A Sailors Guide to Marine Insurance
Practical Sailor buyers guide to selecting an insurer and boat insurance that fits your needs.
The idea for insurance came from traders who began to ship cargo in the 3rd and 2nd millennia BC. Other kinds of insurance developed based on what the traders were doing. Toward the end of the 17th century, modern marine insurance began when Edward Lloyd opened a coffee house in the growing trading hub of London that became a meeting place for parties interested in insuring cargoes. Lloyd’s of London became known as the place to obtain marine insurance. Lloyd’s went on to insure the Titanic, considered a prestigious (and safe) risk to insure. Coverage for the hull alone was £1 million—around £95 million in today’s money. Brokers working with Lloyd’s for the White Star Line were able to negotiate a premium for the “unsinkable” vessel of just £7,500. Despite the high level of claims that arose from the disaster—one of the biggest losses in marine insurance history up to that time—Lloyd’s underwriters paid out in full within 30 days of the tragedy. Today, marine insurance remains a key segment in the Lloyd’s global portfolio.
To avoid a “Titanic experience,” most sailors are just as rigorous about understanding the weather and other challenges the sea might throw at us as we are at scrutinizing and maintaining the systems on our boats. The old adage “Take care of the ship, and she will take care of you” is still the best insurance for any sailor. Indeed, this is part of the fun and challenge of owning a boat—keeping your boat in good condition, going out upon the waters and returning safely—even if it is just a day sail on the bay. Still, there are occasions when everything we have done is not enough, and we need insurance protection.
We last evaluated marine insurance in February 2001 and then followed up on that report in April 2006 and May 2006, when we examined the responsiveness and pricing available from marine insurance providers in different regions of the country. We wanted to examine the changes that have occurred since these reports were written, particularly as a result of the financial crisis that began in 2007.
What we found was surprising. A combination of factors—a slack economy, sharply reduced boat sales, consecutive mild hurricane seasons, and an overall aging of insured boats—have led to insurers working harder for our business. Not only is it becoming easier for boat buyers to find an insurance policy that meets their needs and pocketbook, but existing boat owners—even those with older boats that were previously difficult to insure—are finding opportunities to reduce their premiums.
For the purposes of this article, we used one of PS’s test boats, a 1982 C.E. Ryder Corp. Sea Sprite 34, berthed in Tampa Bay, Fla., as our sample boat as we “shopped” for marine insurance and delved into the differences in coverage. We spoke with four marine-insurance insiders to get a feel for the state of the marketplace and to guide us on what to look for when insuring a boat. The experts were:
· Jim Craig, president of the American Institute of Marine Underwriters (AIMU)—AIMU represents 90 percent of the underwriters operating in the U.S. marine industry, insuring large ships and other commercial marine interests. AIMU has 47 corporate members, representing some of the biggest insurance and re-insurance names in the world.
· Russ Jamieson, vice president of Atlass Insurance Group—Florida-based Atlass has been in the business for 27 years and has relationships with 18 underwriters, including members of the Lloyd’s of London market. Atlass writes insurance in 21 coastal states.
· Mike Pellerin, vice president and director of Marine Insurance Underwriting for BoatUS in Virginia (now part of Warren Buffett’s Berkshire Hathaway group)—Pellerin has been with BoatUS for 20 years. The company writes policies in all 50 states for Continental Casualty Company (a CNA Financial subsidiary). BoatUS sister company Seaworthy Insurance is also part of the Berkshire Hathaway group.
· Mike Smith, senior vice president of Global Marine Insurance in Michigan—Smith has been in the business for 38 years, and Global Marine writes insurance policies using multiple underwriters in all U.S. states, except Hawaii.
Understanding the marketplace
Smith told us that growth within the boat insurance market follows the new boat sales market, and he noted that from 2005 to 2007, there were approximately 335,000 new boats being manufactured yearly in the U.S. That number now hovers between 125,000 and 135,000. (As a sign of the times, PS reported on the bankruptcy of Luhrs Marine Group in April of this year.)
