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Top 15 boating insurance coverage issues agents and brokers need to know.

Byline: Rosalie L. Donlon, PropertyCasualty360.com

In the middle of July in most parts of the United States, people are taking to the water to cool off. They may be sailing, fishing or just cruising the harbor. They may be in anything from a kayak to a 500-foot yacht. An important consideration for all of these boat owners is whether they have the right insurance coverage in place.

Agents and brokers can help by reviewing the customer's needs and pointing out some coverage issues that the customer may not be aware of, advises Michael Terrier, senior yacht underwriter and yacht department manager for the Maritime Program Group, Westbrook, Conn.

[Related: Boat insurance 101 ]

Ideally, your client will call you before buying the boat. If you can, Terrier recommends that you talk to the client about the size of the boat and the engine being considered. "First time boat owners may buy a boat that does not suit their needs or is larger than they can safely operate," he explains. Generally, a boat is 26 feet long or smaller, and a yacht is anything over 26 feet long.

Agents also should educate their clients about the realities of operating a boat before they make the purchase. "It's not like driving a car," Terrier says. "Navigation is very different, and there are hazards that you can't see, for example, the tides, the current, rocks and sandbars."

(Photo: Shutterstock/igor.stevanovic)

Insurance coverage is different, too, Terrier points out, with the main difference that a boat or yacht policy is not an ISO policy. Most homeowners have an ISO HO3, policy, which is "very regulated," and rates must be filed with the state department of insurance. Describing boat coverage as "the Wild West of insurance," he explains that every carrier has its own policy form. Terrier underwrites marine insurance primarily for New Hampshire Insurance Company (NHIC), an AIG Company, which has five separate forms, all slightly different, depending on the lines of business.

Terrier finds that non-marine insurance specialists often focus only on the price, not necessarily the nuances of the policies. He recommends that agents and brokers work with a specialist who knows the ins and outs of the forms and understands each carrier's appetite for risk to help the boat owner make an informed decision.

Here are 15 coverage issues that Terrier suggests agents and brokers discuss with their clients to ensure that they have the best coverage for their needs.

(Photo: Shutterstock/Feng Yu)

1. Homeowners policy limits may be too low.

The standard HO3 policy covers boats under the personal property section first and includes special limits on liability: $1,500 on watercraft of all types, including their trailers, furnishings, equipment and outboard engines or motors.

But that's a very low, aggregate limit, Terrier says. "Two nice kayaks and a trailer could easily be worth more than $1,500."

(Photo: AP/Laramie Boomerang, Andy Carpenean)

2. Windstorm and hail damage is limited.

HO3 also provides named peril coverage with many terms and conditions. Terrier provides the following example: Under the HO3, you would have coverage for windstorm or hail only while the boat and its equipment are stored inside a fully enclosed building--not while the boat is in the water or in your driveway.

A boat or yacht policy, on the other hand, would provide specific coverage wherever the boat is located.

(Photo: Shutterstock/Ivan Cholakov)

3. Homeowners' policies have no theft coverage for boats away from the residence premises.

If an owner is taking the boat to another location to launch it, leaves it on the trailer to go into a restaurant to have lunch, and it's stolen, there is no coverage for theft because the boat is away from the premises covered by the homeowners policy.

This exclusion also applies when the boat is tied up at the local marina.

(Photo: Shutterstock/SUSAN LEGGETT)

4. The liability section of the HO3 doesn't cover personal watercraft, like Jet Skis.

Liability under the homeowners policy depends on several factors, Terrier says, for example, whether the vessel is a sail or power boat, the length of the boat, the type of engine (inboard, outboard or inboard/outboard), the horsepower, or whether it's owned, rented or borrowed. He suggests that agents create a flow chart and go through it with their clients.

Many people believe their personal watercraft is covered by their homeowners policy. The watercraft's engine does fit the description of an inboard engine but it has more than 50 horsepower so there is no liability coverage.

Editor's Note: Although personal watercraft are generally referred to as "jet skis," Jet Ski is the brand name of a personal watercraft manufactured by Kawasaki. Other well-known brands include Sea-Doo and Yamaha Wave Runners.

(Photo: Shutterstock/Willyam Bradberry)

5. Fuel spill liability or marine environmental damage may not be covered.

HO3 Homeowners policies may not cover marine environmental damage from watercraft. "This is a significant issue in certain parts of the U.S. and the Caribbean due to coral reefs and protected areas," Terrier points out. Each boat policy has its own definition of marine environmental damage and limit of coverage. States have right to recover for damage caused by boat owners, for example, from dropping an anchor on a coral reef or running aground.

Agents should explain to their clients that they don't have to be in a fragile environment to be liable for a fuel spill. A fuel tank can leak while tied up at a dock or while the tank is being filled. The boat policy would provide coverage for sudden and accidental fuel spills.

