Insurance for Dummies - A Smart Guide for Yacht Crew

The only item that anybody buys in the hope that they are throwing their money away is insurance. Whoever buys insurance against an eventuality that never happens will see no tangible return but, if a loss occurs or a court summons arrives in the mail, their insurance premiums may turn out to be a smart and relatively low-cost investment.

Yacht owners consider themselves to be smart people, so is buying insurance for a yacht a smart gamble or is it better to take a calculated risk and save the premiums? The latter is often referred to as being ‘self-insured’ which is a misnomer, and a rare choice for obvious reasons. In the event of an incident or a third party claim, the resulting costs may far exceed their capacity to pay.

Protection & Indemnity Coverage: Protecting Third Parties 

For precisely this reason, regulatory authorities may mandate insurance coverage to protect third parties. In the maritime world, this is known as Protection and Indemnity (P&I) coverage.

P&I is an archaic term dating back to the early 1800’s describing insurance cover for shipowners against the loss of, or damage to, their vessels. This protected the shipowner’s assets but it didn’t extend to the losses incurred by third parties who sought redress through the courts. By the middle of that century, case law and legislation gave increasing rights to seafarers, passengers and other parties to seek compensation, so to mitigate potentially catastrophic liabilities, shipowners joined together to form P&I Clubs for mutual protection.

If you’re a crew member, it’s important to have some understanding of the insurance cover surrounding the yacht you work on.

The first type of cover to be expected is Hull and Machinery (H&M) insurance, which protects the owner against physical loss or damage to the yacht due to fire, collision, grounding and so on. A smashed-up hull or wrecked machinery may not have a direct financial impact on crew but the absence of such a policy for anything bigger than a rowing boat should trigger alarm bells regarding the owner’s tolerance for risk.

An owner’s P&I coverage will impact crew more directly. On smaller yachts the H&M policy may include US$ 4 to 5 million liability coverage. For larger yachts, P&I insurance is typically separate from the H&M policy, purchased via a commercial shipping ‘P&I Club’ with a superyachts division.

Yachts in these clubs are known as ‘members’ and mostly pay fixed cost premiums for the year, even if the P&I Club has paid out higher than expected claims on its yacht account.

Burr Taylor of Sturge Taylor provides some startling numbers with P&I policies offering up to US$500,000,000 owner’s liability coverage, sometimes with the option to buy an additional US$1BN.

So why would the owner of a 50m motor yacht consider such enormous coverage? The answer is that an incident involving a large cruise ship or supertanker could feasibly lead to claims approaching $1 billion. Compared to a cruise ship or a supertanker, P&I Club Directors scale down the risk of a superyacht incurring such enormous claims, adjusting premiums accordingly but, if an incident occurs, pollution damages alone can soon rack up to tens of millions.

Indemnity: Payouts Covered by Insurance 

Crucial to the interests of owners, their crews and any third parties is indemnity, whereby funds are available to reimburse an owner for any payouts awarded against them. However, where an incident results in a claim against the owner by a crew member, guest or third party, the claimant has no automatic right to the owner’s insurance although, in practice, any damages awarded may be paid directly by the P&I Club.

The exception, as required under the first amendment to MLC 2006, is specific cover for outstanding wages, repatriation and compensation for death or long term disability. This is normally included within the P&I policy and is posted in the crew mess where it can also be seen by Port State Control inspectors. In the event of genuine abandonment, crew should notify the Flag State who will confirm the situation with the P&I Club so they can make the necessary financial arrangements directly with the crew.

Definitions: Negligence, Criminal Negligence & Wilful Misconduct 

On the subject of indemnity, it’s also important to consider whether or not an insurer will pay out on a claim arising from crew negligence, since P&I is designed to protect the owner against this. Crew negligence is a complex topic and it tends to be overlooked until something goes wrong.

