When you purchase a marine insurance policy to protect a yacht or recreational vessel, there are conditions stipulated in the insurance contract that you need to read and adhere to while the policy is in force. Compliance with all the terms and conditions established in the policy is of paramount importance. Noncompliance can void your insurance contract after a loss occurs and leave you having to pay for all the resulting damages and expenses on your own.
In this article I highlight some of the most common policy conditions found in recreational marine insurance policies. Many of these conditions find their way into most insurance contracts, however they are by no means all the conditions that may be applicable. You have to read your insurance policy carefully to determine what conditions apply. Every insurance policy you purchase should be read when originally purchased and after each renewal. There may be changes that affect your coverage and your responsibilities. You need to be aware of all applicable terms and conditions under your insurance policy.
To start, the insurance policy establishes a policy period i.e. the coverage term of the insurance contract. The policy period runs from a set inception date to an expiry date (as agreed by the insurer and the insured). Said period is normally established as one year (12 calendar months). It may be amended if circumstances require. Such amendments are subject to the prior approval of the insurance company.
The policy term is important because it defines the time frame under which the insurance policy is in force. Any losses falling outside the policy period will not be covered because there is no insurance contract in place protecting the vessel. You should be aware of all coverage periods and make sure that the negotiation of the insurance renewal is successfully completed before the contract expires.
Insurance conditions related to vessel operation
The main set of conditions relate to the use of the Yacht and how the risk is described to the insurance company at the time of underwriting. When completing an insurance proposal form, questions such as the type of use and navigable waters of the vessel are asked so that the insurance underwriter can assess the risk and charge an adequate premium.
The premium amount payable is dependent on the information provided in the proposal form, therefore the information stipulated must be true and strictly adhered to. Any breach in the conditions relating to the type of use or area of navigation of the vessel will result in no coverage being provided while the vessel is non-compliant with the established conditions.
Private or recreational uses contain limitations that prohibit the use of the vessel for hire, reward or remuneration of any kind. If the uses defined in the policy are established as private or recreational, there will be no coverage for any voyage performed for hire without the prior agreement and approval of the insurance company. Any use (howsoever defined) falling outside the applicable definition of use in the contract will be excluded.
On occasion, a vessel may not be operating in any capacity for an extended period of time. If the vessel is not going to be put to use it can be defined as being laid up or put out of commission. If so, due to the reduction of risk to the insurance company while the vessel is not being operated, the insurer will provide coverage for the vessel at lower rates commensurate with the reduction in risk.
The general conditions section of the policy will contain information about the restrictions on the use of the vessel while laid up. Said restrictions will include warranties stipulating that the vessel will not be operated in any capacity or used as a residence.
The insurer must approve the lay up period of the vessel before agreeing to amend coverage terms. The start of the lay up term and the estimated duration must be advised to the insurer. If the vessel is to resume operations, then the insurance company must be notified and they have to give their approval before full coverage is restored.
Compliance with the conditions relating to the vessel’s status and operation are very important and can directly impact the settlement of losses following an accident.
Insurance conditions related to vessel seaworthiness
When agreeing to insure a vessel, the insurance company will want to ensure that the vessel is in good condition and that there is no undue exposure to risk. To determine the condition of the vessel the insurer will require survey reports on the vessel. A survey report entails the inspection of the vessel by a licensed professional where the condition of the vessel is determined.
Insurance companies will use survey reports in their analysis of the risk and will require that any recommendations established in the report be implemented. In effect, by using a survey report, the insurance company is requiring its insureds to maintain the vessel in the best condition possible according to the report.
Adherence to survey report recommendations is important and any breach may impact possible recoveries should a loss occur. However; there is an overarching requirement that the vessel must remain seaworthy for coverage to apply. If a vessel is determined to not be seaworthy, then coverage will be void and any claims that result from a loss will be denied.
Insurance conditions related to underwriting information
Parties to an insurance contract are obligated to act under the principle of “utmost good faith” when transacting insurance. The principle states that all relevant information which might influence a contract party’s perception of the risk, or the coverage provided by the policy, should be disclosed. Information asymmetry, which occurs when one party to a contract knows more about the subject matter of the contract than the other, is a problem when analyzing risks. An insurance company underwriter relies on the information provided by an applicant when reviewing the risk. Based on said information the underwriter will determine if the risk should be accepted and the premium that should be charged.
