Crew hires, new materials in boat construction, faster speeds, market values must be considered
Following the costly hurricane years of 2004 and 2005, the yacht insurance market has “hardened” substantially. Although the market has seen some “softening” recently, the Florida, Gulf Coast states and much of the Atlantic Coastal areas are still quite “hard.” Consequently, there have been some changes in the approach to insuring yachts by insureds, agents (and brokers) and underwriters. Therefore, more than ever, agents need to carefully assess the exposures and the coverages (or lack of coverages) when placing yacht insurance.
Underwriters generally evaluate three areas of underwriting information when quoting a risk:
1) the insured and operators;
2) the boat, and;
3) the location and use of the boat.
The “hardened” market has tightened the required underwriting criteria in all three of these areas.
Insureds and operators
Although most yacht policies previously allowed anyone with the insured’s permission to operate the boat (under the Omnibus Clause), many insurers are now only insuring when the boat is operated by previously approved named operators. This needs to be carefully explained to the insured.
In order for an operator to be approved, he usually must:
- Have experience operating a size and type of boat similar to
the insured boat;
- Have a good driving record (especially no DUI); and
- Be of adult age.
Most insureds and agents realize that if there is a full time employed crew member, the yacht policy must also insure liability to crew. However, too often insureds hire a temporary or part time crew midterm (to deliver the boat to another location or for some other reason) and do not advise their agent.
Agents should be certain to explain to insureds that the hiring of any person at any time (even if just for hours) might result in a substantial uninsured liability exposure if they do not have the correct crew and/or USL&H coverage. Any such exposure should be discussed with the underwriter in advance.
In recent years there has been an increase in the use of exotic materials in boat construction (especially kevlar and carbon fiber). Because of the greater cost of repair of these materials, many underwriters will not insure these boats, or will charge higher premiums and deductibles. It is important that agents determine the construction materials of boats.
It is equally important that agents learn the maximum speed of the insured boat. Boats of all types and sizes are generally capable of faster speeds than in past years. Although 45 MPH might have been considered to be fast a few years ago, it is now quite common. The speed of the boat is one of the factors considered by underwriters when determining its insurability and subsequent premium. Some insureds believe that they can save money by underestimating their boat’s maximum speed. This misrepresentation may lead to increased midterm premium costs, cancellation or even denial of a claim.
As is customary in most markets, it is wise to insure boats on an agreed value basis, not actual cash value. Furthermore, even some agreed value policies have depreciation on certain partial losses. Although all yacht policies depreciate materials such as canvas, lines and similar materials that normally wear, some underwriters now also depreciate engines and equipment. This can substantially reduce the amount of an otherwise insured claim. Therefore, agents should be certain of the physical damage adjustment basis, and explain it carefully to insureds.
In today’s market, in order to reduce premium costs, many insureds have reduced the insured values of their boats. Agents should caution insureds not to insure their boats for much less than its current market value (usually within 10 percent difference is an accepted amount). Should the cost of repairing a damaged boat equal the insured value, the underwriter can, and probably will, declare the boat to be a constructive total loss. In this event, the underwriter will pay the insured the full value of the policy and then seize the boat to sell it for salvage recovery. In such an instance, if the insured has insured a $300,000 boat for only $225,000, then he will lose his $300,000 boat but only be paid $225,000 for it (resulting in a net loss of $75,000 in return for a small premium savings)!
Location and use
The mooring or storage location of a boat is extremely important. If it is a trailer-able boat, is it in a secure location to help prevent thefts and vandalism? If the boat is on a lift, is the lift locked and does it have a remote power cutoff switch? In recent years, no location consideration is greater than the exposure to natural disasters, especially hurricanes. Perhaps the best advice that the agent can give to the insured is to have a well thought out, detailed disaster prevention plan. What extraordinary actions will the insured take to protect the boat in the event of an impending hurricane? Not only will this help prevent or mitigate a loss, but it will also help the agent and insured place the insurance initially. Understandably, underwriters want to know that the insured is prepared to react appropriately to an impending catastrophe before it is too late.
It is important to understand the navigation limits required by the insured, and to discuss them with the insured in detail. For example, why include Bahamas navigation if the insurer surcharges for this and the insured will probably never sail there? Contrarily, do not accept a navigation restriction of not more than 25 miles offshore when the insured voyages to a fishing area 100 miles offshore. Most policies insure limited coverage for overland transit (often only within 100 or 300 miles of the storage location). If the insured trailers or ships his boat between the Great Lakes and Florida annually, be certain that this is covered. The insured should be cautioned that any trip outside of the policy’s limits must be approved by insurers in writing in advance.
Some policies insure liability to water skiers (usually with a lesser sublimit) but most do not. Most policies exclude racing, but some allow local club racing of sailboats. Most policies that allow sailboat racing exclude loss or damge to masts, spars, sails and rigging while racing. Most policies exclude liability to divers. Agents should determine their insured’s intended uses of the insured boat and carefully explain what their insurance policy does and does not cover.
Only by understanding their insured’s exposures, can agents properly protect their insureds and then work with underwriters to obtain the best available insurance terms for them. Agents should require insureds to complete applications in detail prior to submitting the risks to underwriters. Then there will be no surprises to anyone after coverage has been quoted and/or bound.
James Gallaudet is president of Atlass Special Risks Inc., a broker in Fort Lauderdale, Fla., specializing in marine insurance. He has a B.S. from the U.S. Merchant Marine Academy and an M.S. from N.Y. Maritime College. He has been a marine insurance underwriter and broker since 1972. Contact: 954-525-0582 or visit www.atlassspecialrisks.com.