The Captain's Blog

Buying a Yacht? Make Sure You Understand Your Insurance Needs

A boat is typically considered to be 26 feet or smaller, while a yacht is 27 feet or more. A homeowner’s policy usually offers limited insurance for boats and watercraft. Yachts are not covered and require specialized policies with broader coverage.

You will need a specialized policy with broad coverage if you purchase a yacht.

One policy, two main parts

The yacht insurance policy you buy will typically have two parts: liability coverage and hull insurance.

Liability covers damage to other people and property. This part of your policy protects you financially should anyone get injured while on your yacht or if their personal property is damaged while they are on board. It also covers any incidents your yacht might be involved in that cause damage to someone else’s property, such as another person’s watercraft or dock.

Hull insurance covers the yacht itself. At the time you purchase your policy, you will need to agree to the value assigned to your vessel and how much of that amount you would be reimbursed in the event of a total loss.

As for deductibles — the amount of money you’ll be expected to pay for a loss before insurance kicks in — you can consider increasing the deductible amount to lower your premiums. But consider this carefully. The typical policy carries a deductible based on the value of the yacht. For example, a $200,000 vessel would have a 1%, or $2000 deductible. If you are carrying a loan on your yacht, most lenders will allow a maximum deductible of only 2%.

Choices, choices, choices

There are two kinds of yacht insurance policies:
A “named peril” policy covers only the risks speci cally named in the policy. Named perils may include fires, pirates, lightning, wind or theft. If it is not listed, it is not covered. Unless you plan to remain almost exclusively docked, a named peril policy is quite restrictive. It will not provide adequate coverage for the broad range of unexpected situations a yacht may encounter.
An “all-risk” policy covers a broader range of risks. All risk policies typically cover every risk except the ones specifically listed as exclusions. Most boat associations and maritime insurance groups recommend all-risk policies. Even though all risks cover more than a named peril policy, it doesn’t cover everything.

Finalizing the contract language to cover your needs might require some finessing.

The typical policy carries a deductible based on the value of the yacht. For example, a $200,000 vessel would have a 1%, or $2000 deductible. If you are carrying a loan on your yacht, most lenders will allow a maximum deductible of only 2%.

Understand the exclusions and other details

If you have an all-risk policy, you may see certain exclusions, such as:

• Wear and tear
• Marring
• Denting
• Animal damage
• Manufacturer defects
• Ice and freezing

However, don’t assume this is the comprehensive list for your own policy.

Also, confirm if your policy is an agreed value (AV) or actual cash value (ACV):

• An AV policy pays a specific amount you and your insurer agree on. If your yacht is declared a total loss, the insurance company will pay you the amount of the agreement. The insurance premiums are more expensive.
• ACV pays for the yacht’s value at the time of the loss, minus depreciation. The insurance payments are less expensive, but you won’t recoup the full replacement value of your yacht.

Read the fine print and ask your insurance agent to explain the policy details before you set sail. You might have gaps in coverage that leave you at risk.

Additional coverage to close the gaps

Depending on what gaps you find in your base policy, you may want to purchase additional coverage options. Some common yacht policy add-ons include:

• Consequential damage: This covers losses resulting from a failed part, frequently underwater or not easily seen by the yacht owner. But failure due to corrosion, mold, or wear and tear may not be covered because it is considered a “lack of maintenance” issue.
• Towing: It can cost upwards of $400 per hour to return your yacht to shore or take it to a repair facility or dry dock location. This add-on expands coverage beyond the limits of a standard policy and may be useful if you often travel far from shore or your yacht is older.
• Salvage: Some policies do include the cost of salvage, but it may be limited to 25%-30% of the insured value, or salvage might be subtracted from the total amount paid to repair a damaged vessel. A separate salvage policy would cover the full amount needed to rescue your yacht from a perilous or dangerous situation.
• Specialized coverage: You may want specific protection for upgrades or individual yacht parts, such as navigation equipment, an expensive prop or gourmet appliances. Your insurance professional should comprehensively review your yacht’s features before writing your policy. And don’t forget to follow up each time you purchase an upgrade or new equipment so your policy remains relevant.
• Uninsured/underinsured boaters: Make sure your policy covers you for damages caused by boaters without adequate insurance. Every policy is different; you may need to increase your coverage for this peril.
• Captain and crew coverage: If you regularly employ staff for your yacht, you should ensure they’re covered under your liability. You may also need workers’ compensation and employment property liability insurance.

To help you evaluate your policy before add-ons, use this yacht policy description of limits and deductibles as an example:

• Medical payments: $5,000
• $5,000 limit for personal effects after a $250 deductible
• $2,000,000 limit and no deductible for uninsured boaters
• $1,000 to $3,000 limit with no deductible for towing

Talk to your insurance agent about policy enhancements if your insurance limits seem inadequate.

Responsibilities of ownership

Every loss you submit will be scrutinized before payment.

Lack of maintenance

Let’s go back to that “lack of maintenance” issue mentioned above because it can make or break you. Imagine your yacht sinks and there is a fuel spill. Your policy may include fuel-spill liability but only as part of a “covered loss.” Therefore, if it is determined that your yacht sank because you failed to maintain a part, neither the hull loss nor the fuel spill will be covered.

Warranties

As another example, it is paramount that you follow the “warranties” of your policy, which are the parameters of usage that you agree to follow as a condition of coverage. This includes:

• Navigation limits: the specific waterways you can travel
• Lay-up limits: the agreed-to time periods when the yacht must be laid up, usually winter months
• Seaworthiness: the yacht must be fit for its intended purpose

Although most warranties are outlined specifically in the policy itself, admiralty laws may imply additional warranty (such as the requirement of seaworthiness, which may not be listed individually but is still expected).

This only reinforces the fact that yacht owners should work with insurance professionals who are familiar with marine insurance and can provide expert guidance and insight.

In the end, you must commit to ongoing maintenance and adhere to all warranties. If you’ve agreed to winterize your boat by October 1 and you have an incident on October 2, you forfeit your protection. No compliance equals no coverage.

Breach of warranty clause

Speaking of warranties, you should also understand the value of having a “breach of warranty” clause in your policy.

Even if you violate a term of your coverage and you are denied replacement for your yacht’s value, the breach of warranty remains in effect. It will be triggered and pay the balance of your loan, thus absolving you of the additional financial burden. You lose the yacht but don’t have to pay an outstanding loan amount.

Yacht owners should work with insurance professionals who are familiar with marine insurance and can provide expert guidance and insight.

Smooth waters ahead

While these and other details of yacht insurance may seem daunting, an insurance professional with marine expertise can help you craft a specialized, individual policy that covers your unique situation.

And with this due diligence completed before you hit the water, you’ll be more likely to have the adequate protection you need for your seafaring adventures ahead.