Marine insurance is a complicated matter, which works in a different way to domestic or commercial insurance policies. But purchasing it, and knowing how to buy superyacht insurance, and more importantly how to avoid invalidating it, is vital in case the worst happens to your vessel.
I well remember an early August morning some years ago chuckling about a story on the BBC of a man who, without explanation, found himself numb from waist down in the middle of a large gorse bush on the cliff face at Primrose Valley. He had been stuck for two days. I remember thinking what stupid situations people get themselves into.
It was about that time that I received a call from a client telling me that his yacht had run aground on a small island. The captain had fallen asleep on watch and apparently had placed a waypoint in the middle of the inconvenient island, which the yacht struck. The yacht was travelling at some considerable speed at night in waters known to be island-ridden. Thankfully no one was killed or injured, but the yacht was a total loss.
As I said, people do stupid things.
As I write this article, newspapers and television screens are filled with the images of the forlorn and tragic Costa Concordia. It would be unfair to pass judgement on the circumstances but, the loss of life, the potential loss of a 450 million vessel and the potential environmental impact will be matters for all sorts of claimants and the owners' marine insurers to settle.
It is reported that the cruise line might have 'self insured'. It is not unusual for owners to assess their risk and the cost of an insurance premium and cover the risk themselves. I have seen it amongst yacht owners. But generally, self-insurance is not really an option.
Argument against self-insurance
When a client is buying a yacht for the first time, he often won't give much attention to the nature of marine insurance.
Today, a lot of domestic insurance polices are standardised. When you insure your car and you compare premiums you know what you are getting, and you pretty much know the risks that you are insuring and the ones you're ignoring.
It is often the case that a new yacht owner will ask someone in the business to sort out the insurance for him, such as his captain or yacht broker. They get some quotes. The owner will just compare premiums and buy the cheapest insurance, or get three quotes and go for the middle quote thinking that the policies are pretty much the same.
This is muddleheaded thinking. Yachting insurance is not an afterthought; it should be your second thought.
When you decide to buy a previously owned yacht, the very next call you should make is to an insurance broker, or two. Get them to explain what they are offering and the price.
If you have two quotes, put those quotes in front of an independent expert, perhaps a marine insurance lawyer, who can explain what you are covered for and what not. A fantastically competitive quote may not look so attractive after a good poke and see.
Ask your friends or advisers what their experience has been when they make a claim. Are their insurer helpful? Do they make you fight for every penny? These are important issues.
Also ask why an insurer is being recommended. If your captain is pushing insurer A over insurer B, is a commission being paid? It is not unheard of. Don't be embarrassed to ask the question.
Evolution of yachting insurance
When you come to marine insurance, you enter a world where yachts are the poor relation of the world's shipping fleet.
Although there are a few yacht-specific insurance policies, as a rule, superyacht insurance follows commercial shipping. The size and the risks involved in owning and operating a yacht needs to take into account the individual requirements of each owner.
There is no standard form of superyacht insurance coverage. There may be some standard policy wording developed specifically for yachts, but as a rule marine insurance wording relies very heavily on the customs and the laws governing general marine insurance. You cannot forget that when you own a superyacht, you own a ship. It may have a fancy design, but like all ships, it moves through the water; it is pointy at one end and blunt at the other; it carries people; and it can hit other ships and people.
Policy exclusions and limitations
I cannot stress that unless you analyse the coverage of each policy offered to you, comparing premiums is pretty meaningless. There are exclusions and limitations that will have a direct impact on the quality of the policy that you have.
The policy may have restrictions on the waters you may navigate. For example, you may be able to use the yacht in the Caribbean or the Mediterranean, but you cannot sail across the Atlantic. You would need to ask the underwriters if you have coverage for acts of terrorism or piracy. Are all your personal belongings insured? Is the artwork on the yacht insured? Sometimes it is, sometimes it isn't.
I had one client who was certain that the artwork on board was insured until he needed to call on his policy. Unfortunately, for him, some of the artwork was owned by him personally, other pieces by a trust, and some by an offshore company. Suddenly, he found the artwork wasn't insured.
Other considerations enter the picture. What happens if the engine blows up? Does your insurance allow you to charter the yacht? Can you, as the owner, take the helm of yourmy own yacht? Probably not, but if you did take the controls and had an accident, would you be covered? Probably not.
It should be coming clear that the type and extent of coverage required will depend on your individual circumstances, but may include the following:
Hull and machinery insurance: This covers you for physical loss or damage to the yacht and its machinery. Generally it also covers your tenders or your chase boats.
Increased value insurance: This gives you additional hull and machinery cover for a low premium, where the yacht is totally lost or damaged beyond economical repair.
Protection indemnity insurance: This, in addition to hull and machinery, is an absolute must. It provides cover for legal liabilities, including damage to other vessels. Damage to mariners, recoverable expenses and death or personal injury.