(Contributed photo: R. Donlon)

6. Coverage for use by others depends on the policy language.

Generally, the boat policy provides a private pleasure use warranty, Terrier says. If the owner allows the boat to be chartered, the carrier needs to be notified in advance, in writing, so the carrier can issue a special endorsement. Otherwise, any charter, lease or commercial use isn't covered under the boat policy. The policies that Terrier provides don't consider entertaining business clients or participating in a fishing tournament to be commercial use.

Some owners put their boats in a fleet to be rented while they're not using them, which is known as a "bareboat charter" because the boat is being chartered without any crew. A captain charter includes a crewmember or captain to navigate the boat.

When working with clients, Terrier recommends that agents and brokers ask specifically whether the owner plans to use the boat commercially. Even one charter without notifying the carrier is enough to void coverage. Leasing the boat to another person also will void coverage.

Borrowing the boat, however, is covered under the boat policy if it's used with the owner's permission, and the policy allows it. Terrier explains that the definition of named insured or an insured person usually covers the boat owner, anyone using boat with the owner's permission or a paid captain and crew if crew coverage is added. He notes that some carriers have a minimum age limit for boat operators in their policies.

Terrier also warns agents and brokers to be aware that some policies will have a a named operator warranty, although "this is more common with high performance boats." These policies provide no coverage for allowing anyone other than named operator be at the helm at all times.

(Photo: Shutterstock/Condor 36)

7. There is no coverage outside the navigation limits.

Boat policies require territorial limits of coverage, Terrier says, and the policies include a warranty of navigation. That is, the boat owner agrees, as part of the insurance contract, to stay within a certain geographical area with the boat.

"Boat owners often may say they're not going to go south of Morehead City, N.C., but they change their minds and decide to travel as far as St. Simons Island, Ga.," Terrier notes. "If your boat is damaged, even though the damage is not subject to an exclusion, you have no coverage because you've breached the warranty of navigation." He adds that this situation happens on a pretty regular basis.

A better policy will have a Held Covered clause, which means if the navigation warranty or lay-up warranty (see No. 8) is breached due to circumstances beyond your control, the policy will remain in effect providing written notice is given to the carrier regarding the breach as soon as possible.

(Photo: Shutterstock/Maria Dryfhout)

8. Lay-up warranties require the boat to be inoperable.

Depending on where the boat is located, the policy may require that the boat be "on lay up" for the winter. If the boat is primarily kept in an area subject to ice and snow, "we assume that you're not using the boat in the middle of January," Terrier says. If you don't winterize the boat or if you use it for any reason during the lay-up period, your policy won't cover any damage. Some policies require the boat to be hauled ashore during lay up.

He also advises agents and brokers to find out whether their clients are "snow birds" who are likely to change their minds and use their boats in a warmer location in the winter months. This too can void the lay-up warranty.

(Photo: Shutterstock/Gajus)

9. The boat owner can't waive the rights of the carrier.

Terrier reminds agents and brokers to read the boat policy carefully. Owners can't waive any rights that belong to the insurance carrier. "But you have to sign annual dockage agreements and storage agreements," he says, which often include exculpatory language, including waivers of subrogation.

He notes that some are fair while others are very unfair to the insured. The better agreements provide that if the marina or boatyard damages your boat due to negligence, it will pay for repairs. In other contracts, the marina disclaims responsibility for anything--including gross negligence--even if its employees pick a boat up on a lift and drop it.

Some boat policies state that you can void coverage by signing the agreement, Terrier says, but you have no choice if you want to dock or store your boat. The New Hampshire Insurance Company policy allows a boat owner to sign an agreement for hauling, mooring, storing or launching a boat without voiding coverage.

(Photo: Shutterstock/Chuck Wagner)

10. Most policies don't automatically cover boat trailers.

Most boat owners pay attention to maintaining their vessel but they often forget that they also need to properly maintain the trailer, Terrier says. "It's subject to a lot more wear and tear than you think, especially from salt water." He sees lots of frozen brakes, flat tires and bad bearings. The majority of boat policies don't include coverage for a trailer, but it can be added.

"You also need the right tow vehicle, and you have to have it situated on the trailer correctly," Terrier notes. "Even though a trailer is designed to hold a 25-foot boat, not all 25-foot boats sit on the trailer the same way." The balance has to be right, and the rollers have to be right. If the boat isn't situated on the trailer correctly, it will not tow safely.

Terrier provides this basic rule for agents and brokers: If the trailer isn't scheduled, it generally isn't covered.

(Photo: AP/John Froschauer)

11. Owners who live aboard their boats full-time don't have homeowners coverage.

There are two groups of people who live aboard their boats, Terrier explains. The first group includes the people who use the boat as a summer cottage. They have the boat docked at a marina, drive down on Friday, stay on it for the weekend, and go home on Sunday or Monday morning. The people in this group have a permanent residence that is covered by a homeowners policy.