Also reflective of the downturn in new-boat sales, Jamieson said that 8 percent of the policies he writes these days are for new boats and 92 percent are for used. Pellerin confirmed that the market is shrinking, adding that the size of boats also is decreasing as dedicated boat owners try to reduce expenses like slip fees and mooring maintenance costs.
Unlike automobiles, states do not require boats to have insurance, and an astounding 65 percent of boats today have no insurance at all, Smith said.
According to the National Marine Manufacturers Association (NMMA), there are 17 million recreational boats in use today, down from 18 million in 2005, which was the end of a 15-year upcycle. So the pie for marine insurance providers is getting smaller, and recovery to 2005 levels does not look likely in the near future.
While it is difficult to get a precise number, the marine insurance marketplace books about $2.5-$3.5 billion in premiums annually, according to Smith, and that’s not a particularly large number in the world of insurance. However, thanks to minimal hurricane damage over the last six years, Smith said, insurance providers have enjoyed several profitable years.
“Hurricanes weigh heavily on the industry,” he explained. “Hurricane Andrew was a watershed event when the storm ravished Florida in 1992, barely avoiding the complete destruction of billions of dollars worth of boats and yachts, making everyone aware of just how risky the business could be.”
According to the AIMU folks: “The market for pleasure craft insurance is challenging, as are most insurance markets. Customers became more conscientious about their finances, including strength of insurers. Insureds are doing more shopping for quotes, looking for different deductibles, broader coverage, and insured value options in an attempt to save money. Broad usage dropped due to various economic challenges, including fuel prices. Boat foreclosures spiked more so than in the past.”
Both Smith and Pellerin described another interesting trend that gained momentum following the financial crisis: There has been an increase in suspicious boat thefts and sinkings as financially troubled owners attempt to reduce financial obligations. Although the industry does not publish stats on this, it is described as a “moral hazard” for their industry.
These dismal industry stats are in some ways good news for boat owners who are committed to having proper insurance. All of our insiders agreed that competition among marine insurance providers is fiercer than ever as companies fight to grow their share of a shrinking market. Rates are the lowest they have been in years for very comprehensive coverage.
Choosing an Insurer
According to our insiders, the big underwriters for boat insurance in the AIMU group are Seaworthy Insurance Company (Berkshire Hathaway/BoatUS), Chartis (formerly AIG), CNA (BoatUS writes policies for them), Markel American Insurance Co., Travelers, and ACE USA.
“It is an incestuous world,” according to Smith. Some of the underwriters write polices direct, others rely on agents like Smith’s and Jamieson’s companies, and some do both.
All of the underwriters are required to be registered in the state where they write policies. Each state has a department responsible for regulating insurance in their state by “admitted carriers,” typically led by the state’s insurance commissioner. You can find the website for your state’s insurance department by checking the National Association of Insurance Commissioners (NAIC) at www.naic.org.
Many of the state insurance commissioner websites have useful information concerning boat insurance. Most interesting is that you can check to see the status of the underwriter you are using, or contemplating using, including the number of complaints registered against them. A high number of complaints would be an obvious warning sign. You can even review the underwriters’ detailed rate filings on many of the state sites, but this is probably more than you want or need to know. We highly recommend visiting both the national and state insurance commissioner sites as part of your boat insurer search. Make sure that the insurance you are considering is from an admitted carrier in your state.
Another way for you to research underwriters is through A.M. Best Co. (www.ambest.com). Founded in 1899, A.M. Best Co. assesses insurance underwriters’ financial strength and creditworthiness and makes the information available to consumers. We recommend using only insurance companies that A.M. Best has given an A rating.
Although there are several large direct writers of marine insurance, it is typically marketed through independent agents. Surprisingly, it is not easy to find a listing of these agents. According to Smith, there are about 50 significant marine insurance agents around the country offering boat insurance.
“Google boat insurance, yacht insurance, and marine insurance, and look beyond the first page for the specialists,” Smith added. He explained that Google charges insurance firms fees to make sure their names appear near the top of Google search results. Not all of the marine insurance folks are giant firms able to pay Google’s fees, but this does not mean they are not capable marine insurance agencies.
