Disasters at sea – legal and insurance implications

20 January 2015By Benjamin Maltby
Yacht owners must inform their insurers about possible risks to their vessel. Failure invalidates their insurance.

When picturing a disaster befalling a yacht, it’s easy to imagine hitting uncharted rocks or being caught out by an unexpected storm, but it’s hard to imagine sinking beneath the water while moored in port on a still morning. Yet this has happened several times in recent years.

Contracts of insurance are said to be based on the ‘utmost good faith’, meaning that the assured must disclose to the underwriter anything he or she knows (or should know) that would influence a prudent underwriter’s view of the risk. For example, if a yacht’s smoke detection and/or fire alarm system is not working, or if the crew have failed to check whether such systems are installed and working.

Breaching this duty may enable the underwriter to ‘avoid’ the insurance contract – in other words to treat it as if it had never been made in the first place. It is not enough to simply provide answers to questions set out in a proposal form: owners have a positive duty to speak out about possible risks.

Warranty non-fulfilment

A further route allowing underwriters to avoid paying up is the non-fulfilment of a ‘warranty’ – a strict undertaking by the assured to either do or not do something that must be adhered to exactly, even if it does not affect the risk as a whole.

In cases of non-compliance, the underwriter may avoid liability regardless of whether the assured’s failure led to the loss. Not all policy clauses are warranties, however.

An important typical warranty is that that the yacht is fully crewed at all times. A judgement from England’s High Court concerning the $3 million (£1.9 million) yacht Newfoundland Explorer turned on just such a warranty. While laid up afloat in Fort Lauderdale, the yacht’s generator overheated and she was severely damaged by fire.

Crucially, none of the crew was on board at the time, and the court decided that the phrase ‘fully crewed at all times’ meant that there should have been at least one member of crew on board, essential duties excepted.

Seaworthiness requirements

While there is usually no implicit legal requirement for yachts to be maintained in a seaworthy condition, some policies overcome this by expressly obliging owners to do so.

The concept of ‘seaworthiness’ is broad, encompassing both documentary and physical aspects of a yacht and her crew. It applies just as much while a yacht is in port as when she is at sea. And in the case of a marina fire, for example, if a lack of maintenance or training led to the crew being unable to start an engine easily, this could constitute non-seaworthiness.

Even if a policy does not insist on seaworthiness, this area is still likely to be examined by the underwriter after a claim, as any material non-disclosure may still invalidate it. Flag states’ technical codes of practice provide objective measures of seaworthiness. While helpful, these should not be considered as providing a complete description of what constitutes a seaworthy yacht.

Prevent, don’t cure

Prevention is better than compensation. While all employers of yacht crew owe statutory duties of care with regard to the health and safety of their employees, only those yachts that are chartered are subject to the strict regulations affecting ‘commercial’ yachts.

But for private yachts, this is not an excuse to save money by cutting corners on safety: such an attitude could cost owners their lives, and those of their families and guests.

There is no need to reinvent the wheel. Codes such as the Large Commercial Yacht Code (normally applicable by law to UK-flagged yachts in commercial use with load line lengths over 24m, of less than 300GT, and carrying 12 or fewer passengers) provide an excellent set of guidelines for yachts registered elsewhere and/or in private use; including a Safety Management System detailing emergency training and procedures.

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: May 2008. Updated September 2012.