Vessel Title Insurance

You probably have a general understanding of title insurance if you have ever purchased a home. We purchase title insurance for our homes to insure the risk that there may be a defect in the title that affects the marketability of the property. The purchase of a vessel is an investment that also bears risks. Today the purchaser of a vessel, and their lender, has the option of insuring the risk that the vessel may not be free of liens or encumbrances. Title insurance is unique from other kinds of insurance because it covers flaws that occur before the insurance is purchased and the purchaser only makes one payment.

Marketable title, according to Blacks Law Dictionary, is title that a reasonable buyer would accept because it appears to lack any defect. Due to a complicated and often flawed recording system in the United States, many innocent real property owners have had to challenge adverse claims to their property, sometimes years after the transaction, because an unknown defect existed when they purchased their property. History reports that Abraham Lincoln lost a home twice in his lifetime due to imperfect title issues. The concept of title insurance arose for the purpose of defending claims against ownership and also to indemnify the homeowner or lender for losses.

Title insurance is an attractive option in a vessel transaction because many of the liens that a vessel incurs are hidden. In other words, under the unique laws of Admiralty, a vessel can legally accrue liens against it without the requirement of recordation. A related issue is that vessels, unlike your home, are mobile. It is difficult to discover liens against an investment that may have traveled across the Atlantic Ocean many times in its existence. Without title insurance, the best one can do to reveal title defects in a vessel is to hire an Admiralty attorney whose leg work might reveal the existence of liens by tracking down the businesses that have been involved in the life of the vessel. However even the most diligent attorney will not discover all possible title defects or fraudulent transactions.

Title insurance should be especially attractive to a lender that secures its loan with a Preferred Ship Mortgage. Even where a mortgage is recorded correctly with the National Vessel Documentation Center, other interests may affect the preferred status if filed between the transaction time and time and recordation time. Vessel title insurance will insure against interests that are recorded within that gap. Furthermore, title insurance would usually cover against recording mistakes that are occasionally made by Coast Guard personnel. The case of Mayfield v. Energy VII illustrates that possibility. In that case a lender secured its loan for a vessel with preferred status and filed its interest properly. However it was not recorded correctly by the Coast Guard. A federal court granted a subsequent mortgage interest priority over the proceeds of the sold vessel because it did not have notice of the original mortgage that was recorded first-in-time.

Title insurance will not cover all risks and so it is important to have an attorney review your policy to advise you of the policy limitations. Generally a policy will not cover against what are termed "Preferred Liens" under Admiralty law. These include employee and stevedore wages, tort liens, salvage liens, and general average. Despite these limitations, the professionals involved in a vessel transaction should be familiar with the concept of title insurance and to advise their purchasing clients. Otherwise, if a title defect does eventually affect the purchaser's investment on the water, they may come back pointing fingers against others that were involved with the transaction.