All marine insurance agents are required to be licensed or registered in the states where they sell insurance, and it’s worthwhile to make sure the agent you are working with is licensed in your state. (This is often a different state department or agency than the insurance commissioner; for example, in Florida, the state’s chief financial officer is in charge of registered or licensed professionals.) The information is easy enough to come by. The state websites we checked out listed the agents, the insurance companies they represent, their license number, and the issue and expiration dates of their appointment with the underwriting company.
Both Jamieson and Smith told us that the London Insurance Group (LIG), located in Tampa, Fla., has been offering a new-ish certification program, Certified Marine Insurance Professional (CMIP), for the agents. Even veterans like Smith and Jamieson are taking the LIG courses so they can become certified.
Insurance generally falls into two categories: boat and yacht. “Yachts” are usually classified by the marine insurance industry as vessels 27 feet or longer, while “boats” are 26 feet or shorter. “Boat” policies tend to be more fixed with standard limits and are designed for trailered, outboard boats. Many boat owners with vessels in the under 26-foot category have the boat covered by their homeowner insurance to reduce costs. Although the cost is substantially less, the coverage can be quite limited. “Yacht” policies offer more choice based on the fact that yachts inherently incur more risk due to their size and navigation area.
We looked only at yacht insurance for this article with a focus on our old Sea Sprite 34.
· Hull Coverage: Boat owners naturally first think about the loss sustained should their boats sink or be completely destroyed. For this, there are two types of hull coverage: actual cash value and agreed value.
Actual cash value policies determine the value of a boat based on the age and condition at the time of loss. To make a value determination, underwriters will reference the NADAguides (www.NADAguides.com), the BUC Used Boat Guide (www.bucvalu.com), or other resources. While costs might be lower for this coverage, we don’t consider it the best option given that you don’t know upfront what amount the insurer will pay in the event of a loss.
Agreed value policies are agreed upon by both the owner and insurance underwriter at the time the policy is purchased. This, in our opinion, is a better choice.
For example, in 2003, we felt the value for our 1982 Sea Sprite 34 was approximately $50,000, based on what we saw similar 34-footers selling for. A marine survey confirmed our boat was in good condition and estimated the value at $54,000. BoatUS proposed an agreed value policy of $40,000, which we accepted. Could we have done better? Maybe. But at the time, we were in the midst of a very busy 2003-2004 hurricane season in Florida and had been dropped by our previous insurer, who apparently wanted to escape the Florida market.
At the time, we were grateful that BoatUS would cover us, and the company has stuck to that agreed value through our latest policy, which was renewed in May 2012. BoatUS’s Pellerin told Practical Sailor that they review these agreed values from time to time and make adjustments. If their analysis showed that our Sea Sprite was now worth a few thousand dollars less than $40,000, Pellerin said, the company would likely stick with $40,000. On the other hand, owners of older boats might want to reduce the agreed value as the boat ages in order to save money on the policy, even if your insurer has no objection to remaining with the higher value.
Owners of older boats that have been paid off—as is the case with the Sea Sprite—have the flexibility of choosing agreed value or actual cash value. However, those who are financing a boat likely will be required by their lender to have agreed value coverage. Most lenders allow a maximum 2-percent hull deductible and require protection and indemnity coverage of $300,000 or more. Another important stipulation in insuring a financed boat is that the name on the insurance policy must be the same as that on the boat title and loan documents, and the lender must be named as the loss payee.
The Sea Sprite 34’s policy includes the hull as well as “the machinery, sails, spars and furniture.” It also covers “equipment regularly carried aboard which is considered normal for the safe operation and routine maintenance of the boat as well as a dinghy and its outboard engine.” Personal items such as Scuba and fishing gear, clothing, portable TVs, stereos, cameras, fuel, and consumables are not covered; however, we could elect to cover personal effects for an additional fee.
An important consideration is coverage for “consequential damages,” or an indirect loss. For example, if a seacock fails as a result of a manufacturing defect, we are not covered for the replacement of that part; however, if it fails and our boat sinks, we would be covered.
