Features February 1, 2001 Issue

Boat Insurance: Reading the Fine Print

Do you know how much your insurance carrier will pay if your boat sinks? Or if a passenger is injured while stepping aboard? An annual policy review is a smart move. Here’s what to look for.

Most boat owners carefully evaluate the construction techniques of builders before making a purchase decision. Warranties come under close scrutiny. Negotiations of purchase price and trade-in values are time consuming, and most buyers shop for the lowest loan interest rates available.

Most policies require owners to maintain their
boats to resist damage from ordinary weather.

If a bank requires insurance to protect a loan, however, most buyers purchase coverage from the same agent or company that provides other personal coverages, or from someone recommended by the dealer. Buying an insurance policy for your boat is almost an afterthought.

It shouldn’t be.

Failing to remain informed about your coverage can produce as great a financial setback as neglecting a leaky through-hull. Do you understand the difference between Agreed Value and Actual Cash Value provisions? Is it possible that your policy will pay less than your outstanding loan, or if you hold clear title to your vessel, that you will recover less than its value if she sinks, or is damaged beyond repair?

Because it is possible to review a policy in less time than it takes to scan an issue of PS, we feel it is a wise use of a small amount of time.

The Industry
The insurance industry was not immune to the turmoil experienced in the financial services industry during the 1980s and 1990s. For the first time in its history, carriers faced insolvency, mergers between large carriers became commonplace, and smaller companies were acquired, many by European holding companies.

The distribution system also has undergone dramatic changes as a byproduct of the universal use of personal computers and access to the Internet.

The primary marketers of insurance have historically been independent agents, who represent one or more carriers, and “direct writers,” agents who represent only one company—State Farm, for example.

The advent of the Web provides consumers with the ability to search the industry for specific policy information and, in some cases, premium quotations. Some carriers allow consumers to purchase coverage without speaking to a human being.

However, considering the financial and legal implications of any insurance transaction, we think making decisions without the benefit of counsel from an experienced agent is a risky move.

In addition to receiving credible advice, you also can get from state insurance departments and guaranty associations a level of protection against fraudulent actions and financial uncertainty.

The states define an “admitted carrier” as one that falls under the regulation of the department of insurance. Along with legal and financial requirements involved in that decision is consumer protection against the carrier’s insolvency; in the event of the financial collapse of a company, a guaranty association funded by the industry steps in to process and pay claims.

Boaters insured by “non-admitted carriers” (those who do not come under the jurisdiction of the department of insurance) do not enjoy that level of protection. Interestingly, Lloyds of London is the best example of a “non-admitted carrier.” Primarily a group of syndicates providing specialized lines of insurance, Lloyds plays a major, behind-the-scenes role in the industry by insuring insurance companies.

As a consequence, the first question asked of an agent should be whether he is proposing coverage from an admitted carrier.

The second question relates to a company’s rating by the A. M Best Co. A. M. Best is an independent firm that has been publishing evaluations of insurance companies for more than 50 years. Its analysis includes annual comparisons of each company’s financial operating results, including premium income, loss ratios and reserves available for the payment of contingencies (claims and related risks).

Ratings are alphabetical, with an A-plus being the best. Since many established companies with A ratings from Best are marketing boat insurance, we don’t feel there’s any reason to purchase coverage from lower rated carriers.

In our survey of companies, we requested sample policies and specific information from five major carriers providing nationwide coverage, and five independent firms that specialize in insuring boats ranging in size from 16 to 200 feet. Those who responded to our requests for information represent many of the largest producers in the industry, and offer coverage for all major boating areas.

By our reckoning, the participants all provide the types of coverage and expertise required by serious boat owners. Surprisingly, Allstate Insurance, the “good hands people,” declined to provide sample policies or premium quotes, as did the Progressive Insurance Co.

Though most companies do business in all of the lower 48 states, some avoid certain states because of the legal environment. That you may sustain a loss while traveling in a state in which the company is not doing business does not invalidate your coverage, however.

The Risks
Most policies are divided into several sections that include provisions for coverage of the yacht and equipment, personal effects, trailer, liability (including bodily injury and property damage), and medical payments.

To the companies’ credit, the obscure legalese that traditionally typified policies has been replaced by everyday English. The Fireman’s Fund Yacht policy, for example, is only six pages long and double-spaced.

In addition to producing policies that are reader-friendly, the companies now type important provisions in capitalized print and, in some cases, bold print. Policies are now free of provisions jokingly referred to as “Pink Elephant Clauses” that covered all risks so long as a pink elephant was involved in the accident.

