Vessel Title Insurance
By Mike Vaughn
(The following article was written several years ago. Since that time all of the insurance companies have abandoned Vessel Title Insurance. If you know of anyone writing Title Insurance for Vessels, please send me an email.)
Vessel title insurance is one of the newest innovations facilitating the transfer of title of yachts and ships.
Up until this time, the veracity of a title to a vessel was assured only by the abstract of title provided by the local U.S. Coast Guard Office of Documentation which was responsible for the filing of all documents relating to the title to any documented vessel.
However, in the early 1990's the Office of Documentation was consolidated in Falling Rivers, West Virginia and all local documentation offices were closed. This required that all documents be physically transported to West Virginia for filing and created "dead spots" in the title search and filing system. It became theoretically possible for a lender to advance funds for the purchase of a vessel and have a lien or other claim be filed during the period between closing and the actual filing of the mortgage.
To avoid this, most lenders required all of the documents providing for its priority to be filed and returned before funds would be disbursed. This created a period of uncertainty on the part of the seller who was required to relinquish his ownership to the buyer on the faith in the escrow agent and lender. This created much uncertainty and many problems in the transaction process if the buyer and seller were not equally financially astute.
Additional problems also face buyers who although not frequent, do create massive legal problems for the lender and buyer.
1. Document forgery has repeatedly been a problem, where vessels are sold with notarized signatures, but which are in fact forgeries. In California, up until recently, Notaries were not requiring positive identification of the person purporting to be the person whose named appeared on the document. While this has been somewhat rectified in California, many other jurisdictions are lax in their enforcement of the positive identification rule.
2. For many years a ring of thieves was stealing boats on the East Coast and reselling them on the West Coast of the United States. They falsified title documents and laundered the boats through a foreign flag and then returned them to the U.S. The purchasers of these vessels received nothing when the authorities discovered the true ownership, seized and returned them to the owners or their insurance companies.
3. Corporations and Limited Liability Partnerships own many yachts and commercial boats. The authority to sell such a vessel resides in the Board of Directors, which must approve and authorize the sale. Unfortunately, most transactions are merely approved by a routine authorization provided by the Seller and, in most cases, it is very difficult or even impossible to determine if it is in fact authentic. Closely held corporations and partnerships, many times, fail to keep their charters up to date, which may render any action by the corporation invalid.
4. In many jurisdictions, state sales tax liens may not appear on the searched title and may arise later to haunt the new owner. Likewise, when dealing with a vessel that has been sold by an Estate after the death of the owner, there arises the danger of Estate and/or Inheritance Taxes creating a lien on the title. Lenders face not only these same problems, but also must contend with the fear that the priority of their First Preferred Mortgage in relationship to other claims.
5. Defective filing is an issue that usually occurs when there is a breakdown in the documentation process. This may occur either in the office of the private Documentation Service that the Lender is using, his own mortgage office or the office of the attorney assisting the Lender. Also, he must consider that a mortgage duly filed with the U.S. Vessel Documentation Office, may be misfiled, misdirected or lost. While there is statutory authority to correct such clerical errors, it may result in litigation and potential financial loss.
6. Priority of the lien is critical to the Lender. A properly recorded First Preferred Ship's Mortgage is superior to the rights of all other lien claimants filed subsequently, except:
- Expenses of the court if a vessel is arrested.
- Seamen's and master's wages, maintenance and cure; and wages of longshoremen directly employed by the vessel.
- Salvage and general average liens.
- Tort lines, including personal injury and death.
- Pre-mortgage liens for necessaries.
7. A properly filed Mortgage always has priority over subsequently filed:
- Liens for necessaries under 46 USC Section 31304 (4) et seq.
- State created liens of a maritime nature
- Liens for penalties and forfeitures for violation of federal statutes
- Preferred non-maritime liens, including tax liens;
- Attachment liens;
- Maritime liens in bankruptcy.
Consequently, the Lender requires a "clean" title at the time of his filing. None of the items in paragraph 7 should be on record because they will then take priority over his mortgage.
When a Buyer and Lender are reviewing a potential sale, these are the issues that concern them.
First American Vessel Title a division of First American Transportation Title Insurance Company has developed a policy that satisfies most of the issues raised in a title transfer. They provide a policy of insurance that provides coverage for:
- Ownership Disputes
- Document Forgery
- Fraud or Duress
- Incompetence or Incapacity of Party
- Defective Filing or Recording of Documents
- Post Policy Forgery
- Unrecorded State Tax Liens
- Labor or Material Liens
- Preferred Status of Mortgage
- Invalidity of Lien
- Priority of Lien
- Estate or Inheritance Tax Liens.
The value to the yacht and ship owner is peace of mind for a small fee. Once an insurable title has been achieved, each subsequent transaction should be more easily accomplished.
A detailed information sheet can be obtained for the Insurance Company by contacting:
- Mr. John Casbon
- (504) 588-9252
- (800) 247-4035
This innovation will take some time to become an accepted practice. However, having litigated disputed First Preferred Mortgages and defective titles in courts in Panama, the U.S. and the British Virgin Islands, I highly recommend this service.