In the event, P&I would meet, defend or deny a claim involving negligence according to the wording of the particular policy. Without delving into legal definitions and case law, a claim for negligence arising from sloppiness or carelessness would generally be covered. On the other hand, a claim for negligence resulting from the failure to follow a standard procedure would probably be defended. Similarly, a claim for negligence arising from reckless behaviour is likely to be defended as it is likely to be against the owning company which has played no part in the reckless act.

According to Simon Dixon of Moore Stephens Crew Benefits (MSCB), in reality any decision is contingent on whether or not willful misconduct can be proven. If the incident involves such egregious negligence that criminal liability is apportioned by a court, the insurer will deny a claim, declaring gross negligence and willful misconduct.

Criminal negligence is another thorny problem. Burr Taylor observes that a regulation may be breached through no deliberate intent, for example where the wording or intent of a regulation was misconstrued, in which case the claim would be defended. However, if a claim results from overt criminal activity, such as smuggling, it would be denied.

Let’s take the more imaginable example of a yacht captain being charged under French criminal law due to a guest causing an accident while operating a PWC in French waters. Most, but not all, P&I Clubs would defend the case. Another example could be a crew member causing an accident while operating a PWC under the influence of alcohol after a lunch ashore with the owner. Such a scenario is likely to test the limits of the owner’s vicarious liability coverage.

In case of injury to guests caused by crew negligence, the injured party would sue the owner under the principle of his/her vicarious liability. The P&I Club would defend the owner against the claim or indemnify them by covering any damages awarded to the injured party.

But there are grey areas to be aware of. Generally the P&I policy would cover some off-yacht activities for guests, such as tender excursions and the use of water sports equipment, but other activities such as an excursion in a hired bus may fall outside the policy. If crew were subsequently injured in an accident on that bus (while carrying out their duties), the P&I policy would indemnify the owner against damages awarded to the crew. However, an injured guest on the same bus may have to make a claim under their personal travel or accident policies or sue the bus company.

Reputational damage to the owner is more complex and, as Simon Dixon confirms, it cannot be covered whatever the cause, since there is no objective way to quantify such an intangible loss.

Subrogation: Seeking Compensation for a Payout

Subrogation is another tricky subject, referring to an insurer’s right to seek compensation from a third party for paying out on a claim. It’s not normally something crew need to grapple with, although captains may have been on the receiving end of an email from a shipyard on the subject of liability derogation and coverage limits while undergoing refit or haul-out. The best course of action here is to refer the matter to the yacht’s management company or insurance broker.

Collisions often involve a crossover between H&M and P&I, as physical damage to vessels almost always include injury to people. Recent examples include collisions between US warships and commercial vessels, resulting in deaths, injuries, damaged hulls and fuel spills, which will keep the concerned H&M and P&I issuers tied up for years to come.

Michelle Van der Merwe of Pantaenius Yacht Insurance quotes the example of a collision between an out-of-control tender and a yacht moored in Palma two years ago. The yacht’s H&M insurer paid out for the damage caused to the yacht, then sought recompense from the P&I Club covering the yacht to which the tender belonged. Luckily in this particular case there were no personal injuries.

Terms and Conditions: 'Exclusions' 

Neither H&M nor P&I are issued without conditions known as ‘exclusions’. For example, P&I Clubs may be especially tough on claims arising from stowaways, making it a condition of coverage that the Directors of the P&I Club may, at their own discretion, reject or reduce such claims if they believe the shipowner did not take all reasonable steps to prevent stowaways coming on board.

‘Unseaworthiness’ is a more standard exclusion. An implied warranty of seaworthiness applies to hull insurance but it is less strictly enforced unless an owner was actually and demonstrably aware of a specific defect which later caused a loss, damage or injury.

On the other hand, P&I coverage may require an express warranty of seaworthiness, calling for due diligence in maintaining the vessel in a seaworthy condition. Ultimately the definition of seaworthiness in any specific case may be resolved mutually or be left to a court to decide. Either way, it’s in the interests of owners, managers and crews to observe procedures and best practices at all times.

But what about the insurers themselves?