Interestingly, however, an insurance policy lists coverages and exclusions on the same page. Exclusions are identified separately, and many are printed in bold type. It is in a boatowner’s best interest to read the entire policy, rather than just the Declaration Page, which identifies the boat and operators, coverage afforded, limits of coverage, and premium.

As a general rule, policies fall into two categories. The first are known as “boat owner” policies, typically created to insure boats under 26 feet that may be powered by outboards and may be trailered; several companies issue these policies for boats up to 30 feet in length. These policies often have standard limits that may not be altered.

Larger boats are covered by policies referred to as “yacht policies” that offer a cafeteria approach to coverage; specific amounts of coverage for certain risks may be purchased, and the policies may provide more coverage for tenders, electronics, and other gear not found on smaller boats.

The essential elements of the two types of policies are identical.

The greatest property risk a skipper faces is the possibility of the boat sinking or being completely destroyed. Two types of hull coverage are offered—Agreed Hull Value coverage and Actual Cash Value (ACV)—and it’s important to understand the differences because they are significant.

In the event of the total loss of a boat covered under an Actual Cash Value policy, the company will pay the depreciated or market value of the boat.

The Actual Cash Value policy marketed by SAFECO Insurance insures more than 100,000 boats and develops premium income of $20,000,000; it covers boats up to 30 feet in length.

Though the boat may be insured for a specific amount, the policy reads: “In case of loss SAFECO shall not be liable for more than the smallest (our italics) of the following: 1. the actual cash value of the property at the time of loss; 2. the cost to repair with no deduction for depreciation with new materials of like kind or quality; 3. the amount stated in the declarations.”

Because boats begin depreciating the minute ownership is transferred from the dealer to the purchaser, this provision is significant. Depending upon loan interest rates and the duration of the loan, a boat may depreciate faster than a mortgage can be reduced, leaving an owner making payments on a nonexistent vessel.

An odious practice among insurers is the continuance of a constant premium level for a decreasing amount of insurance, a practice the boat industry shares with its counterparts in the auto insurance industry.

By comparison, in the language of the Royal and Sun Alliance Royalmaster Preferred Yacht Policy the insurer states that: “Agreed Hull Value means the value of the insured without deduction for depreciation.” Before the policy is issued, insurer and client agree on the value of the boat and the company agrees to pay that amount in the event of a total loss. These policies are issued with no deductible.

The distinction between Agreed Hull Value and ACV policies disappears if a partial loss is sustained, or when an owner incurs damage or theft of gear and tenders, or damage or loss of a trailer.

Because these benefits are paid subject to a deductible and a depreciation schedule, it is essential to communicate specific needs to an agent.

Premium quotations are usually issued with a 1% deductible; an $85,000 boat, for example, would have an $850 deductible. However, to reduce premium levels, a higher deductible may be purchased; an increase in the deductible of 1%-2% may produce a reduction in premium of 10%-20%.

Coverage for non-attached equipment differs greatly between small boat and large boat policies. One company’s Agreed Value runabout policy limits coverage for outboard motors, outdrives more than five years old, personal property, sails and trailers to the lesser of actual cash value at the time of the loss, cost of repair or replacement.

The same holds true for that company’s yacht policy, though the company allows the purchase of additional coverage for specific items with the payment of an additional premium. This section deserves careful scrutiny, especially on larger boats, which tend to attract lots of excess gear.

The BoatU.S. Boat Saver policy for boats shorter than 26 feet extends coverage to “sporting equipment” only if specified at the time of purchase. Sporting equipment includes water skiing, fishing, and diving gear, and shotguns and decoys.

One yacht policy covers “personal effects” for a specific amount shown on the policy Declaration Page. Like most, it excludes coverage for a list of personal items, including currency, jewelry, and computer hardware or software; some companies also exclude cellular phones if a VHF radio is installed on the boat. Mysterious disappearance also is excluded.

The second greatest risk an owner faces is the potential of a financially crippling lawsuit, though the topic receives scant consumer attention.

If, for example, a guest boarding your vessel slips and is injured, you may be expected to compensate the injured party for medical expenses. Similarly, a boom hitting a guest on the head, or a skier injured while being towed, presents the risk of legal exposure. In an extreme case, you could also be sued for the loss of income.

Consequently, policies have historically included coverage for Protection and Indemnity (P & I) that is now referred to as Personal Liability and Medical Payments.

Watercraft liability coverage provides protection for legal liability in the event of an accident resulting from the ownership, maintenance, or use of your vessel. Coverage includes bodily injury, property damage, and legal defense. It typically includes coverage for loss or damage to “any other ship or vessel or other property caused by an insured yacht.”

