Reading a yacht insurance policy is often like reading a novel in Greek – just impossible. However, understanding a yacht’s insurance policy is critical to protect oneself from breaching the insurance policy or being denied coverage.
The final yacht insurance policy is a meeting of the minds between the yacht owner and the insurer. Thereafter, the yacht owner cannot unilaterally change the policy terms without the insurer’s consent, as doing so could lead to denial of coverage. Typically, shipyard contracts alter the yacht insurance policy terms without the insurer’s consent. Even worse, many owners might not know of this conflict, since it is typically their crew or brokers who are signing the shipyard contracts.
Shipyard contracts contain a “Hold Harmless and Indemnify” clause where the yacht owner agrees not to hold the shipyard responsible if it causes damage to the yacht and agrees to compensate the shipyard for any loss it suffers, even if the yacht owner is not at fault.
Shipyards also require the yacht owner’s insurer to add it to the yacht’s policy for liability coverage. This gives the shipyard rights under the yacht owner’s insurance policy. Adding the shipyard removes the ability of the insurer to recover from the shipyard if it causes damage to the yacht, as insurers will not subrogate against a party named in the policy. Yacht insurance policies cover the yacht owner for liability from the ownership and use of the yacht. When placing the yacht in the shipyard’s custody and control, the yacht’s insurer expects the shipyard to be responsible for its acts and insure its operations accordingly.
In the shipyard’s “Waiver of Subrogation” clause, the yacht owner agrees not to recover from the shipyard any damages the yacht owner sustains due to the shipyard’s negligence. Subrogation is a significant right under a yacht insurance policy. Subrogation allows the insurer to cover a loss that is not the yacht owner’s fault and then allows the insurer to pursue recovery from the party at fault. The “Waiver of Subrogation” clause takes this right away from the insurer without the consent of the insurer.
In the “Limitation of Liability” clause, the shipyard places a maximum dollar amount on its liability. This is similar to a waiver because it means the yacht owner waives his right to recover from the shipyard above this amount.
What is the major impact of these clauses? Yacht insurance policies contain exclusions for additional liability that yacht owners assume that the insurer has not consented to, such as the additional liability that the yacht owner assumes when signing the shipyard contracts containing the above clauses. For example, when the yacht owner signs a shipyard contract containing these clauses, he is agreeing to pay another party for damages that party sustains, even if the yacht owner is not at fault. The yacht owner is uninsured in this situation and would be paying out of pocket in the event of a claim.
Yacht Insurance policies usually contain a clause prohibiting yacht owners from waiving insurer’s right to subrogate. If the yacht owner signs a shipyard contract that contains a subrogation clause without the insurer’s consent, then the insurer is not bound by this. Therefore, if the shipyard drops the yacht causing damage and the insurer pays to fix the damage then seeks to recover from the shipyard, the shipyard can look to the yacht owner to recover its monetary losses.
Yacht insurance policies might also deny coverage for claims due to hot work, unless the insurer agrees to the work in advance. Hot work involves welding, burning, soldering, using fire or spark-producing tools, or work which might produce ignition. Initially, hot work might not be required, but as more items are added to the repair, hot work might become necessary. Resulting damage from hot work would not be claimable if the insurer did not have knowledge of it. If the yacht owner has signed a shipyard contract agreeing to waive his rights of recovery due to the shipyard’s negligence without the insurer’s consent, then his claim will be denied and he will bear the cost of any third party damage claims, not the shipyard.
How does a yacht owner prevent denial of coverage?
1) The yacht owner can work with yacht’s insurer to modify coverage to address gaps.
2) The yacht owner may work with his insurer and the shipyard to include contract terms that are fair for both parties.
3) The yacht owner can sign the shipyard contract “as is” and bear responsibility for all costs that are not covered by yacht owner’s insurance policy.
Simply put, be proactive and notify your insurer or maritime attorney prior to shipyard repairs to address these issues in advance to avoid breaching the policy.
Danielle J. Butler is a Maritime Attorney and Partner at Hill, Betts & Nash, LLP. Ms. Butler handles both transaction and litigation matters within the yachting and pleasure boating community. Hill, Betts & Nash, LLP was founded in 1898 as a general practice law firm. The Firm provides expert legal counsel on matters relating to world trade and transportation, commercial and tort litigation, insurance, surety, equipment leasing and financing, bankruptcy, admiralty and aviation law. Hill, Betts & Nash has offices in Fort Lauderdale and New York City. Visit: www.hillbetts.com
Ms. Butler may be contacted at +1 (786) 543 1141 or [email protected].