Many underwriters are now offering a “disappearing or diminishing deductible” for those with good claims records. During the May renewal of the Sea Sprite policy, BoatUS advised us that because we have never made a claim, we would receive a 25-percent deduction in our hull deductible, making the reduced deductible $340. We preferred instead to have a reduced premium, and the BoatUS folks recommended increasing our deductible to $1,360, which resulted in decreasing the annual premium from $1,988 to $1,278. According to BoatUS, this new deductible would also begin to drop so long as we maintained an excellent claims record.
· Protection and Indemnity: While hull insurance is important, a much greater concern to us is the risk of a financially crippling lawsuit—especially in this litigious society where anyone with a boat is considered wealthy and a good target, even if your sails look like your grandmother’s quilt.
Suppose you have some friends out for a sail, and an accidental gybe leaves one of your guests with a severe head injury. They might expect you to compensate for medical expenses, or even the loss of that person’s income, particularly if negligence is proven. This is why “boating liability” or “protection and indemnity” (P&I) coverage is so important.
The limit of liability coverage ranges from $100,000 to $500,000, although it may be possible to purchase more from some underwriters. Since we are very paranoid about this, we elected for a $500,000 liability limit from BoatUS for the Sea Sprite and then purchased a $1,000,000 umbrella policy from a different provider (SafeCo, www.safeco.com) that will provide us with incremental liability coverage not only for our boat but also our car and home for $165 per year. Be aware that umbrella policies require you to have “base liability coverage” from your primary policy. In our case, SafeCo requires that we have base coverage of $500,000 on the Sea Sprite.
Smith, of Global Marine, also recommended checking to see whether the liability coverage you are quoted covers “cost of defense.” For example, if you have a $100,000 coverage limit, and it costs $50,000 in attorney costs for your defense, you might have only $50,000 left for the judgment, an obvious problem, if the judgment is more.
· Commercial Towing and Assistance: While we pride ourselves on having never needed to be towed during the 20 years we have owned the Sea Sprite, we think this is an important provision because the expense of a tow can be very high. We also have an unlimited TowBoatUS membership (www.towboatus.com), and we highly recommend subscribing to a towing service plan to supplement any towing your insurance policy may cover. (Some insurers, like BoatUS, require that policy holders use an approved towing service provider.) Keep in mind, however, that no company can have towboats on every lake and waterway, so it’s a good idea to subscribe to a towing service plan that offers service to the areas you most frequently sail.
· Salvage Coverage: According to BoatUS, most people buy insurance to cover the “big things” like sinkings or hurricane claims. In both cases, it is often the policy’s salvage coverage that will pay to remove a boat from the bottom of the bay or from your neighbor’s backyard. A good policy has separate and full salvage coverage (up to your policy’s limits) for the costs to remove the boat that is not limited to a percentage of the hull value. Hull coverage will reimburse you for the actual loss of the boat, but without salvage coverage, you may be left paying salvage costs out of your own pocket.
· Medical Payments: This provision pays medical expenses (up to a defined limit) resulting from a bodily injury to boat owners or others from an accident occurring while in, boarding, or leaving the boat. Coverage may be secondary to your primary medical insurance policy.
Jamieson urged us to think twice and not to be cheap here. “Suppose you are visiting another country in your boat,” he said. “You are washing the boat and slip on the soapy deck, falling into the cockpit and breaking your ankle. You arrive at the local hospital and present your major medical card. They politely indicate they don’t take it.” You are then an uninsured boater from a medical coverage standpoint. Be sure to always have the correct coverage based on where you are traveling.
· Fuel and Other Spill Liability: This is mandated by the U.S. Coast Guard, and pollution coverage is required on all yacht insurance. The maximum a boat owner could be held liable for is $854,400. Read your policy carefully to be sure it doesn’t limit this coverage to your chosen liability limit.
· Uninsured Boater: Our Sea Sprite 34 has a theoretical maximum hull speed of 7 knots, so we tend to view with distrust go-fast boats with 600 horsepower or more bolted to the stern. And since we learned that 65 percent of boats on the water have no insurance at all, uninsured boater coverage is important to us.
This coverage requires that your insurer pay for damages resulting from bodily injury you sustain as a result of a collision with a boat that is uninsured or under insured. This coverage is often identical to the liability limit and also can be secondary to your primary medical insurance coverage.