Third party insurance: This can be obtained in respect of physical damage to the yacht and third-party liabilities. It provides cover for losses caused by accidents and terrorism, capture, seizure and arrest, that are otherwise excluded under hull and machinery or protection indemnity cover.
Crew medical and accident cover: This provides for medical and repatriation expenses. This type of cover may depend on the yacht, flag and the nationality of the crew.
Successfully making a claim
Now, just because you pay your premium, it doesn't mean that the insurer must pay out if you suffer a loss.
Contracts of insurance are known as 'contracts of good faith'. In writing the policy for you, the insurers are trusting that everything that you have said to them about the yacht, the crew, your insurance history, and that everything that you do whilst the yacht is insured, is true and is in accordance with the agreement.
They cannot check everything you say on your proposal form, so they are taking it on good faith that you are telling the truth and that if anything changes you will let them know. If the facts change, so the risk borne by the insurer might change. If you don't tell them of a change, they cannot assess if they still want to carry the risk.
I had occasion to advise a client some months ago in relation to a discovery by the client that his captain's registration and qualifications were, to put it bluntly, fake. Luckily, the yacht had not been involved in a collision, but if it had been, the insurers, having relied on statements about the captain's qualifications, could have claimed a breach of good faith, and not paid out.
Pay careful attention to any terms in the policy described as a 'warranty' or a condition precedent; a breach of these terms will have serious consequences.
In insurance law, a warranty is a promise that certain facts are true, and will continue to be true, and that you, the insured, will do or not do certain things.
If these are not complied with, the insurer may terminate the insurance policy from the date of the breach.
A breach of a condition precedent may prevent you from claiming for a particular loss. For example, if you are insured to carry six guests and you find yourself in a position where you have eight, apart from notifying the flag state of the increase of the number of guests, for which you must obtain permission, you must notify your insurers and get their agreement for you to carry additional people.
Effect of a flag state
I am often asked whether the nationality of the owner or the flag state has any bearing on a premium.
Nationality, not necessarily, but the certification of the vessel by a first-class classification society like Lloyd's, the American Bureau of Shipping, Bureau Veritas or one of the other leading members of the International Association of Classification Societies, will give the insurer certain comforts.
However, a yacht classed by classification society X, whilst she was built in country Y, may attract a higher premium as opposed to the same classification society supervising the build in another country. This is not a comment on the quality of a builder, but it is known in the industry that the quality of class surveyors varies from country to country. That will have an impact on the yacht's insurance premium.
Build and refit insurance
If you are building a yacht, one of the questions you must ask the builder is if it is properly insured. If there is a fire or some catastrophe, would you get your instalments back or will there be insurance monies to repair a partial loss?
Never assume that the yard is properly insured. Always have an insurance specialist review the yard's 'builders all-risk policy'. You, as an owner, must have your interest noted on that policy, so that if there is a loss, the proceeds of that policy get paid to you and not just to the shipyard.
That's not the end of it. There is a risk that the builder might breach warranties or conditions. Your project manager must carry out regular audits and get confirmation from the builder and the builder's insurers that everything is OK with the policy.
Owner's interest insurance
On a recent yacht build, we agreed with the yard that they would purchase for the owner what we have called an 'owner's interest insurance policy'. This is not a standard product. In fact, it is a new product that effectively provides that in the event that the builder's all-risk policy fails to pay out to the owner for any reason within the control of the builder, the owner will be able to call on this third-party policy, which is written in his favour.
There have been circumstances where the builder's insurers have refused to pay out on a total loss typically, a fire where there is some suspicion as to the cause of the fire. In those circumstances, the owner is left high and dry. Although it is in its infant stages. this kind owner's interest insurance policy is designed to protect the owner against that kind of circumstance.
Refit and repair insurance
A controversial issue relates to what happens to the owner's insurance when the yacht goes in for its annual service or a major refit.
Never assume that the yard's insurance will step in instead of yours. Your captain or your yacht manager should be clear as to what insurance the refit yard has and what information your insurers need to know about the refit yard's insurance.
It may be that parts of your insurance will be suspended during the period of the refit. Your insurers may insist that any 'hot works' i.e. welding is only covered by the yard's insurance. It may be that the crew is not allowed to stay on board during such a period of works. Again, assume nothing.
Superyacht insurance is not easy. It is not a commodity product you can buy and forget about. It is an active, on-going relationship. Be clear about what you want to cover and be totally transparent with your insurer. Marine insurance underwriters and brokers are practical people. They understand many things, but they will not forgive a lack of good faith.
John Leonida is a partner at the international law firm Clyde & Co, LLP, adviser to some of the leading super-yacht designers, builders and owners.
Originally published: Superyacht Owners Guide 12.
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