When Marine Insurance Policies and Shipyard Contracts Collide
How to cover your bases during a repair.
By Danielle J. Butler
Reading a yacht insurance policy is often like reading a novel in Sanskrit: just about impossible. But understanding your yacht’s insurance policy is critical to protecting yourself from breaching the insurance policy and being denied coverage.
A yacht insurance policy is a meeting of the minds between the yacht owner and the insurer. Once agreed, the yacht owner cannot unilaterally change the policy terms without the insurer’s consent.
Here’s the problem: Typical shipyard contracts alter the terms of the policy and, in too many cases, neither the owner nor the insurer is aware of this conflict, particularly when the yacht captain or broker is signing the shipyard contract on behalf of the owner. The result? If the shipyard damages the yacht, the insurer is fully within its rights to deny the claim.
The first issue revolves around the word “subrogation.” Subrogation is the legal doctrine that allows one person to take over the rights of another against a third party: In a situation where a shipyard damages a yacht, the insurance company would cover the owner’s claim and then, under subrogation, pursue the shipyard to recover the damages.
However, most shipyard contracts contain a “Waiver of Subrogation” clause where the yacht owner agrees not to recover on damages the yacht sustains due to the shipyard’s negligence. Subrogation is a significant right under a yacht insurance policy because it allows the insurer to cover a loss that is not the yacht owner’s fault and then recover from a third party. The “Waiver of Subrogation” clause takes this right away from the insurer without consent.
The second issue is a “Hold Harmless and Indemnify” clause in shipyard contracts that essentially says the owner agrees not to hold the shipyard responsible if it causes damages to the yacht and also agrees to compensate the shipyard for any loss it suffers, even if the owner is not at fault. This clause requires the yacht owner to add the yard to the owner’s insurance policy, which is another effective block to subrogation. An insurer will not subrogate a party named in the policy.
When placing the yacht in the shipyard’s custody and control, the yacht’s insurer (and the owner) expects the shipyard to be responsible for its acts and insure its operations accordingly. But, under the above clauses, the yacht owner agrees not to recover from the shipyard any damages the yacht sustains due to the shipyard’s negligence.
A third zinger often hidden in shipyard contracts is the “Limitation of Liability” clause. This usually contains a maximum dollar amount on the shipyard’s liability. Similar to a waiver, it means the yacht owner gives up his right to recover anything above this amount from the shipyard.
What is the major impact of these clauses? 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. In the event of a claim in this situation, the yacht owner is uninsured and would be paying out of pocket. Or, if the shipyard drops the yacht and the insurer pays to fix the damage and then seeks to recover from the shipyard, the shipyard can look back to the yacht owner to recover its losses.
On the other side, an insurance clause owners (or their representatives) should understand concerns “hot work,” which involves welding, burning, soldering, using fire or spark-producing tools or work that might produce ignition. Unless the insurer agrees to hot work in advance, most policies allow them to deny coverage. Complicating the matter, hot work may not be required initially but, as more items are added to the shipyard work order, may become necessary. At this point, the owner must inform the insurer, because damage from hot work would not be claimable if the insurer did not have knowledge of it.
How does a yacht owner prevent denial of coverage? First, the yacht owner should work with the yacht’s insurer to modify coverage to address gaps, often by adding riders to the existing policy. Second, the owner should bring his insurer and the shipyard together to agree on contract terms that are fair for both parties. Or, the yacht owner can just sign the shipyard contract “as is” and bear responsibility for all costs that are not covered by the yacht owner’s insurance policy. That’s not a good decision.
Simply put: Be proactive, understand your insurance policy, and notify your insurer and maritime attorney prior to shipyard repairs to address all these issues in advance to avoid breaching the policy because of fine print you didn’t notice.
Danielle J. Butler is a maritime attorney and partner at Hill Betts & Nash, Fort Lauderdale, Florida. She handles transaction and litigation matters for pleasure yachts and commercial vessels. She is admitted to practice law in New York, Florida and District of Columbia. She may be reached at email@example.com and hillbetts.com.