It is an unfortunate fact that while yacht insurance policies are relatively commonplace today, and many similarities exist between the various policies offered, individual insureds continue to be confused about coverages and terminology. Some of the confusion is an unavoidable consequence of the inherent nature of the English language, further complicated by skilled attorneys zealously pursuing the interest of their clients, be they insureds or insurance companies. The regrettable reality may be an insured who is not entirely clear on the policy coverages, and may not feel completely satisfied with the insurance policy they purchased. In a claim scenario this confusion can lead to misgivings about not only the policy coverage, but also possibly even the service provided by their agent.
While a comprehensive legal analysis of individual policy wording is beyond the scope of one article, a few general concepts to clarify a few of the most common areas of misconception can be found in this article. The comments herein are necessarily generalizations. A complete review and understanding of an insurance policy should always be performed in the company of a qualified marine insurance attorney.
Common terms in marine coverage
Some of the most common industry terms thrown about in the marine insurance industry are Agreed Value, Actual Cash Value, Replacement Cost and occasionally Stated Amount.
Most yacht insurance policies are Agreed Value, wherein the company and insured both agree up front on the value of the insured vessel. In the event of total loss, the settlement amount under an Agreed Value policy is known and displayed on the Declarations Page of the policy. Note that the Agreed Value most commonly only applies in the event of a total loss (constructive or otherwise), whereas partial losses under Agreed Value policies are typically settled either on an Actual Cash Value (ACV) basis or as Replacement Cost.
Some confusion may arise through the similar meanings of policy jargon, where the term Actual Cash Value can also be accurately described as “Replacement Cost with depreciation.” Conversely, the term Replacement Cost used alone actually indicates “Replacement Cost without depreciation.”
Be careful, however, because not all Agreed Value policies contain the same wording, and not all companies use the terms consistently. In fact, there is more than one policy on the market currently being marketed as an Agreed Value policy that includes a clause granting the company “the right to substitute like kind and quality” at the time of total loss. Such policy language may diminish the strongest feature of an Agreed Value contract, and should be considered carefully.
There are not many Actual Cash Value policies widely marketed today, and more often they are associated with niche products such as older, lower value vessels or performance boats. It is of paramount importance to work with an insurance agent who clearly understands these policy differences.
Stated amount coverage
There also exists a lesser-known type of yacht policy, most accurately referred to as a Stated Amount policy. Easily confused with an Agreed Value policy, the true mechanics are much different. The Stated Amount policy is most commonly seen when assets such as boats or cars become classics, and thereby more challenging to value accurately, particularly when it comes to developing a premium rate.
The Stated Amount policy allows the insured to state a value to the insurance company, on which the premium rate is then based. At the time of a total loss, however, the settlement is typically the lesser of the Stated Amount and ACV. In other words, the Stated Amount is more of a rating feature, rather than a loss settlement provision. Occasionally the term Stated Value surfaces, which seems to be a subconscious blending of the two terms Stated Amount and Agreed Value. The intended meaning of the blended term may be unclear, so it is generally suggested that the specific policy wording be inspected when considering this type of policy.
It is often commented that the Agreed Value policy always trumps the ACV policy. However, the ACV policies typically carry lower premiums which can add up to significant savings for your insured while still providing insurance to cover exactly what they have lost in a claim—the true value of the vessel at the time of the loss. In this way, it can be argued that ACV policies are more closely aligned with the principle of indemnity, the central underpinning of insurance.
When considering that most insureds go through life without a claim and that the large majority of claims are not total losses but partial losses, the terms Agreed Value policy and Actual Cash Value policy may actually produce loss settlement results that are more similar than might commonly be assumed. In particular, when the insured has a current valuation of the vessel, required at the time of binding for most yacht insurance contracts, the Agreed Value of the vessel should in fact be very similar, if not identical, to the Actual Cash Value, thereby resulting in a potential identical loss settlement provision.
Clearly, the important thing is not to look for rote advice or buzzwords to share with your insureds, but instead, take the time to read and understand the differences in each policy that you offer. Hopefully, insureds will become more well acquainted themselves with the policy coverages, feel more empowered, and become better and more valuable long-term clients. Maybe they will even begin to think of insurance in, well … better terms.
Cary Breese is the president and CEO of Trafalgar Marine Insurance Services, a national managing general agency located in Irvine, Calif., specializing in marine insurance for boats, yachts, high performance vessels and commercial marine risks throughout the United States.