The other group are people who have sold their homes, put their possessions in storage and live on their boats permanently. The typical boat owner in this group is a retiree couple, empty nesters who have decided to travel without being tied down to a house. They no longer have a homeowner's policy, but they often forget that they do have possessions that need coverage.

"The boat policy doesn't provide coverage for personal liability, such as defamation, false arrest, or dog bite claims, for example," Terrier points out. There also is no coverage for personal property off the premises--all those items in storage, for instance. Most boat owners who live aboard buy an endorsement that adds personal liability coverage back on, he says.

Another major concern for live-aboards is the effect of cold weather. "You usually have 30 amp service going into the boat, but you're used to 200 amp service in your house," Terrier observes. When you add two or three space heaters, a microwave, a toaster oven, and other electronic devices, you have a high risk for fires. In addition to the amount of power they draw, space heaters could tip over while the boat is rocking--also a fire hazard.

(Photo: Shutterstock/Roy Pedersen)

12. There is an exclusion for boats that aren't 'seaworthy.'

Terrier points out that in most cases, boat owners have a survey done before buying the boat, similar to a home inspection. Even when the boat owner doesn't ask for a survey, if the purchase is being financed, the lender will require one. The survey will identify all possible problems with the boat that should be repaired or replaced, which helps to ensure that the boat is in good condition and safe to operate.

Many insurance carriers exclude coverage if a vessel isn't seaworthy, but they don't really define the term, although there is an implied doctrine of seaworthiness, Terrier says. If the boat leaves the dock and is damaged, the boat owner has no coverage if the boat is deemed "unseaworthy" by the carrier. "Does 'unseaworthy' mean that the horn doesn't work or does it mean something more significant, like a like a corroded-through hull fitting?" Terrier asks. He has found that the better--and more costly--policies have more a generous definition. But whatever policy your client chooses, read the definitions and exclusions carefully so you understand what is and isn't covered.

(Photo: Beneda Miroslav)

13. Uninsured boaters coverage may depend on physical contact with another boat.

Uninsured boaters coverage is different from uninsured or underinsured motorist coverage on your auto policy, explains Terrier. The similarity is that the policy pays for medical expenses for people on board the boat who are physically hurt due to someone who has no insurance or can't be found. But uninsured boater claims are not very common, he says.

"Some boat policies require physical contact between two boats to trigger coverage, but the NHIC policy doesn't read that way," Terrier notes. This is a common scenario: A speeder goes by, throws a wake, a wave washes over the deck and someone on the boat falls and breaks a leg. The person in other boat keeps going. The NHIC policy, and other similar policies, would provide coverage, but some lesser policies won't. "The limit of liability is usually standard and preset," he explains, "based on protection and indemnity [marine liability] limits, but the boat owner can buy up. The larger the boat, the larger the limit."

(Photo: Shutterstock/Ventura)

14. Illegal acts, including boating under the influence, are excluded.

Most boat policies will not pay for loss or damage caused by the dishonest, illegal or intentional acts of any "covered person." Although the policy generally doesn't define illegal acts, it definitely covers boating under the influence (BUI) of alcohol or other drugs.

According to the U.S. Coast Guard, the use of alcohol is involved in about one-third of all recreational boating fatalities. "Some carriers exclude any liability for damage caused by someone operating a watercraft under the influence, Terrier says. The exclusion under some policies is for a blood alcohol content or breath alcohol level equal to or in excess of the one for motor vehicle operators in the state in which you reside, not where you're operating the boat Currently, the legal limit is 0.08 in all states.

(Photo: Shutterstock/Goodluz)

15. Exclusions vary by policy.

Terrier points out that yacht and boat policies fall into the categories of good, better, best, depending on premium, policy limits, coverage, available endorsements and exclusions. Some policies are written as "actual cash value," (ACV) and pay for replacement costs less depreciation at the time of the loss. If the boat sinks and is declared a total loss, the value would be determined by checking used boat price guides.

A better policy would provide for recovery on an "agreed value" basis, which means that the boat owner and insurer agree on the value of the vessel and there would no deduction for depreciation. "Most policies have some form of depreciation for outboard motors, sails, carpeting, and furnishings," Terrier says. Some policies exclude all mechanical breakdowns to machinery while others use actual cash value from the date the owner takes delivery of the boat on the paint, finishes, or gel coat, for instance.

He add that, unlike car insurance, if the boat has an engine failure not caused by wear and tear or another excluded condition, it would be covered under a better policy. A lower priced policy generally provides for ACV on the hull and personal effects, and probably excludes mechanical breakdown.

As with most insurance policies, "the devil is in the details," agrees Terrier. "The best thing agents and brokers can do for their clients is be sure everyone understands the details before they purchase or renew coverage."

[Related: Boat insurance 101 ]
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Publication:Property and Casualty 360
Date:Jul 13, 2015
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