Since H&M and P&I issuers have a stake in the game, why are their representatives seldom if ever present onboard to inspect the assets they are insuring? At one time it was more common for H&M insurers in the USA to send an independent surveyor, at the owner’s expense, to inspect a vessel before issuing or renewing coverage. Tighter regulations since the early 90’s, such as the ISM Code, the Manilla Amendments to STCW, and MLC 2006, have increased confidence (and possibly complacency) on the part of insurers in relying purely on Flag and Class certification.

An independent surveyor may still be engaged by an insurer, again at the owner’s expense, after a prolonged lay-up of a yacht, or if a yacht is beyond a certain age, especially if not in Class. A few issuers may also send an independent surveyor to check on a yacht’s own operating risk assessments.

The CVs of senior yacht crew may also be more closely scrutinized these days, but a five year interval between basic refresher courses is still accepted without question by owners, managers and insurers, none of whom would accept the same situation in commercial aviation.

Michelle van der Merwe suggests that proactive risk assessment is also partly a cost issue. In recent years many smaller players have issued coverage based on a yacht’s market value but the full risk picture would include operational and maintenance considerations which could impact incident probabilities and raise premiums.

Medical & Accident Cover for Yacht Crew 

An area of particular concern for yacht crew is medical and accident cover. MLC requires “that all seafarers on ships that fly its flag are covered by adequate measures for the protection of their health and that they have access to prompt and adequate health care while working on board” (MLC Reg. 4.1.1).

A crew medical insurance policy per se is not specified in the Code but evidence of such coverage is to be looked for in a Flag’s DMLC Part 1. Most owners are concerned to find good crew coverage over and above the MLC minimum, especially those with larger management companies with commercial operations. Some very large private yachts with high numbers of crew reportedly look for the cheapest options, while crew on smaller private yachts are the most likely to need to provide their own medical cover, depending on their yacht’s Flag requirements.

This last point brings up the question of what, if any, additional insurance any crew member should take out on their own behalf, particularly in the case of US crew. As employees onboard, any insurance claim arising from their actions, except as outlined above, would be met by the owner’s P&I. The chances of subrogation being applied and an insurer coming after them for reimbursement are remote. It would do the insurer’s reputation no good, and the crew may not have the funds to pay.

Captain’s liability coverage is available but it’s hard to find and it’s expensive due to low take-up. It could provide some protection if an owner decided to sue following a P&I payout, but the same objections apply. Further, if P&I denied a claim on the grounds of willful/gross negligence this personal cover could be denied on the same grounds.

On a final note, here are some independent measures that all yacht crew can follow: 

1. If you are a family breadwinner, do not rely on the MLC protections regarding owner’s liability. Consult a reputable broker and arrange appropriate family insurance.

2. If you don’t have personal medical or travel insurance that covers you between jobs, it’s worth looking for an insurer who will cover this gap. WYCC is a good place to start. 

3. Consider joining Nautilus for a range of benefits including certificate protection (CoCs) as well as legal advice and assistance around maritime incidents, compensation rights and employment tribunals.  

4. Full membership of the PYA now includes help towards legal defence costs up to a total of 50,000 GBP. 

5. Always keep to hand a small zip-lock bag into which, in an emergency evacuation, you can put your smart phone, your passport, wallet, driving license, credit card and cash. Keep these items and your escape flashlight near your bunk when you turn in, and keep them with you, separate from all other luggage, whenever you board a plane. Remember that your personal H&M coverage is your self-reliance, and your personal P&I is your preparedness. 

Related Articles & Resources:

Perspectives on Safety in Yachting
Superyacht Accident Reporting: A P&I View
Crew Pregnancy: Where the Industry Fails Us
Full Life Cover Doesn't Have to Cost More
Insurance & Dayworkers Under MLC
Superyacht Salvage - Insurance Implications 
MIN 537 (M) MLC 2006: 2014 Amendments Ship Owner Liability & Abandonment of Seafarers 

Photo credits: cheapfullcoverageautoinsurance.com via Flickr, Pantaenius, Frederic Michel, OnboardOnline, CCO.