What is Bottomry?

Legal Definition
A bottomry, or bottomage, is an arrangement in which the master of a ship borrows money upon the bottom or keel of it, so as to forfeit the ship itself to the creditor, if the money with interest is not paid at the time appointed at the ship's safe return.

This occurs, for example, where the ship needs urgent repairs during the course of its voyage or some other emergency arises and it is not possible for the master to contact the owner to arrange funds, allowing the master to borrow money on the security of the ship or the cargo by executing a bond. Where the ship is hypothecated, the bond is called a bottomry bond. Where both the ship and its cargo are hypothecated, the relationship is called respondentia. Due to the bottomry bond's relatively low priority as against other liens in the event of a libel against the ship, the use of bottomry bonds declined greatly in the 19th century and the subject is today of interest only to legal historians.

The Code of Hammurabi describes a form of bottomry which is a risk transferring technique. A bottomry would be taken, but the repayment would be contingent on the ship successfully completing the voyage. This is more like a catastrophe bond than traditional insurance. In traditional insurance, you pay premiums and receive a benefit on the risk event. With bottomry and catastrophe bonds, you receive a loan up front and only pay it back with a premium if the risk event doesn't occur.

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.
-- Wikipedia
Legal Definition
Maritime law. A contract, in nature of a mortgage of a ship, on which the owner borrows money to enable him to fit out the ship, or to purchase a cargo, for a voyage proposed: and he pledges the keel or bottom of the ship, pars pro toto, as a security for the repayment; and it is stipulated that if the ship should be lost in the course of the voyage, by any of the perils enumerated in the contract, the lender also shall lose his money but if the ship should arrive in safety, then he shall receive back his principal, and also the interest agreed upon, which is generally called marine interest, however this may exceed the legal rate of interest. Not only the ship and tackle, if they arrive safe, but also the person of the borrower, is liable for the money lent and the marine interest. See 2 Bl. Com. 458; Marsh. Ins. B. 21 c. 1; Ord. Louis XIV. B. 3, tit. 5; Laws of Wishuy, art. 45 Code de Com. B. 2, tit. 9.

2. The contract of bottomry should specify the principal lent, and the rate of marine interest agreed upon; the subject on which the loan is effected the names of the vessel and of the master those of the lender and borrower whether the loan be for an entire voyage; for what voyage and for what space of time; and the period of re-payment. Code de Com. art. 311 Marsh. Ins. B. 2.

3. Bottomry differs materially from a simple loan. In a loan, the money is at the risk of the borrower, and must be paid at all events. But in bottomry, the money is at the risk of the lender during the voyage. Upon a loan, only legal interest can be received; but upon bottomry, any interest may be legally reserved which the parties agree upon. See, generally, Metc. & Perk. Dig. h. t.; Marsh. lnst. B. 2; Bac. Abr. Merchant, K; Com. Dig. Merchant. E 4; 3 Mass. 443; 8 Mass. 340; 4 Binn. 244; 4 Cranch, 328; 3 John. R. 352 2 Johns. Cas. 250; 1 Binn. 405; 8 Cranch, 41 8; 1 Wheat. 96; 2 Dall. 194. See also this Dict. tit. Respondentia; Vin. Abr. Bottomry Bonds 1 Bouv. Inst. n. 1246-57.
-- Bouviers Law Dictionary
Legal Definition
In maritime law. A contract in the nature of a mortgage, by which the owner of a ship borrows money for the use, equipment or repair of the vessel, and for a definite term, and pledges the ship (or the keel or bottom of the ship, pars pro tQto) as a security for its repajment, with maritime or extraordinary interest on account of the marine risks to be borne by the lender; it being stipulated that if the ship be lost In the course of the specified voyage, or during the limited time, by any .of the perils enumerated in the contract, the lender shall also lose his money. The Draco, 2 Sumn. 157, Fed. Cas. No. 4,057; White v. Cole, 24 Wend. (N. Y.) 126; Carrington v. The Pratt, 18 How. 63, 15 L. Ed. 267; The Dora (D. Ct) 34 Fed. 343; Jennings v. Insurance Co., 4 Bin. (Pa.) 244, 5 Am. Dec. 404; Braynard v. Hoppock, 7 Bosw. (N. Y.) 157.

Bottomry is a contract by which a ship or its freightage is hypothecated as security for a loan, which is to be repaid only in case the ship survives a particular risk, voyage, or period. Civ. Code Cal. § 3017; Civ. Code Dak. § 1783. When the loan is not made upon the ship, but on the goods laden on board, and which are to be sold or exchanged in the course of the voyage, the borrower's personal responsibility is deemed the principal security for the performance of the contract, which is therefore called "respondentia," which see. And in a loan upon respondentia the lender must be paid his principal and interest though the ship perish, provided the goods are saved. In most other respects the contracts of bottomry and of respondentia stand substantially upon the same footing. Bouvier.
-- Black's Law Dictionary
Legal Definition
The mortgage of a ship as security for a loan. See 4 Binn. (Pa.) 244, 5 Am. Dec. 404.
-- Ballentine's Law Dictionary