Key Elements of Yacht Insurance, Q&A

Accidents happen. That comes as no surprise to those in the insurance industry, but what may be a surprise is the fact that the majority of maritime accidents occur in good weather with perfect visibility. In the following Q&A, Joseph McNulty, founding member of Carroll McNulty & Kull, joins Richard Furman and John Orzel, members of the same law firm, in a discussion on the key elements of marine insurance and what underwriters and claims professionals need to know about federal laws governing the maritime industry.

Q. Let's start at the beginning. What is marine insurance?
Furman: Generally speaking, marine insurance combines first-party and third-party liability coverage for any commercial activity related to water. Claims that arise under marine insurance policies can include the obvious things like vessel collisions, injuries to sailors, longshoremen and passengers or may include things like injuries that occur on off shore oil platforms.

Q. What does yacht and boat insurance cover?
Orzel: It covers personal, non-commercial watercraft. Yacht and boat insurance is similar to auto insurance in that it may cover property losses, individual protection and watercraft liability for bodily injury to occupants or others involved in an accident.

In addition, yacht and boat insurance may provide medical coverage, uninsured boater coverage damage incurred from hit-and-run accidents, uninsured vessels, towing, salvage, engine failure, and mechanical breakdown.

For these policies, boats are defined as 26' or smaller while a yacht is 27' or larger. This distinction is important only to the extent that yachts have a greater cruising range, creating unique exposures that a policy may have to address.

Q. What is protection and indemnity insurance (P&I), and is it essential for vessel owners?
Furman: P&I insurance is coverage for third-party liability claims. The types of risks covered by P&I insurance will include things such as personal injury or death of crew members, stevedores and passengers; damage to or loss of cargo; collision liabilities excluded by hull insurance; pollution; wreck removal; certain salvage expenses; fines and penalties. A separate cover can also be obtained for legal expenses; this is known as FD&D coverage.

Most often, P&I insurance is obtained through a protection and indemnity "club," which has traditionally been made up of a group of shipowners who mutually agree to insure their common liabilities. The modern version of the traditional P&I club will actually be run by a management company; however, the shipowner members of the club still exert a great deal of control over the management.

For the most part, yachts are excluded from P&I clubs. The liability insurance coverage provided by P&I insurance is included in most yacht policies.

Q. Do yacht insurance policies contain warranties?
Orzel: Yes. Any insurance policy will contain express warranties, which are contractual terms, which must be complied with for policy coverage to be effective. There are also implied warranties which are assumed to be included in insurance policies, common sense things that "the law" and tradition have concluded should be part of every insurance contract. Most states have codified the rules relating to warranties in traditional "land-based" insurance contracts. The rules are completely different for marine insurance contracts. Warranties play a far greater role in the evaluation and application of marine insurance policies. The breach of a particular warranty under a land-based policy, which may not lead to the policy being void, may be treated as voiding a marine policy.

Q. What are some of the differences between having a case tried in federal or state court?
Orzel: Cases tried in federal court, under the court's admiralty jurisdiction are normally tried by a judge, without a jury. Non-marine cases require that at least US $75,000.00 is involved. There is no jurisdictional minimum amount in admiralty cases. To a great extent, admiralty cases will be resolved faster than non-admiralty cases. In addition, federal court has exclusive jurisdiction over prize cases, suits against vessels in rem, maritime attachment cases, salvage cases, suits involving U.S. government vessels, limitations of liability, and preferred vessel mortgages. State cases are tried to a jury and therefore, at least in personal injury cases, have the potential for greater damage awards because juries tend to be more sympathetic to injured individuals.

In maritime cases, there are two types of jurisdiction - tort and contract. Admiralty tort jurisdiction requires both a maritime situs and a nexus or connection to traditional maritime activities or commerce. Maritime contract jurisdiction is determined strictly by the subject matter of the contract.

Q. Do injured crew members have the right to sue a vessel owner for negligence?
McNulty: Yes, they do. The Jones Act provides crew members a cause of action against the owner in the event of injury. Under the Jones Act, workers must prove that a shipowner's breach of duty in providing a safe working environment contributed to the injury in some way.

Contributory negligence, and even the assumption of risk, will not bar recovery and a statutory violation can be used to prove negligence. The statute of limitations on these personal injury claims is three years.

Q. What type of protection do shore-based workers have under federal law?
McNulty: The Longshore and Harbor Workers Compensation Act provides a workers' compensation scheme for longshoremen and shore-based workers. Coverage under this statute depends on a two-part test, situs or location of the injury and status of the injured person, if that person engaged in a maritime activity. In regard to location, it requires that the injury occur on or adjacent to the navigable waters of the U.S. As for status, coverage is limited to those engaged in maritime employment, excluding the master and crew of the vessel. Compensation under the Act is based upon a schedule established by Federal regulation. The Longshore Act has recently been amended to exclude workers in a shipyard which is engaged in building or repairing pleasure craft or yachts. As the compensation paid by the Longshore Act is significantly higher than traditional, shore-based, state compensation schemes, there is a large incentive to be covered under the Act, in the event of injury.