If left unchecked asymmetric information can lead to adverse selection. Adverse selection occurs when high risk insurance customers purchase insurance products at rates/premium that do not accurately reflect the level of risk they bring to the insurance company. To protect the insurance company and its customers, there are strict conditions in place that require that all material (relevant) information be disclosed.
Fraud, non-disclosure, misrepresentation or concealment of material information under an insurance contract will render the contract void and any resulting losses declined. Said actions represent a moral hazard on the part of the insured that is not insurable. Without such safeguards in place, insurance companies can find themselves with a portfolio of written business for which not enough premium was collected, which in turn could lead to insolvency.
The duty of disclosure is ongoing and is renewed at each policy renewal. Changes in material information should be disclosed to an insurance company immediately to avoid complications in the settlement of claim.
Insurance conditions related to contract cancellations
Insurance companies and insureds have the right to cancel insurance contracts, including those covering yachts and recreational vessels. Notice must be given to the opposite party of when the contract is to be canceled. Insureds can cancel coverage at any time, insurers must provide a notice period before cancellation can take place.
There are statutes in each state defining minimum notice periods for insurance company cancellations. Said periods may read 10 days for non-payment of premium and 30 days for any other reason (it can vary from state to state). Said periods allow insureds to remain covered while alternative insurance coverage can be sourced. There may also be statutes defining the acceptable reasons for which an insurance company can cancel an insurance contract.
The sale of, or a change in the insured’s interest in, a vessel will lead to the immediate termination of the insurance contract without notice. A new insurance contract must be negotiated for the new owner of the vessel or the change in interest.
When coverage is canceled, premiums paid or those that remain outstanding are adjusted according to the insurance company’s time on risk covering the subject matter of the insurance contract. For cancellations initiated by the insurance company, any unearned premium is returned at pro rata terms i.e. proportionate to the length of time from the date coverage actually terminated to the original expiry date. Cancellations initiated by insureds may take place at short rate terms i.e. not proportionally but rather as established in the insurance contract.
The objective when writing insurance policies is to see insurance contracts run their course from policy inception to expiry. However; in situations where coverage must be canceled, the steps to follow for cancellation to take place will be delineated in the policy.
Warranties and preservation of insurance company rights
The insurance contract will require you to comply with all established warranties and subjectivities. When analyzing a risk, an insurance company may require that certain conditions be met prior to offering coverage. Said requirements may take the form of vessel protective devices such as fire suppression equipment, GPS tracking, etc. Or may affect the vessel operation such as requiring the vessel to be operated by multiple crew members, setting captain experience requirements, etc. The goal of said warranties is to mitigate (reduce) the risk of loss. All warranties need to be met and complied with in order for coverage to remain effective. A breach of warranty can render the contract void should a loss occur.
Finally, you are responsible for preserving the rights of the insurance company at all times. Via subrogation, an insurance company acquires your rights of recovery against at fault third parties for claims payments made following a loss. Waiving an insurance company’s right of recovery can reduce your claim settlement by the amount that could have been otherwise recovered. Waiving said rights may result in a denial of a claim that may otherwise be covered.
Compliance with all terms and conditions in an insurance contract is extremely important. The above were some of the general conditions that are found under insurance contracts covering yachts and recreational vessels. It is not meant to be an all inclusive list of conditions. You should read your insurance policy carefully and follow the conditions described therein. I have not included the conditions describing your duties after a loss or accident occurs. Those will be discussed in a future article.
Risk Reinsurance Holdings, Inc. is an insurance brokerage firm located in Broward County, Florida. We can find insurance coverage on your behalf to address personal, business and specialty risks to protect you, your family or your business against loss. We offer insurance solutions to cover your boat and yacht (marine) exposures. Our recreational marine insurance products are tailored to address the insurance needs of individuals operating boats, yachts and other vessels for private and recreational uses.
We are an independent insurance agency, representing many insurance companies. This allows us to compare coverage alternatives on your behalf and select the most appropriate option to address your needs.
Try Risk Reinsurance Holdings today and leverage our expertise and market access to solve your marine insurance needs. You may follow the link hereunder to complete a questionnaire and get the quoting process underway.
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