· Cruising Area and Other Restrictions: Underwriters will define the waters where you will be covered. If you want to venture beyond the area, check to see whether you will be covered. It may be necessary to switch underwriters, if you plan to travel far.
We checked with BoatUS to see what it would cost to add sailing areas for our Sea Sprite 34 and found that the Bahamas would increase our cost by only $100 per year. Coverage for the Caribbean to Trinidad (excluding Cuba and Haiti) would add about $3,500 to our annual premium and would be subject to a survey (including rig), prior sailing experience in the Caribbean and offshore, number of crew going and their offshore experience, and safety equipment on board. We were also told that the boat would need to be back in the U.S. from June 1 to Oct. 30, hurricane season. Coverage in other locations would be decided on a case-by-case basis and usually would be only for defined time periods.
· Hurricanes and Tropical Storms: “Most specialty marine insurance companies now offer what is called ‘hurricane haulout coverage’ with various limits available, such as $1,000 to $1,500, some with copays and or deductibles,” Smith told PS. “This relatively new coverage, which may have been invented by BoatUS, has reduced the losses paid out in hurricanes dramatically!”
Pellerin explained that there is no extra charge for hurricane haulout coverage; it is automatically included. “If a hurricane warning or watch is issued for an area by NOAA, BoatUS will pay 50 percent of the cost, up to $1,000, for having your boat moved by a professional (to a hurricane hole), for a professional haulout, or for the professional execution of a hurricane plan,” he said. A “professional,” he said, is someone employed by a marina or boatyard, or a licensed boat captain. BoatUS encourages its customers to take advantage of the haulout coverage, so using it is not considered as a loss claim.
· Liability Only: For owners of older boats owned outright (no lien holder) who want to forgo hull coverage but still wish to have liability coverage, there are liability-only policies. These cover liability for third-party property damage or bodily injury, medical payments, fuel-spill liability, and uninsured boaters. While you have to pay the costs to repair or replace your boat, the coverage protects your assets and guests. The industry folks we spoke with advised us to make certain that the policy also covers wreck removal, which can be extremely expensive, especially if your boat sinks in a navigable channel or difficult location.
For older boats, the amount of the liability-only coverage that is available is usually determined on a case-by-case basis. “The market could not bear the pricing at which liability-only coverage could be consistently profitable,” the folks from AIMU explained. “Arguably, this could create a moral hazard for boaters looking to save money by securing liability-only coverage by shortcutting maintenance and other expenses.” Boat owners are better off looking at actual cash value options and higher deductibles than liability-only solutions.
Insuring an older boat
In the current economy, owners are holding on to their sailboats longer, and first-time boat buyers or those upgrading are more likely to buy used than new. Our industry insiders explained that in recent years, insurers have become more willing to insure older boats, and some, such as BoatUS, will also write policies for older wooden boats. However, there aren’t set criteria (that we could find) to determine whether an older boat will be insured. Instead, it seems, providers decide by reviewing applications on a case-by-case basis.
One certainty in insuring an older boat is that a survey will be required, and in many cases, if you stay with the same underwriter, you may be asked to get regular surveys. BoatUS’s Pellerin told us that the company will pay for a follow-up survey if they think it is time for the boat to be surveyed again, but this might not be true of all carriers.
We found that understanding the differences in marine insurance coverage is not as easy as the industry websites would have you believe, and this is the main reason you want an experienced agent to help you understand your choices.
We were extremely impressed with the knowledge of all those we spoke with, but not all insurance providers will pro-actively try to determine your needs and provide you with the best price. You want an agent who will ask you if you can handle a higher hull deductible, what kind of experience and training do you have, what kind of equipment is on board, and other things you might not think to bring up.
Atlass’s Jamieson made a very persuasive case for using an established agent who represents multiple underwriters to get the best deal. And if your needs change, and you decide to head out on that world cruise, you might need to change carriers to one that a firm like Jamieson’s likely has in his stable of underwriters.
Our probing also found that it’s possible to insure an older boat and even a fixer-upper. However, caution is strongly advised. If you have not yet purchased a boat of advanced years, we’d check very carefully with an experienced marine insurance agent to make sure it is insurable before making the buy decision.