Yacht Insurance: Colin Dawson looks at Cover versus Premium

Insurance is a necessary evil. A broker is offering an owner a product that both he and the owner hopes will never have to be used. Many believe that the likelihood of having a claim is very slim and therefore feel that there is little point in spending money on insurance. While it is true to say that claims are relatively rare, they do happen and when they do, they are complex and expensive, often leading to a significant amount of downtime for a yacht.

However, these problems can be minimised by buying quality cover from a specialist broker. Downtime might not be so much of an issue for a privately run yacht but if a yacht charters it’s a very expensive headache which is not covered by standard insurance. As such one wants a yacht to be up and running as quickly as possible after an incident and a combination of good crew and good insurance will assist with this. If there are arguments with insurance over a claim the costs for this additional downtime will likely outweigh any difference in premium cost. It is therefore extremely important that a policy responds in the way an owner expects it to.

This means an owner has to fully understand what cover he has and more importantly, what cover he does not have. As such, when arranging yacht insurance, it is very important to look at the actual cover that is being given and who is providing / advising on it. Experience tells us that quality cover actually saves costs and headaches in the long run and therefore much more important than the initial price paid for it, especially when it comes to claims settlements and risk management discussions. A cheaper offer will invariably result in less cover being given and much more difficult discussions during a claim and when a change or flexibility is required.  Someone once mentioned to me the phrase ‘there is no more expensive insurance than a cheap insurance that does not pay a claim’ – this is a very true statement.

Obviously, one buys insurance to protect one’s self (and others) in the event of an accident and it is therefore vital to ensure that proper cover is in place, it’s not much point paying any premium to an underwriter (however cheap it may sound) if the cover you think is in place is not actually there when it comes to needing it. A specialist broker will only use underwriters they are sure provide full, comprehensive cover and have a full understanding of yachts. In most cases these are specialists themselves and therefore appreciate the feelings of owners which is extremely important, especially when it comes to appointing surveyors to handle claims for them. It is far easier to discuss technical aspects of a yacht with these people than those who look at yacht insurance as part of a general portfolio.

While premiums from specialist providers will likely be higher an owner should be confident that the cover put in place for him is as extensive as it can be with no gaps. Often an owner will be unaware that his cover with some poorer quality insurers is restrictive as he or the broker may not know what to look for to ensure full cover is in place. We believe there are various gaps in cover in certain sets of clauses and below are several areas we’d especially look for when it comes to having a yacht insured.

How are the tenders / ‘toys’ secured to the yacht and are they towed? Some insurers are very strict on this. Are there any personal effects on board? Do you want these covered? While most covers will allow for this the sub limits are often not very much.

If you have high value items on board such as art or wine how are these insured? Nowadays some High-Net-Worth property insurance covers this and, if it does, why pay premium twice for it?

Some clauses exclude cover for damage to motors, connections and electrical equipment if caused by heavy weather. For smaller yachts liability cover will not be in place if the boat is operated by a yacht broker or marina, yard operator / employee – certain more professional yacht brokers will refuse to handle yachts unless this aspect of insurance is fully catered for.

How much liability cover are you getting? Is this sufficient in today’s environment? For super and charter yachts this is well catered for by buying separate P&I insurance but for smaller yachts where this is included within the Hull and Machinery programme cover may be limited.

Does the yacht have a boat from which water-skiing takes place? If so, you will likely need to extend cover. Within the Institute Yacht Clauses cover will not be in force if the yacht is at anchor off an exposed shore / beach, unless the yacht has an automatic fire extinguishing system in the galley fire will not be covered at all under any circumstances, if you hit rocks (a common claim we see) no cover is in place for the propellers, struts, rudders, or shafts.

War and terrorism insurance will be excluded, Check your deductibles, some cheaper insurers offer cover with very high hidden deductibles which will affect you in the event of a claim. We feel it is extremely important to ensure owners are aware of the different of Agreed Value versus Market Value. Unless specifically stated a policy is likely to be on Market Value basis. Agreed Value means the sum insured which is stated is what will be received in the event of a Total Loss. Other insurance arrangements often provide cover on a market value basis which means that, although you are paying premium based on the stated value of your yacht, the sum received in the event of a loss may only be a market value which could be considerably less. This may also apply to Partial Loss claims where deductions may be made considering a yacht’s age.

If you take someone from your office or a client on your boat technically speaking this can be construed as corporate entertainment and might not be covered. Where and how is the boat moored? Many insurers are very particular about this. Many owners will shop around each year for cheaper premiums without really understanding this may do them more harm than good. By its very nature the yacht insurance market is very small. The yacht insurance market has contracted significantly in the past 5 years and there are few insurers willing to offer full cover for yachts, especially if these have wider cruising patterns than local waters. If more than one broker is asked to offer quotes it is very likely that the same insurers will be approached by these different people. This does not help the owner’s cause when trying to negotiate a lower cost or expanded cover.

A good insurance broker should approach all reputable underwriters available in the market for the type of risk involved and look to promote the best quality, value for money and appropriate cover to an owner - not necessarily the cheapest one available. When it comes to renewals, as in any business relationship, it is always best to try to remain with the same insurer as far as is practical. A long-standing relationship will always help in the event of a claim or when changes are needed. Further, if the insurer is confident that an owner is not going to continuously shop the market and play one insurer off another, he is likely to be more flexible when the time is needed.

While an alternative quote with a cheaper premium may look attractive its very worthwhile comparing the cost of insurance to the annual operating cost of a yacht. The globally accepted cost of this is between 10% and 15% of the NEW delivery price of a yacht. Take a yacht with a delivered value of, say, USD20 Million that carries a premium of, say, USD120,000 when all is taken into account. The annual operating cost of this yacht will be between USD2 Million and USD3 Million. Insurance is therefore approximately 4.5% of this annual cost. It can barely be seen on the spreadsheet. Now, take looking at a cost of premium that is USD100,000 as opposed to USD120,000 – that’s a 20% saving. With this an owner will be saving 0.9% of his annual operating cost. Maybe now the saving doesn’t look so attractive, especially when the potential consequences are thought through.

With the above in mind, we believe that any additional cost for quality cover that comes from a specialist insurance broker and underwriter (within reason when looking at the overall purchase and running cost of the yacht) is money very well spent when considering the above points

• Their specialist knowledge of yachts
• Their specific approach to risk management
• The specialist nature of the underwriters used to insure your asset
• The quality of surveyor used when the need arises

The very high levels of service that will be given by a bespoke / boutique operation – think of the difference in how one is looked after by boutique hotels as opposed to a 3-star hotel chain

If there are any queries relating to the above or any other areas you wish to discuss please do not hesitate to contact us.

Email Colin Dawson Managing Director, The George Group at colindawson@tgg.com.hk

Colin Dawson is a Technical Representative on behalf of Howden Insurance Brokers (HK) Limited - Insurance Authority Technical Representative (Broker) License no. IA1689