What Does Bottomry Mean?
Bottomry is a credit situation, rarely used today, in which the owner of a ship or its captain obtains a loan with the ship as the collateral. After a ship's voyage, the borrower must pay off the loan or the lender becomes the owner of the ship. If the ship is lost in the voyage, the borrower does not need to pay back the loan.
Insuranceopedia Explains Bottomry
The name of this type of credit contract refers to the keel, a fin-like structure on the bottom of the ship, considered the most important part of the ship. It is also named so because it is only the boat that is being made collateral, and not the cargo. The credit rests on the fact that payment of delivery of goods will make the borrower (be it the ship's owner or the captain) able to pay back the loan.
The risk from the creditor's side is that if the ship is lost in the open sea or gets destroyed, and can by no means return to port, the loan will not have to be paid. This risk is the reason why this type of contract is no longer popular in maritime insurance.