Superyachting can be said to have been growing up over the last 20 years, a time during which an entire industry has evolved to give insurance advice to the owners of very large vessels.
Yacht management companies and specialist yacht insurance brokers are often consulted to help owners find comprehensive insurance coverage in keeping with their needs. These specialists are familiar with the complex legal issues and the insurance companies that might or might not be capable partners in showing yacht owners how to buy superyacht insurance.
But what do owners who need to consider managing their yachts on a personal scale? With the rapid growth of yachting around the world, many more insurance carriers offer coverage for vessels over 24m that are valued at between $5 million to $25 million (£3.2 million to £16 million).
Their products can vary greatly, but the differences are sometimes hard to discern, except by experts in the field. Indeed, at this level the decision making process is often handled not by an expert, but by the yacht owner, his captain, accountant, or personal assistant, none of whom will be well-versed in insurance contract language and will not have much time to devote to this responsibility.
How coverage works
Generally there are two ways for an insurance carrier to define what is covered in a policy:
Specifying what risks or perils are insured in a 'Named Perils' policy, or
Declaring that everything is insured except what is excluded: an 'All Risks' policy.
Under a 'Named Perils' policy, the policyholder bears the burden of proof that a given risk is insured, and proving that a particular risk is covered if it does not exactly fit under one of the named perils (is a bent mast the same as a broken mast?) may be grounds for an insurer to try to negotiate a lower settlement.
Unfortunately, you might be forced to decide, in view of potential legal costs, that although this is not the fairest solution, it is the most economical.
Alternatively, the insurer may deny the claim entirely and you will have to hire the services of legal counsel to attempt to prove otherwise.
Under an 'All Risks' policy, the insurer would have to prove that the same risk was not covered, and you would have to assume that, for similar economic reasons, the insurer would be looking to find an agreeable and reasonable settlement without incurring additional legal costs.
Both types of contracts have exclusions, and these must be read carefully to interpret the full breadth of cover. Even a Named Peril may be excluded or modified elsewhere in the contract.
If, for instance, your vessel has more than a certain maximum design speed, the application of a 'speedboat clause' would exclude damages to your rudder, strut, shaft and propeller due to grounding a typical (and potentially expensive) Named Peril.
Many insurance policies exclude or limit coverage due to latent defects in a yacht or any arising from the design or manufacturing methods and processes. Damages resulting from these kinds of defects can be difficult to prove or disprove, particularly when the part in question may be at the bottom of the ocean and irretrievable.
It is often possible to negotiate with your insurer to delete this exclusion entirely, which in the world of 'double negatives' means that you have coverage again.
While the thought of incurring substantial damage to a yacht or even total loss is enough to ruin an owner's day, most loss of sleep is caused by the threat of a liability suit.
Superyacht owners maintain a small battalion of lawyers to minimise their exposure to liability claims and the bad press that might accompany them. Management companies are hired to develop handbooks defining the protocol for every possible scenario, and oversee their implementation. These steps are reasonable for the owner to take, when their yacht is valued at $5 million and $25 million.
In the eyes of some, however, anyone who has such a large asset is an interesting potential target for a lawsuit. For this reason, the liability coverage afforded under the yacht insurance contract (or the lack of) is of particular importance.
To measure the appropriateness of your liability coverage it is necessary to ask two questions:
Do I have coverage to protect me against those liability risks that I may be exposed to?
Do I have enough protection against such risks?
To answer the first question, it is probably easiest to start by examining what is not covered or excluded from your insurance contract.
Some policies exclude claims for loss, damage or injury resulting from intentional or criminal acts. Others exclude such claims, while maintaining coverage for any insured parties who were not directly or indirectly involved.
Since it is nearly impossible for an owner always to know exactly what his crew are doing, it is certainly advisable that his insurance policy should defend him against any insured claims that might result from their criminal actions.
If prompt and proper measures are not taken to defend the owner, some countries will even impound the vessel in an attempt to extract a financial settlement.
Government fines or penalties may also be excluded from the insurance cover. While it is generally not the purpose of insurance to pay such fines, one exception relevant to yachting should be negotiated with your provider.
Many countries now impose a fine for damages that are incurred due to marine environmental harm, such as the destruction of coral reefs, or as a result of a pollution incident. In cases where the cause of the damage was accidental and not intentional, many insurance companies are willing to view the fine as a reparation cost rather than a penalty, and will reimburse such expenses.