The limit of Liability Coverage is a specific amount that usually ranges from $100,000-$300,000. Considering the potential loss we think the wary owner should closely evaluate his coverage.

Consider this: A person earning $30,000 a year will earn $300,000 in the next 10 years. Reimbursement for loss of that income caused by a boating accident, especially if negligence is proven, could be placed on the owner.

If the skipper is a professional person driving an expensive boat, these types of lawsuits are more likely, and awards can be astronomical.

Given that risk, you should seriously consider purchasing high limits of liability coverage and, in some cases, the purchase of an “excess liability” policy that will pay for awards exceeding the limits of your yacht policy. However, you need to double-check the excess coverage to assure that coverage for watercraft operation is included; many policies specifically exclude water-related claims.

The Medical Payments provision pays medical expenses up to the limits in the policy for the insured and other occupants of the boat injured by an accident resulting from the same conditions. However, it’s important to examine the coverage because certain risks that result in injury are excluded.

Typical coverage includes first aid at the time of the accident, medical, surgical, X-ray and dental services, and ambulance and hospital services.

Under a Non Owned Yacht provision, policies extend an insured’s coverage to the operation of another boat with the permission of its owners.

An Uninsured Boater provision is especially important. It provides coverage that requires your insurer to provide for the payment of damages resulting from bodily injury you sustain as a result of a collision with a boat operated by an uninsured or underinsured boat. The benefit is extended to a “covered person” who may be “the primary insured, a family member, or any other person occupying an insured yacht.” In many cases, the Uninsured Boater coverage is identical to the Liability limit.

Optional coverage may include trailers, which are covered for physical loss or damage.

Miscellaneous Provisions
A policy issued by Markell Insurance includes coverage for the loss of “reasonable expenses you incur to charter or rent a replacement yacht during a repair period lasting longer than two days.”

Emergency towing and assistance covers reimbursement for expenses incurred when you are unable to procure voluntary help. Eligible expenses include towing to the nearest place repairs can be made, delivery of fuel or repair parts to the site of the disablement, and cost of emergency labor.

Oil pollution liability covers expenses incurred arising from the unintentional spillage of a contaminant from an insured yacht. It specifies coverage of the reasonable costs directly associated with the clean-up, legal expenses, and costs of defending a lawsuit.

The BoatU.S. policy was the only policy we reviewed that provides coverage for “Investigative Services.” Under its provisions, suffering direct physical damage as a result of a defect caused by manufacture or construction results in “investigative services outlining the probable cause of the loss.”

Most policies include coverage for loss or damages not caused by the owner that are the result of a manufacturing defect. A bulkhead fails, for instance, and the interior is damaged. In this instance the company would pay for the damage to the boat but not the repair of the defect which, depending upon warranty, could be covered by the manufacturer.

Under the BoatU.S. investigative provision the company will pay up to 5% of the Agreed Hull Value for a marine surveyor or other professional’s inspection of the damage, and a written report of findings “and/or laboratory analysis.” The benefit is provided without additional premium, and carries no deductible.

We’d like to see a provision like that in other policies.

Restrictions
The typical boatowner’s policy is designed to insure against the risks associated with recreational use of the boat, and specifically excludes coverage when the boat is being used commercially.

Surprisingly, however, most extend coverage to predicted log and sailboat racing.

Exclusions
Most policy exclusions make sense; no coverage is provided for normal wear and tear, osmosis, blistering or delamination of fiberglass, for example.

Owners are expected to maintain their boats; failure to maintain the yacht “so that it cannot be damaged by ordinary weather and water conditions in the rigors of regular use” is a typical exclusion.

Many carriers exclude coverage for bodily injury or property damage resulting from ownership or operation of a personal watercraft.

Cruising Area
Carriers partially base premiums on the geographic area in which the vessel will operate; premiums vary between the coasts, gulf states, and the Great Lakes. Most include coverage for offshore operation within 75-100 miles of land.

Coverage for extended cruises is available from many carriers but this is an area in which we look to the independent broker who specializes in that type of coverage, and who has access to several company’s products.

From an underwriter’s standpoint. the primary hazard facing the long-distance cruiser may not be the sailing but the logistics of facilitating a repair. John Beachley of National Marine Underwriters told us that for two reasons a double deductible applies to sailors heading for the Bahamas: “The cost of settling the claim is increased because there’s the cost of flying an adjuster to the wreck to evaluate the damage. And, there’s the cost of finding a yard capable of making the repair, and supervising their work.”

