Superyacht insurance warranties

20 January 2015 • Written by Benjamin Maltby
To avoid invalidating insurance, owners must not breach insurance warranties and must obey local laws.

Most owners would not dream of cutting spending on obvious safety equipment, but compliance with obscure flag state regulations and local laws can sometimes seem like unnecessary expense. Yet if an owner is to remain protected by their insurance in the event of an accident, spending more money on detailed compliance may be money well spent.

What is a warranty?

Confusingly, the word ‘warranty’ is often used in the superyacht sector to mean a guarantee under a contract to build a new yacht – hence the phrase ‘warranty work’ to mean the work putting things right after launching.

In the context of insurance, however, it means a promise, by an insured party, to do or not to do something, or a statement regarding an aspect of the risk.

The promise or statement must relate to circumstances which, in the event of a breach, the law will allow an underwriter to repudiate the contract altogether – and walk away without paying in the event of a claim.

How can warranties be recognised?

With such serious consequences flowing from a breach of warranty, it is vital to be able to identify what warranties apply to a policy. The trouble is that warranties can be expressed in the contract, but not actually described as a warranty. More worryingly, they can be implied automatically by law, without even having to be agreed upon.

Thankfully, express warranties must be included in the policy, or must at least be contained in some document referred to in the policy. So in the event of a claim it wouldn’t be good enough for an underwriter to simply dust-off some previously unknown ‘standard’ terms and refuse to pay. Express warranties are normally added as a deliberate and obvious fundamental stipulation of the contract.

While implied warranties cannot be found in policies, they are easy to ascertain from the UK’s Marine Insurance Act 1906, and we’ll consider the more important ones below.

While it may seem narrow-minded just to look at English law, it’s worth considering that most of the world’s risks are insured on the London market, and most countries model their own insurance laws on this Act – sometimes word-for-word.

Whereas express warranties tend to be specific, implied warranties can be overarching and vague; so there can be overlaps between them. But an express warranty will not exclude an implied warranty on a related matter, unless directly inconsistent with it.

Fire insurance warranties require a yacht to be crewed at all times.

What happens if a warranty is not complied with?

The essential characteristic of a warranty, whether express or implied, is that it is a condition which must be strictly complied with, whether it is material to the risk or not.

Any breach of warranty, even though unrelated to the risk or loss, is sufficient to terminate the contract from the date of the breach – and therefore relieve the underwriter from any obligation to pay.

Discharge from liability is automatic and is not dependent on any decision by the underwriter to treat the policy as at an end. Furthermore, the assured cannot use the excuse that the breach has been remedied, and the warranty complied with, before the loss occurred.

An inquiry into whether the breach of warranty actually affected the risk is out of the question. So, too, are questions as to whether there has or has not been substantial compliance with the warranty. Where a warranty has been broken, even though the loss may have been totally unconnected with the breach, the underwriter is still free from liability.

When is non-compliance excused?

Non-compliance with a warranty is only excused when either: the warranty ceases to be applicable due to a change of circumstances; or when compliance with the warranty is rendered unlawful by a new law. In reality, it is hard to imagine any circumstances in the context of yachting where either of the above could apply, but they would have to be considered should an underwriter seek to rely on a warranty. It might also be arguable that the underwriter has waived the right not to take advantage of a breach – although an implied warranty of legality cannot be waived.

How are express warranties construed?

In spite of their sometimes harsh effect, warranties are construed in the same way as other contractual terms. This means that the actual meaning can be broader than might otherwise be expected. For example, a reference to a ‘person’ will include a reference to a company – which may be pertinent where the owner is a company.

In a 2006 English case, concerning a claim following a serious fire on board the motor yacht Newfoundland Explorer while she was laid up afloat in Fort Lauderdale, the court held that the phrase ‘warranted vessel fully crewed at all times’ meant that the owner had to keep at least one crew member on board the yacht 24 hours a day, subject to:

Emergencies rendering crew departure necessary; or

Necessary temporary departures for the purposes of performing crewing duties or related activities such as adjusting mooring lines.

It wasn’t good enough to employ a captain who lived ashore 30 minutes away.

History was repeated in 2008 with a fire on board another vessel, Resolute, whose crew lived nearby – and the court in that case came to the same conclusion.

Typical express warranties

The two most widely used policy forms – the Institute Yacht Clauses and the American Yacht Form – contain warranties that the yacht is only to be used for ‘private pleasure purposes’ and is not to be chartered unless the underwriters specifically agree.

The Institute Yacht Clauses also frame agreed navigation limits and the vessel’s maximum speed as warranties.

Other popular forms often demand that when the yacht is under way a competent person must be on board and in control of the vessel.

Implied warranties are easy to ascertain from the UK’s Marine Insurance Act 1906.

The warranty of legality

Arguably the most important warranty is not expressed, but implied. Under the UK’s Marine Insurance Act 1906 (and in the laws of many other nations) there is an implied warranty that:

The ‘adventure’ (ie a charter or a period of use by the owner and/or crew) will be lawful, and

The yacht will be used in a lawful manner – as far as the assured can control the matter.

With regard to legality of the adventure, at one end of the spectrum a yacht will clearly not be covered where the owner uses it for smuggling.

Problems arise where the owner does nothing wrong and has no knowledge of anything illegal being undertaken– say where a crew member brings a small amount of drugs into a port, and the yacht then catches fire.

Illegality may stem from local law as well as the yacht’s flag state law: a yacht chartering in Spanish waters without a Spanish charter licence would not be covered. Whether bribing a port official to secure a berth during an adventure will breach the warranty of legality is unclear. One would also want to ensure that the complex US security regulations are complied with when entering their waters.

As for the second part – using the yacht in a lawful manner – this is only an issue as far the owner can control it. In one case involving a trading ship, the court held the warranty was effective in defeating a claim by an owner for damage, as he knew that crew members were separately involved in smuggling on his ship, yet failed to replace those crew members.

The issue of whether a yacht is being used in a lawful manner often means that an owner – or his or her yacht manager – must abide by all the various maritime rules and regulations, including those covering safety equipment and systems, crew qualifications, manning levels and working hours.

English courts have been prepared to overlook those regulatory breaches where only fines can be imposed. It should be noted that non-compliance with the International Safety Management (ISM) Code or the Large Yacht Commercial Code (LY2) both carry prison sentences of up to two years – therefore giving underwriters the right to walk away from all claims in the event of any non-compliance. In other jurisdictions, all the rules must be adhered to – to the letter – if an owner is to make a successful insurance claim.

So important is the warranty of legality that breaches of it cannot be waived by a kind underwriter, neither can the parties agree to overlook it.

The warranty of legality has been used to avoid payment even where the crew failed to keep a proper watch – as this was in itself a breach of international collision regulations.

In one landmark case, a yard was also denied cover where fire destroyed yachts in the yard, but where the yard itself did not conform to municipal bye-laws.

Conclusion

Cutting down on crew, employing inadequately qualified crew or not bothering to make sure that the correct safety management systems are in place may bring immediate savings, but there’s also the possibility that insurance premiums may be being wasted.

Some underwriters may be prepared to overlook deficiencies and pay small claims in order to maintain their reputation, but this can never be relied upon.

Benjamin Maltby is an English barrister with consultants MatrixLloyd, providing impartial guidance on all aspects of large yacht purchase, building, ownership and operation.

Originally published: February 2009. Updated September 2012.

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