When it comes to buying, converting or building a superyacht or indeed any other high value asset insurance can sit a long way down the priority list, quite often being taken care of at the last minute.
Whilst it can be taken for granted, a certain level of insurance is mandatory to use and operate a superyacht, and if something does go wrong, having comprehensive insurance cover with a reputable insurer can make a real difference. Therefore, like it or not – insurance is important as recent events demonstrate.
Until quite recently securing such insurance for superyachts through insurance brokers could be done quite quickly. Not only that, but owners were for the most part seeing insurance premiums falling year on year since the financial crisis. This in short was a result of too much insurance capacity in the market driving the premiums down.
However, we have recently witnessed significant losses in the yacht sector running into the millions with Hurricanes Irma and Maria in 2017, the two new build total losses caused by fire and the 2018 storms in the Mediterranean to name but a few. The number of crew claims has also been on the increase both in terms of numbers and severity.
In 2017 two fires destroyed six yachts in Port Forum in Barcelona, Spain
Falling income with higher claims is obviously unsustainable and we are now seeing a much needed correction in the market, known as a 'hardening market'. Quite a number of insurers have as a result of these incidents either closed or reduced their yacht books. Whilst some of this risk may be absorbed by other markets thereby alleviating the squeeze, there is no escaping the facts and the figures and the inevitability of change across the wider market.
Implications of a 'Hardening Market'
The unfolding of these recent events resulting in the reduction of insurance capacity in the yacht market is well reported. But what are the practical implications that stakeholders in the industry need to be aware of? The trends that we are already seeing are (i) increased premiums; (ii) more onerous terms including higher excesses; (iii) stricter navigational limits with limited cover for yachts staying in hurricane affected areas; and (iv) more selectivity about the yachts and risks that insurers are to cover.
By way of example, because of perceived increased risks, some insurers may not want to cover substantial refits at all; others might favour yachts with a regular crew over one with high crew turn over. Indeed, even the perceived reputation of certain flags and classifications societies may also be taken into account. Inevitably this has also affected the grand prix racing yachts with a substantially reduced number of insurers understandably requiring much more onerous terms.
Wrecks and debris on the beach in Dominica after Hurricane Irma in 2017
As a result of these developments it is also taking more time to put insurance in place, particularly if the risk is very unusual or the asset is exceptionally high value. Therefore, if you leave insurance to the last minute you might not get cover in place in time. This could be a deal breaker for a sale and purchase or could cause significant delays if a yacht is going into a yard for refit, which in turn could be costly. Equally, one does not want to discover, having already signed a Memorandum of Agreement, that a yacht will be very difficult or expensive to insure without substantial work being undertaken.
A Trend for Increased Premiums
Therefore, if you are buying, selling, converting, building or even seeking a renewal it is worth contacting your insurance broker at an early stage. To speed this process up one should have the documents in order to present the risk and be prepared to answer the insurer’s questions. Whilst there may be a trend for increased premiums overall, owners might seek to mitigate that by taking on themselves a greater part of the risk for certain assets.
Further, whilst UK insurance law changed in 2016 with the coming into force of the Insurance Act 2015 limiting the circumstances that an insurer might avoid a policy for breach of warranty or other terms, insurers may well be more stringent in enforcing policy terms. One would simply not want to fall foul of failing to give notification of a claim within time, inadvertently cruising outside of navigational limits without seeking an extension or failing to disclose a material circumstance which might affect the insurer's decision to cover the risk. Any such failures could result in a claim being refused by the insurer with good reason. It is therefore really important as part of any yacht's operation to keep your insurance broker up to date about what the yacht is doing.
In 2018 severe storms battered Liguria in Italy causing widespread damage and disruption
Efforts to Limit Liabilities
These issues are not only affecting owners seeking to insure their yachts, but also industry stakeholders needing insurance, such as yards, managers and technical experts. We have noticed that insurers are looking closely at their insureds’ business practices and their terms and conditions so as to ensure they are doing what they can to limit their liability to a reasonable level. Equally, yacht insurers may be less willing to waive their own rights of subrogation against yards for refit work.
Of course, insurance is a global market and there may be other insurers not familiar with the yacht market who will step in to fill some of the capacity which has been withdrawn. However, with lesser known entities you have to ask yourself about the reputation of the insurer, their understanding of the yacht market, how quickly claims will be paid and the prospect of enforcing a claim which will depend on where the insurance entity is. The old adage being, if it seems too good to be true, it probably is.
So, in conclusion, whilst the insurance market for yachts and high value assets is changing this should not cause insurmountable problems. Quite simply we all need to be a little bit more insurance savvy and not only put it up the priority list, but include it in any operational plans for the yacht to deal with at an early stage.
About the Author
Sarah Allan is a partner at Thomas Cooper LLP specialising in maritime law. She is regularly instructed in relation to superyachts by owners, yards, insurers and stakeholders to advise on a wide range of legal matters including sale and purchase, build contracts, insurance as well as handling disputes. She is also an accomplished sailor having worked on yachts and is a yacht master giving her first-hand practical knowledge.