Working on a yacht can sometimes be dangerous. As an owner, if you do not or cannot complete a separate employer's liability insurance, it is important to make certain that you have coverage against personal injury claims that might be made against you by your crew within the framework of your liability insurance coverage.
Be particularly careful to check that your policy is willing to defend you against claims in keeping with the liability laws of any nation and does not exclude crew members from a particular country. The liability laws of some countries would hold an owner responsible for maintenance and care, which could translate into financial support over an extended period of time and be quite costly.
The potential cost that may result from a liability suit is exactly the issue that makes a yacht owner feel vulnerable, which takes us back to the second question: How much liability coverage is recommended?
Level of coverage
Generally, the level of liability coverage should at least equal the value of the yacht. If you want a higher level of security you should choose an insurer who is willing to offer higher limits.
Sometimes an owner will be told that a lower limit is acceptable because they can add the yacht to their separate personal excess liability policy (or umbrella).
While the combined limits may appear to offer adequate cover, it is important to note that many umbrella policies do not cover all the components of a personal liability policy, excluding employee (or crew) related claims as well as pollution some of the most contentious and expensive exposures that an owner can encounter.
Under these circumstances, the underlying yacht liability limit may quickly prove to be inadequate and leave the owner exposed to long-term costs.
An owner also needs to check that the liability coverage defined in the policy does not limit his cover to unacceptable levels for particular risks.
A number of carriers, for instance, limit their responsibility to reimburse claims resulting from pollution. Instead of having the entire liability limit of, say, $15 million available, the policy may cap claims resulting from pollution at $1 million per incident.
Many countries have taken a harder stance on pollution liability, so, just as in the case of crew liability, it is probably one of the areas where an owner most needs to be certain that adequate coverage has been put in place.
The purpose of liability insurance coverage is not only to offer an owner compensation against valid claims, but also to defend them against invalid claims.
Since the legal expenses associated with building a proper defence can be high, it is important to know whether such costs are included in the liability limit, or paid in addition to this limit. A limit of $15 million may be adequate if any defence costs are in addition to this limit, but sorely inadequate if they are included in it.
To make matters even more complicated, some carriers offer a mixed solution, offering defence costs in addition to the liability limit for some jurisdictions and limiting it in others, particularly the US.
While this may seem acceptable as long as the vessel is in Europe, it should be reconsidered before going to the US or any of its protectorates (including the US Virgin Islands). In fact, an owner of a vessel cruising in Europe may be sued in the US if, as a result of a collision, a US citizen is injured.
Knowing how a policy deals with this issue is essential in helping you to choose the correct overall limit and, possibly, the correct insurance provider.
Selecting an insurance provider
With more and more insurers now entering the yacht market, particularly for those vessels valued up to about $25 million, how can you know which one is best for your needs?
Any owner completing an insurance policy is doing so under the premise that their insurer possesses the financial strength and willingness to pay in the event of a claim.
As fundamental as it sounds, to check the financial strength of the insurers of your yacht, you have to know who they are! If your insurance cover is to be underwritten by a number of companies, you must check the financial strength of each participant. This information can be obtained from your insurance broker.
Willingness to pay
Judging whether a company has the will to pay is more difficult but not impossible.
Insurance companies have a reputation, so you should be able to make certain that the one you are considering is known for paying claims fairly and promptly. Find out from your insurance broker whether it has a knowledgeable and dedicated yacht team.
If you plan on travelling globally, your insurance company should have a global service platform and experience in settling even the most difficult claims abroad.
The number of yachts over 24m has risen steadily in recent years. Very large yachts are handled by a relatively small number of expert companies, but more and more insurers are looking to serve the needs of the growing 'middle' luxury yacht market.
Since there are no standard service levels, however, the owner or his adviser must choose between products that can offer fundamentally different levels of insurance coverage.
Understanding the key issues and choosing the appropriate insurance company is essential for continued smooth sailing.
Danielle Massé has been in the yacht insurance industry for almost 20 years. She is currently vice-president and international yacht director of AIG Private Client Group, which has offices in New York, Toronto, London, Dubai, Hong Kong, and Australia.
Originally published: October 2008.