Underwriting
As with automobile insurance, the best risks pay the lowest premiums.

Qualifying for insurance involves an analysis of the age and experience of the owner and other family members expected to skipper the vessel, type and age of the vessel, safety gear on the boat, and prior claims. Many companies also evaluate automobile driving records in determining rates.

One broker provided a sheet to calculate a rate that reflects a company’s biases. After establishing a base rate based on the amount of coverage and type of boat, discounts are provided for automatic fire extinguishers (5%), higher deductibles (15-20%), experienced owners (5%), and restricted navigational areas.

Other companies offer premium discounts for prior boat ownership, completion of safety classes, five claim-free years of operation, and membership in specific boating organizations. Credits are applied for installation of depth finder, VHF, fume detectors, EPIRB, radar, GPS and Loran. BoatU.S. considers a dinghy safety equipment.

One company gives credits for completion of US Power Squadron or Coast Guard Auxiliary courses, as well as membership in those organizations.

An additional criterion with older boats, especially wooden boats, is the owner’s ability to maintain the yacht, and completion of a favorable survey. Surprisingly, one underwriter told us that he considered old fiberglass an acceptable risk since, though susceptible to delamination, older boats have thicker hulls.

Because boats more than 10 years old present a greater risk to insurers, one underwriter told us they are looked upon more favorably when higher deductibles are selected.

Coverage for extended offshore cruisers is available from several companies, but the underwriting process is more stringent. Singlehanders, for example, will find it more difficult to secure coverage than fully crewed boats. More experienced and skillful skippers and crew are required. The boat comes under more scrutiny; boats under 30 feet are more difficult to insure, and a recent survey may be required.

Nonetheless, considering the amount of vessel traffic and number of submerged objects floating offshore, sailing without coverage presents an unnecessary risk.

Adjusting Claims
Adjusting claims for small boats is similar to the process of adjusting an automobile claim. Many carriers have in-house claim processing that can be accomplished over the telephone; others employ a staff of outside adjusters who evaluate damage.

When dealing with big claims for large boats, however, you can expect the involvement of an adjuster and, perhaps, a surveyor. Insurance companies are interested in fair settlements, but do not want to be vulnerable to the owner of a boatyard who has his eye on a new truck.

We like those policies that allow the insurer and insured to each select an expert to evaluate the damage and present their findings to a disinterested third party for adjudication. The process saves time, avoids legal logjams and court costs, and produces satisfactory results for both parties.

Conclusion
For most boatowners, buying insurance is simply an unavoidable necessity. And like most other types of insurance (health excluded), years may pass without a claim.

As with many financial transactions, price tends to be the measurement by which most boatowners evaluate their company or coverage; in the insurance industry, quality is often a byproduct of price.

However, there are elements of risk associated with recreational boating. Slamming into a submerged log on Puget Sound (we’ve done that). Running aground off the point at Annapolis (that, too.) Returning to the boat and finding the electronic gear has been removed by night-raiders who practice their thievery from dinghies.

When an accident occurs, a skipper’s first telephone call will be to his insurance provider. Unfortunately, that’s when many discover they didn’t pay close attention when benefits were being explained.

Whether you choose to buy from an agent who represents only one carrier, or an independent broker, we think that finding a representative who specializes in the marine industry is your best bet.

Many agents claim that you receive discounts by purchasing auto, home and boat insurance from one company. That may be true. However, if the agent isn’t a boat owner, or well-versed in the marine industry, it is unlikely that he’ll be able to give you the type of technical advice you need.

As a judicious consumer, we recommend adding an evaluation of your insurance policy to your annual maintenance checklist.

Also With This Article
Click here to view the Checklist of Policy Provisions.
Click here to view "It Pays to Shop Around."
Click here to view "BoatU.S. and West Marine Insurance Plans."

 

Contacts- The Insurers: State Farm Fire and Casualty Co., 112 E Washington St., Bloomington, IL, 61701 309/766-6756. Nationwide Mutual Insurance Co., One Nationwide Plaza, Columbus, Ohio 43215, 877-On Your Side. The Brokers: BoatU.S., 880 S Pickett Street, Alexandria, VA, 22304, 800/283-2883. Leisurecraft Insurance Agency/Transpak Insurance, 210 N Tustin Ave., Santa Ana, CA, 92705, 800/7335242. Mariner’s General Insurance Group, 2507 West Coast Highway, Newport Beach, CA, 800/922-4443, 949/642-5174. National Marine Underwriters, P O Drawer 4636, Annapolis, MD, 21403. 800/262-8467.

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