When you sign a contract to charter a yacht, how liable are you for damages should something go wrong?
A simple math test:
You cause $200,000 worth of damage to your chartered yacht. The yacht owner’s insurance policy deductible is $25,000. What is your total financial exposure?
Several charter brokers, when asked this question on behalf of clients like you, answered $25,000. Others answered zero. Still others said $200,000.
Those last brokers are right, says Gary Carroll of Comprehensive Yacht Assurance, a Florida-based insurance agency that handles charter yacht policies regularly.
“You pay the owner the $25,000,” Carroll explained during a presentation before the American Yacht Charter Association, or AYCA. “The yacht owner’s insurance company pays out to cover the rest of the damages. But the insurance company’s client, the person listed on the insurance policy, is the yacht’s owner, not you. So you, according to their binding legal paperwork, are not actually covered. The insurance company then subrogates—which means acting on their right to recover damages not caused by their client.
“It goes something like this: ‘Hi, Mr. Charterer. We know you paid $25,000. We just want to know how you plan to pay the other $175,000. My, what a nice house you own…’”
What Your Contract Actually States
Your actual level of financial exposure remains the same, Carroll says, no matter what your charter contract with the yacht’s owner states—which is, apparently, what causes confusion. Oftentimes, when you charter a yacht, you will sign one of several standard contracts that charter brokers use regularly. These contracts tend to have clauses that appear, at quick glance, to include you under the yacht owner’s existing insurance policies.
In the case of the AYCA, for instance, the standard contract includes Clause 16. It states, in part:
• The owner shall insure the vessel… [and] the charterer shall be entitled to the benefit of the owner’s insurances.
• Copies of all relevant insurance documentation shall be available for inspection by the charterer.
• The charterer has the sole responsibility and duty to determine whether such insurance coverage and applicable deductibles are adequate and appropriate for charterer’s purposes and, if necessary, arrange for additional coverage, at least to the extent of covering liability not included in the owner’s insurance.
“This clause does several things exceptionally well,” Carroll says. “One is to place responsibility for understanding and acquiring insurance squarely on the shoulders of the charterer. Not the yacht owner, not the charter broker, but the charterer.
“A broker may say, ‘It’s the type of contract that makes you temporary owner of the vessel, so you get the benefit of the owner’s insurance,’ but that is not true in the eyes of insurance companies. You are not named as an insured person or a covered person on that yacht owner’s insurance policy, so the insurance company will refer back to this clause in your charter contract that says it is your responsibility to know how you’re covered and get supplemental insurance if needed.
“They will not be held to the terms of a charter contract. It means nothing to them. They will come for their money.”
Protecting Yourself, Step One
So, how can you ensure that you are protected when booking your charter yacht?
The first thing, Carroll says, is to ask your charter broker to obtain copies of the yacht owner’s insurance policies. You don’t want only the declarations page, but instead the policy in its entirety—which you are entitled to under the terms of your charter contract with the yacht’s owner.
“You especially want the endorsements page of the insurance policy,” Carroll says. “These are the policy exclusions. It’s the most important part of a policy that you can read.”
Some yacht owners may have insurance policies, he says, that state “any guest of the yacht owner is insured.” Some charter brokers take this to mean that you, as a charter client, are also covered—but that’s not what the wording actually states. A guest visiting the owner’s yacht is different from a charterer who pays to use it. Again, what appears to cover you in fact may not.
In addition, if you have a personal umbrella insurance policy, it may state specifically that you are covered onboard vessels up to a certain size. If you charter a yacht that is too big by a single inch, your existing policy may not cover you at all.
“Even if there is an insinuation that you are covered,” Carroll says, “you may not be.”
Protecting Yourself, Step Two
The second thing you can to do is purchase charter liability insurance—which, by way of full disclosure, Carroll sells. He said his company offers $2 million policies for about $1,300, or $5 million policies for about $1,800. These costs would be in addition to typical charter expenses such as food, fuel, and crew gratuity, and in addition to other insurance policies you might consider, such as trip cancellation.
Some charter brokers at Carroll’s presentation said they routinely offer liability policies to clients, making clear to each client that the legal burden is on their shoulders whether they purchase a policy or not. Other brokers balked at the idea of offering liability insurance because it adds even further to the price of a charter and makes it harder to close deals. Several brokers also grumbled after being told that it is the insurance agent, not the charter broker, who earns a commission on insurance policy sales.
If your charter broker is not offering you liability insurance, these might be the reasons why. Or, the broker may simply feel that liability insurance is unwarranted.
One broker, at the end of Carroll’s presentation, asked how many of her 60 longtime colleagues in the room had ever seen a need for such a policy in all their years of booking charters worldwide. Only two or three brokers raised their hands.
“But those are very expensive hands,” Carroll countered. “It’s not health insurance. It’s sick insurance. It’s not life insurance. It’s death insurance. For a thousand bucks, you can put a million bucks in your back pocket. If something goes wrong, can you afford to buy that charter yacht? That’s where the rubber meets the road.”