge and consent
The requirement that an insured peril must have occurred without the mortgagee’s knowledge and consent serves as an important safeguard. It ensures that MII policies protect innocent mortgagees who have no control over the owners’ day-to-day trading decisions and compliance with policy warranties. This reflects the commercial reality of shipping finance, where the mortgagee typically has little involvement in the operational management of the vessel. However, the Court’s reasoning suggests that mortgagees who become aware of potential breaches should actively protest and document their objections, and should ensure that any consent is expressly conditional upon confirmation of appropriate cover.
- The nature of the mortgagee’s insurable interest
As the Court expressly declined to definitively resolve the debate as to whether the interest insured under an MII policy is a mortgagee’s interest in the vessel or its interest in the proceeds of the war risks policy as a loss payee, it is worth noting that the point remains open for further judicial consideration. Seeing as this is a first instance decision and the Court has granted permission to appeal, the Court of Appeal may take a different approach.
A challenge to this decision was heard by the Court of Appeal, and an update will be provided when the appeal judgment has been published.
With thanks to Anna De Freitas for her assistance in preparing this post.
Source: Oceanus Capital SARL v Lloyds Insurance Company SA | Global law firm | Norton Rose Fulbright
