By Dorie Cox
No one wants to burn through a $20 million loss like the 102-foot M/Y Polar Bear in a San Diego shipyard in 2014. The yacht was in for repairs when welding started a fire. Neither the yacht owner nor captain had notified the insurance company of the work. The yard contract had been signed and subsequently, the loss was not covered by the insurance company.
The yacht owner signed the ‘I’m holding you harmless’ clause, said John Jarvie, vice president of Oversea Yacht Insurance, who served as an expert witness on the M/Y Polar Bear case. The yacht owner reasoned the cost of repairs would be below the deductible, according to an article in riskandinsurance.com.
“That voids your insurance policy. If you hold harmless, you void,” Jarvie said.
The Polar Bear case eventually settled, but it highlights something that insurance experts urge their clients to do regularly: Talk to your broker before doing anything to the yacht, even going in for “affordable” repairs. After last year’s fires on motor yachts Lohengrin, a 161-foot Trinity, Reflection, a 107-foot Christensen, and Andiamo, a 120-foot Benetti, yacht captains, owners, insurance companies, shipyards and marinas are talking about managing insurance coverage.
“Insurance underwriters are very cautious following recent fire losses,” said Scott Stamper, senior vice president of Atlass Insurance Group. “The yacht and shipyard have to be in agreement. Most importantly, the underwriter has to be in agreement.”
No matter who is ultimately responsible, the captain is the one at the helm to notify insurers of a risk profile change. New cruising grounds, purchase of yacht tender, or a yard visit for repairs are considered a change of risk and require that insurance policies be reevaluated. When a captain is comparing yards for future work, he or she should identify the choices for the insurance broker to look at different yard’s conditions. Also, captains need to be aware that when a vessel is left unattended for periods of time, the risk profile changes.
And unlike more standardized home or auto policies, yacht policies are customized.
“As the risk increases, we together have to develop a reasonable plan to mitigate the increased risks,” Stamper said.
Yachts are typically insured to be used as boats, as a navigating risk, said AIG senior yacht underwriter Sean Blue.
“If it is under a paint shed, that is a different status of risk, a change of circumstance – and it needs to be changed, we need to be notified,” Blue said.
“Make sure you understand what it covers and doesn’t, and your obligations,” Blue said. “What’s the difference between repair and maintenance? No. 1 is to call the broker, inform him of what you’re doing, and to send a copy of the yard contract in advance of signing.”
“Captains call all the time, but we wish it would happen more,” Blue said.
At the core is that yacht insurance premiums don’t balance with payouts after some yacht fires.
“The contractor may carry insurance coverage of significantly less than the value of the yacht. The liability may be $2 million, but a claim can be beyond $2 million. Now the risk is transferred to the yacht underwriter,” Stamper said. “It’s not fair that underwriters be expected to take on this additional risk without being party to the discussions regarding the scope of work and safety protocols to be taken.”
Since underwriters often do not know the skill sets of hired contractors, they must clarify work scope, safety protocols, and shipyard or contractor insurance coverage, he said. Even then, “once we learn and agree, we still have a large amount of risk,” and owners expect to be paid by the insurance company should the vessel suffer loss beyond the limits of the yard or contractor, Stamper said.
“When you’ve hired someone without sufficient limits of coverage, and if we are being asked to cover the additional risk that rightfully belongs to your contractor or shipyard, then we need additional premium,” Stamper said.
In addition, the insured parties are often unaware of the totality of claim expenses following a loss. This can extend to environmental concerns with fuel, contamination, and damage to structures and docks.
“These repair expenses fall to the marina,” Stamper said. “Typically repairs and cleanup need to be made immediately to avoid fines and penalties, and to avoid extended business interruption. When a marina suffers a loss and submits a claim, it follows that their premiums increase at renewal – it is a ripple effect that goes with the loss often emanating from the yacht. Does the shipyard have legal standing to recover their losses against the contractor, the yacht or both?”
To address the financial imbalance, companies such as AIG are selective about who they insure and attempt to spread the risks with coverage through the several hundred megayachts over $10 million that they insure, Blue said.
“Out of 25,000 boats, it is a large significant segment of premium base, but it spreads the risk,” he said. “So one large loss is not a big deal, we built our portfolio to sustain large losses by who we insure. We are selective and choose the best risks, and how we manage risks, so one or two big hits don’t negatively impact.”
AIG dedicates efforts to ensure that those clients lessen their risks, said Carl Lessard, yacht loss prevention specialist with AIG.
