Bottomry

Summary of Bottomry

A contract whereby the owner or master of ship borrows for the use of the vessel, pledging the ship (or bottom) as collateral. It is stipulated that the loan shall be forgiven if the vessel is lost during the tenor of the loan or another stipulated period.

(Main Author: William J. Miller)

In his Life of Cato the Elder, Plutarch describes how he would use the process to make money, but calls it “the most disreputable form of money-lending.” Kaplan and Kaplan describe it as follows:

“Ship insurance springs naturally from the necessity of trade, the existence of sophisticated entrepots, and the rapacity of barbarians — all long-familiar facts of life on the Mediterranean. Its ancient Greek form, as described by Demosthenes, was what is now called by the splendid name of “bottomry.” It was not a direct transfer of risk, but rather a conditional loan: The insurer staked the merchant to a sum of money in advance of the voyage, which was to be repaid with (considerable) interest if the voyage succeeded — but forgiven if the vessel was lost. It is an arrangement that is easy to describe but difficult to characterize: not a pure loan, because the lender accepts part of the risk; not a partnership, because the money to be repaid is specified; not pure insurance, because it does not specifically secure the risk to the merchant’s goods. It is perhaps best considered as a futures contract: the insurer has bought an option on the venture’s final value.”

Definition in Insurance law

Method of transferring pure risks that is perhaps the seed of the modern day insurance policy. Ancient Greece held to the concept that a loan on a ship was canceled if the ship failed to return to its port.

This concept was adopted by Lloyd’s of London in the 1600s when insuring England’s merchants for goods shipped to the colonies. The formation of property and casualty insurance companies worldwide began by insuring the transport of merchandise over bodies of water.

Source: Barron’s Insurance Dictionary