Errors that masters, managers and DPAs can make in Superyacht insurance scenarios can be multi-million ones. Here, Nick Smith of Charles Taylor marine describes three distinct areas where pitfalls can occur, and how to avoid them.
Most people who run superyachts would rather not think about insurance. It is something we take for granted and, in an emergency, it can be very much an afterthought. Yet a basic understanding of the rules of the game has become an essential part of the seafarer’s toolkit.
Putting it simply, the wrong response to a crisis could add millions of dollars to an insurance claim, wrecking the owner’s loss record and guaranteeing much larger insurance premiums in the future. In extreme cases, the actions of the master or crew could actually render the cover null and void.
By way of background, it is worth emphasising that underwriters who accept superyacht risks do so in good faith and are willing to deal with claims in a fair manner. They do, however, expect the people they are covering to abide by the rules. Not everyone does.
The first potential pitfall arises when you apply for your insurance. You have a legal obligation to disclose to your underwriters every material fact. According to the UK Marine Insurance Act of 1906, any circumstance is material if it would influence the judgement of a prudent insurer in fixing a premium or determining whether to take the risk. When in doubt – declare it.
Let’s take an example. A superyacht has been cruising the Med for two or three seasons. The insurance policy covers her for such cruising. The owner then decides that the yacht is looking a little tired and has the captain book her into a yard for a six-month refit.
The underwriters have insured the vessel on the basis of exposure to navigating risks. They did not insure her as a commercial risk in a yard with - statistically - an increased risk of loss by fire, injuries to crew and others. The risk has materially altered and should be declared to the underwriters. They can then decide if they wish to continue cover and, if so, on what terms. The golden rule is that no captain can be criticised for disclosing too many facts. The peril is in disclosing too few, potentially leading to avoidance of the entire policy by the underwriters.
Moving on to operational issues, this article now looks at three other common insurance pitfalls: choice of yard; immediate response to an event; and use of salvors.
Choice of repair yard
When a superyacht requires repair after an incident there will be many compelling reasons to offer the work to the nearest available yard; this can be a big mistake. Reading the small print of any repair contract is a time-consuming chore, but you have to do so before making a commitment.
Limitations, Disclaimers or “Red Letter Clauses” are on the increase. It is common for yards to exclude all their liability or limit it to an amount so small, typically €300,000, that it will be woefully inadequate if things go wrong.
Signing a contract for repair, refit or maintenance that limits or relieves the yard from liability might invalidate your yacht’s insurance policy. This may appear harsh until you consider that a loss arising from a yard’s negligence is no more the fault of your underwriter than it is the yacht owner’s. Why should underwriters lose their right to recover from the negligent yard just because a captain or manager did not read the contract terms properly?
Increasingly, yacht insurance policies state quite clearly that any work beyond routine maintenance must be declared to the underwriters and agreed by them. What constitutes “routine maintenance” can be a matter for debate. When in doubt we recommend an owner, captain or manager fully disclose all intended work to the underwriter or insurance broker. If the contemplated work includes hot work – disclose it. If the scope of the work goes beyond cosmetic – disclose it.
The accident aftermath
Yacht crews tend to be very tidy people; this admirable quality goes hand-in-hand with working in a confined space at sea. The natural reaction when there has been a collision or fire is to clear up the mess as quickly and comprehensively as possible. This can be another disastrous mistake.
The debris left behind may well contain vital clues to the cause of the incident and help establish where blame lies. For example, flame vector analysis will enable investigators to work out where a fire started down to the smallest failed component. Clearing the debris may kill any chance of successfully determining cause.
The insurance claims manager needs a reasonable period of time to brief his experts, and the evidence could make or break the investigation. Destroy it and, unless you can demonstrate an overriding safety or operational reason for doing so, you may find that you have negated any recovery chances, particularly in the United States under Spoilation of Evidence laws.
Under most policies, such a course of action will not render the insurance void but may invalidate the claim as it will make it more difficult for your underwriter to recover compensation from a third party. It will also adversely affect the owner’s claims record, and so the premium to be paid going forward.
Once again there is a simple solution. Inform your insurer or broker when there has been an accident or serious fire and take advice from them. If in doubt, just leave the evidence where it is. There may be a temptation to believe that pictures of the scene pre-clean up will suffice; they will not. Accident investigation is a science and no crew will adequately photograph or document the scene. Your insurance company, adjuster or surveyor will advise you on when is the right time to clean up. Of course safety always come first and one should not delay any clean up mandated by safety considerations when e.g. an incident occurs on passage and the vessel must still navigate to a safe haven, insurers should of course be contacted in such a case unless the nature of the incident itself makes that impossible.
Salvors – be very careful
If you ever require assistance at sea, the natural reaction may be to take the first offer of help that comes along. This can sometimes be the right decision. Where the crew or yacht may be in peril, then it goes without saying that their safety is paramount.
Usually, however, the circumstances are inconvenient rather than life-threatening. It is the Master’s duty to ensure that he pays a fair price for the salvage; this is likely to require patience and a bit of shopping around. Remember, some salvors see a distressed superyacht as a licence to print money. They may well produce the standard Lloyd’s open form, giving them a veneer of respectability. Unfortunately, it can appear later like a blank cheque.
In one recent case in Florida, negotiations reduced the cost of salvage by 96%. Put another way, the first person to offer help was proposing to charge 25 times as much as the master actually needed to pay. The precise definition of accepting a salvage may vary by jurisdiction. The overriding principle, however, is that just accepting a line may constitute salvage services for which the salvor is legally entitled to a reward.
Yes, an owner or insurer who believes the charge for a salvage to be unreasonable can contest the amount, but this may lead to a lengthy, expensive Arbitration. It is a little understood fact that Arbitration can cost as much as a trial. Apart from the cost of going down this route, it is time-consuming and diverts attention from other matters. Prevention is much better than cure.
So, if you need help from a salvor (and as long as delay does not jeopardise safety), you should resist the temptation to take the easy, quick way out. Instead, negotiate the best possible deal, with the help of your insurer. That is the sort of expertise that your owner paid his premium for.
What, however, should you do if you cannot contact your insurer because he is unavailable? There are still many that do not offer a round-the-clock claims service and, in such a situation, you have to take your own initiative.
If a case were ever to come to court because your insurer thought you had acted incorrectly, the guiding principle would be that of the “reasonable uninsured”. This is another way of saying, did you behave in a sensible manner consistent with how you would have acted if you had no insurance policy? In other words, did you take all reasonable steps to limit the cost of damage given what you knew at the time?
Forewarned is forearmed
All the lessons to be learnt from these varying scenarios are easy to understand. In fact, once explained, they seem pretty obvious. It is important, however, to discuss these issues before anything goes wrong. When the crisis eventually materialises it will be too late unless the correct response is already embedded in training procedures and the thought processes of the crew.
Masters, in particular, need to have a good general understanding of the way that marine insurance works. In addition, they should make it part of their job to understand the detailed wording of their vessel’s insurance policy and how it might affect their decisions. If anything is unclear then ask your insurance broker or insurer. They should be happy to help.
These emergencies are invariably handled best when there is good teamwork. As well as the master, insurers and other external advisors, the Designated Person Ashore and the manager have important roles to play. It is essential, both during the incident and its aftermath, that the DPA works closely with insurance representatives. Likewise, that managers are actively involved in drawing up the scope of repair and choice of yard.
Insurance will never be the most exciting aspect of going to sea, but time invested in understanding it could save a lot of embarrassment and money.
Nick Smith is Director of the Yacht Practice at Charles Taylor marine.