“We educate clients to not have claims, to hire the best crew, to maintain the yacht to a high standard, and to be proactive to manage risk,” Lessard said. And there’s a personal side, such as last year’s AIG-sponsored crew training for M/Y Archimedes, a 222-foot (68m) Feadship, for fire and water damage control before a trip to South America and Antarctica. It is a significant value to the vessel to have them work as a team – it will have a bottom line impact, Lessard said. Such educational outreach is proving to mitigate losses.
“We know it’s working, we have improvement of the loss ratio,” Blue added.
Marinas and shipyards attempt to prevent their liability for losses also, according to Doug West, president of Lauderdale Marine Center (LMC).
“Our boat handling agreement has limits on liability. When based on an incident not caused by LMC, we would be excluded from liability,” West said. “If it is based on damage we caused, it is based on the the value of the boat.”
LMC works closely with insurance companies on the boat handling agreements, but yacht captains and representatives are still integral, he said.
“Boats should be checking with their carriers to make sure they are OK with the language,” West said of the contracts.
Along with yacht coverage, the yard has insurance requirements for contractors.
“First, general liability. If they are at work on a boat and do something that causes damage to the property or an adjacent boat, it will be covered,” West said. “They also need ship repair liability coverage – this covers damage to the boat they are working on if damage occurs as a result of the work they are doing on the boat.”
“If a boat wants to hire someone without it, they have to sign a ‘hold harmless,’ ” West said. “If you want to take that chance with a contractor without coverage, you are responsible.”
All of this legal work is about trying to protect the customer, he said, and he shared a scenario to illustrate.
“There was a company blasting fuel tanks in a boat, they did not do proper containment and damaged the engine room,” he said. They didn’t have ship repair liability coverage, so the boat had to claim it on their insurance and their rates went up. This was because of the yacht’s choice to use a contractor without sufficient or proper insurance coverage, he said.
In most shipyards, yard work is managed through the yard’s office, according to West.
“The contractors are chosen through the yard, so work is covered under the yard’s insurance,” he said. “In our model, the yacht works with the contractor directly and we are out of the equation.”
So where does all of this conversation leave the industry with regard to insurance?
Rates are going up in the marine and yacht market after significant individual losses, Blue said. Factors include a loss of about $700 million after a fire at the Lurssen yard in 2018, recent hurricane damages, and worldwide losses in the offshore marine energy market, as well as other yacht fire claims.
“That caused markets to decide that they don’t want to be in that line of business,” Blue said. “Now there are fewer players in and then the price goes up. And reinsurance goes up.”
“Yes, we are taking increases, but also we’re being more selective – like not letting yachts tow with quads [engines], which up until last year was common,” Blue said. “Underwriters are doing less risky things.”
These increases are not just due to fires, but fires are important because often they are severe, impact multiple boats and are total losses, he said.
Another hot topic is hot work – welding, cutting, soldering, grinding or using spark-producing tools – and there is more acute awareness of such work in shipyards. This brings with it a focus on the boat, the vendors, the plan and the work, according to Nancy Poppe, North American yacht practice leader with Willis Marine Superyachts.
Captains should work with their insurance broker or underwriter in advance, with full-disclosure on the scope of work, whether it is routine maintenance or hot work, Poppe said.
“It’s critical to a smooth yard period and that insurance coverage is not compromised,” she said. “Don’t sign any forms, including shipyard forms, with terms and conditions that may set up who is responsible for what. Then it’s not that the yacht didn’t tell anyone, it’s that they signed that paper.”
It is incumbent on everyone from captains to owners to be clear on coverage and ask questions, she said.
“We love nothing more than to hear from a captain, ‘I read this on page 40 and I don’t understand this,’ ” Poppe said. “That shows us an attention to detail.”
And this is especially vital because often the yacht owners don’t see the yard or work contracts.
“The captains sign them to move things along,” Jarvie said. Captains are acting for the owner on insurance policies, signing documents, arranging yard time and hiring contractors. Usually the captain chooses a contractor that the owner doesn’t know.
“This makes understanding policies even more important for the captains to know – even more than the yacht owners,” Jarvie said.
And that’s why, after each yacht fire, from Polar Bear to Lohengrin, the phones begin to ring at Oversea Yacht Insurance and insurance brokers are standing by to do what they try to encourage people in the industry to do on a regular basis: double-check their coverage.
“Very few people do read their policy, even with home or auto insurance,” Jarvie said. The first thing they ask about their insurance policy is, “Am I covered?’”
Dorie Cox is editor of The Triton. Comments are welcome below.