INSURANCE: Good, Bad, and Ugly
The insurance market for cruising sailboats has opened up a LITTLE in the past year as a few companies have come crawling back into the market. Many ran running and screaming from this business after taking a hammering from hurricane related loses three years ago. At the time we had several posts on our insurance trials and tribulations (here 1, here 2, here 3 and here 4 ). We decided to solicit quotes again and see what could be had.
We were pleasantly surprised that there actually were more people writing policies, and willing to talk to us. Since insurance is expensive, we were hoping for a budget break. All the results are not yet in, but our initial results came up with a SMALL savings in dollars, for a policy with serious drawbacks compared to the current policy we are carrying that we shopped so hard for three years ago. The bad news was this new policy is so terrible! The good news is that we had done our homework carefully last time!
What we have learned is that recommendations from most people are pretty worthless, unless they really know insurance contracts in detail. Most people evaluate the insurance based on the premium cost and the personality of the broker who sold it to them.
Hopefully our wading through the policies in detail can save somebody issues in the future. Here are some comparisons between two policies. While we go through these, remember, these policies are quite similar in overall cost. In addition, an important caveat: I am not a lawyer, and this is not legal advice. Everything here is just my layman’s opinion, and should not be relied upon to make decisions that are important to you without checking with someone actually licensed to practice law and who gets paid to read and interpret contracts.
A Simple Difference
Policy #1 EXCLUDED: Losses caused directly or indirectly by ice or freezing.
Policy #2 EXCLUDED: Occurrences caused by or contributed to by changes of or extremes of temperature or humidity, by flood, spray or weather damage, by earth movement or by electrical power surge or failure unless protection customary for the type and location of the property has been arranged. [emphasis added]
For us this clause really doesn’t matter much. After all we don’t come up against freezing weather, hopefully ever. But it gives us a flavor for what is to come. If you had Policy #1 and had your boat stored for the winter, and had freezing damage, you are out of luck, even if this damage was as serious as a cracked engine block.
Boats have sunk when water froze and cracked a seacock. Policy #1 says, “So sorry! Nothing about that is covered." Not only did you lose your boat but all the costs to salvage it are on YOU! MAYBE if you paid someone to winterize your boat, you could sue him for damages, but short of that, you are on your own. What do you think of that???
Policy #2 would cover you as long as you took “customary” precautions to avoid this kind of damage. That seems a reasonable limitation. I can’t think of a better way to phrase it, since what is “customary” would be very different for a boat stored in Maine for the winter than in North Carolina, for example.
Now a Practical Difference
Policy #1 EXCLUDED: Your personal expenses or those of your family including but not limited to the cost of your own labour, hotel or accommodation costs, car rental and communication costs.
Policy #2 INCLUDED: If a loss should occur which renders the Vessel unfit as a residence and the Vessel was at the time of the loss being used as the residence of a Named Insured, then the necessary increase in living expenses incurred to maintain the customary standard of living of that Named Insured which exceeds one thousand dollars shall be paid in addition to the loss. Payment under this clause shall be limited to ten thousand dollars for any single occurrence regardless of the number of Named Insureds. Payment under this clause shall be further limited to the expenses incurred until the Named Insured settles in a new residence or the Vessel is repaired or replaced. No payment shall be made under this clause for travel expenses.
For us this is an important additional coverage, since our boat is our home. If it was lost or rendered uninhabitable for a time, the costs of housing could be significant.
If you think you are exempt from shenanigans like this because you only carry liability insurance and not hull coverage, here is one for you. This issue is hidden in a LOT of boat insurance policies in very short and simple language, and can result in a HUGE uninsured loss:
Policy #1 EXCLUDED: Liability assumed by you under any contract or agreement.
Policy #2 INCLUDED: …if a moorage or storage contract for the Vessel is executed which contains a requirement that the person providing the moorage or storage be covered by the insurance of the Vessel, then that person shall, only during the term of that contract and only with regard to Protection and Indemnity Coverage, be an insured.
Many (Most? Nearly all?) Boatyard and marina contracts have a clause basically transferring all liability around the storage and handling of the boat to the boat owner and his insurer. A real world example of this: A boat stored on the hard for the winter fell off its stands in a storm and damaged the boatyard’s buildings. The boat owner received a bill for $20,000. He had signed a standard boat storage contract that assumed this liability. The insurance company denied all coverage since they did not explicitly approve taking on this extra liability. Surprise!!! He was lucky his boat didn’t knock down several other boats, all of whom would have had a claim…
Note that in the case of the policy we are using as a positive example here, they only agree to cover this added liability for mooring or storage contracts. Watch out for other contracts you might sign that can include liability language.
You Think You are Covered, But…
Now, to another REAL killer:
Policy #1 Actual Cash Value Repairs: We will place your vessel in the same condition it was in before your loss, in so far as it is possible. [Ed.: Sounds good so far, right?] What this means is that we will apply depreciation to costs that have been agreed as fair and reasonable. [Ed.: In other words, "We will pay you less than what has been agreed to be fair and reasonable"!]
Policy #2 Like Kind and Quality Repairs: The amount of a loss shall be the cost to repair the Vessel with materials, parts, labor and equipment of like kind and quality to that which is being replaced so that the Vessel is in substantially the same condition as it was immediately prior to the loss. The repairs shall be made in accordance with the manufacturer’s specifications or accepted repair practices including spot repair. Nevertheless, in the event that materials, parts, labor or equipment of like kind and quality are not readily available, no deduction shall be made from the cost to repair the Vessel for any resulting betterment to the Vessel
You are counting on your insurance actually covering a large and expensive loss. That is why you are paying for it right? Let’s run some numbers here…
You have a 10 year old boat, with mostly original equipment. Policy #1 lists depreciation rates ranging from 7% to 20% per year depending on exactly what equipment is involved, so let’s call it 10% on average. Let’s assume you get hit by lightning, which basically destroyed all your electronics and most of your electrical system. The last boat I heard of where this happened had a repair bill of $50,000. Good thing you have been paying for insurance!
But… wait… Policy #1 don’t cover the whole $50,000. All that equipment has been depreciating 10% per year for 10 years. Policy #1 now values it at about 35% of its original cost, so they apply that discount to the repair cost. Instead of $50,000 payout, you now expect about $17,500. You might EXPECT that much, but guess what? This policy has a $30,000(!) deductible for lightning damage. Your $50,000 loss gets you exactly ZERO dollars, every penny of the loss coming out of your own pocket. Is that what you expected? Are you a happy customer? Can you afford it?
If you run the numbers carefully, you’ll find out that there is almost nothing–short of a total loss–that ever gets paid out. It’s not a case of the insurance company cheating you, they are following the policy exactly as written. They just know that almost nobody actually reads and understands the policy.
Policy #2 covers ALL the repair costs (less a $5000 deductible) to put the boat back in working condition, as good as it was or better. Gee… Let me think about this…
There are some good policies out there.
There are some terrible policies out there.
Without a deep dive into the details it can be very hard to tell the difference between a good policy and a bad one.
It is not true that all expensive policies are good.
It is EXTREMELY unlikely that a cheap policy will be a good one.
It is very unlikely that you will find a broker who will highlight the downsides of a policy he is selling, especially if he doesn't have a better one to offer.