Buying Insurance for Your Charter Boat
Special thanks to Professor Terry Johnson, Marine Recreation and Tourism Specialist from the University of Alaska for this article. Used by permission.
If you operate a charter boat, or other small vessel carrying passengers for hire, you have special legal and liability concerns. There are requirements for operator licensing, safety equipment, drug testing, and so on. Similarly, the kinds of insurance you need are unique, in part because maritime law places extraordinary burdens of responsibility on the master of a vessel.
The vessel owner is responsible for all damages resulting from "negligence," which has been interpreted very broadly by the courts to include any situation in which a crew-member or passenger gets hurt, other than intentional self-injury.
Components of a Vessel Policy
Vessel package policies may have numerous components, but the primary two are: * Hull and Machinery , which covers the vessel and its attached parts, including engines and electronics.
Protection and Indemnity (P&I), which is a broad form of liability coverage.
Hull and Machinery Vessel Policy Coverage
Hull and Machinery coverage is based on agreed value or actual value. Generally, agreed value is preferable because it is established at the time of the policy purchase, usually on the basis of a marine survey. Replacement value is even better, but usually too expensive, or simply unavailable.
Hull policies are either all risk or named hazards. All risk is more inclusive and is better for the vessel owner. With a named hazards policy, the owner can recover only for losses resulting from causes listed in the policy, and that list usually is pretty short. All risk policies cover losses from any cause except those listed, which normally includes only a few causes like acts of war and losses resulting from use in criminal activity.
Hull and Machinery covers not only the entire vessel in the case of collision, fire, or sinking, but also individual components like electronics, deck machinery, and engines. Even an engine with some years' use may be covered if it suddenly breaks. Normal wear, and damage due to improper or inadequate maintenance, usually are not covered, nor is loss of revenue due to engine breakdown. Coverage of engines and other machinery varies from one company to another.
Protection and Indemnity (P&I) Vessel Policy Coverage
P&I indemnifies (pays) someone for personal injury or property damage caused by your vessel or suffered while a passenger aboard your vessel. It also pays to defend against lawsuits brought against you due to the above, and in many cases the chief function is to pay for an out-of-court settlement to prevent expensive litigation and potentially more costly damage awards.
What a plaintiff stands to gain in a lawsuit is limited by the circumstances and severity of the loss as well as the amount of the vessel owner's assets.
Courts commonly adjust awards downward to reflect contributory negligence or the degree to which the plaintiffs’ actions contributed to his or her injury or loss.
The purpose of a Hull and Machinery policy is to get the boat back into operation as quickly as possible, and the purpose of P&I is to defend you in litigation, and to protect your assets in the event of a personal injury or damage award.
Some P&I Considerations
Coverage limit. How much P&I coverage do I need? The standard insurance industry answer is—all you can get. Or, more specifically, what is the value of your business and personal property that would be jeopardized in a major claim?
Typically, marine P&I policies provide $300,000 or $500,000. This is per incident, not per person. Ask about excess coverage, often provided by a secondary underwriter, in amounts up to one or two million dollars. (Cruise lines require charter boats that serve their passengers to carry a minimum $1 million P&I policy.) The price of excess insurance is relatively low because it is less likely to be needed. A premium increase of a few hundred dollars can double the coverage.
Pollution. P&I policies usually cover accidental discharge of pollutants, such as fuel or oil, resulting from an accident. If not standard, it should be obtainable as a rider. Pollution cleanup in a remote location can be very expensive, and the vessel owner is liable. Pollution insurance does not cover intentional discharges, nor does it pay fines.
Shore excursion. Your vessel policy covers your passengers only while onboard the vessel. As soon as they set foot ashore they are off your policy unless you have shore excursion coverage. Land management agencies like the U.S. Fish and Wildlife Service, U.S. Forest Service, and Alaska State Parks require it.
Generally shore excursion pertains only to accompanied visits to shore, not drop-offs. Coverage of unaccompanied drop-off passengers is unobtainable through marine underwriters. Operators doing unaccompanied drop-offs should require passengers to sign a services contract that spells out safety issues and contains a hold-harmless clause that absolves the operator of liability.
Divers. Vessel insurance does not cover people in the water, and most vessel underwriters will not cover sport divers, period. Some, in fact, may cancel your coverage if they learn that you are doing dive business. PADI (Professional Association of Diving Instructors) has a dive charter vessel insurance program, but it does not cover divers in the water. The only liability coverage for sport diving is written not for vessel operators, but for dive masters and instructors, although the vessel operator can be named as additional insured. Insurance protection is not available for dive charters unless the divers are under the supervision of a licensed instructor or dive master.
Crew coverage. If you have crew on your boat, they must be specifically covered in your P&I policy, and you will pay for each included individual. Do not buy crew coverage for only one crew-member, if you have more than one, on the assumption that not more than one will get hurt at a time. This can be grounds for policy cancellation.
Passenger medical payments. Good charter boat policies include passenger personal injury coverage, as a "damage control" measure. The limit is relatively low—between $500 and $10,000—but there's no deductible, and the injured doesn't have to sue or even file a claim. The vessel owner picks up the doctor or hospital bill, and sends the receipt to the insurer for reimbursement. This coverage protects both the operator and the underwriter against more expensive claims by aggrieved individuals, who have suffered minor injuries but go for a big settlement if they aren't treated well.
Personal effects. Some but not all P&I policies cover personal effects (crew and passengers), and those that do may have high deductibles ($200-$500). The assumption in the insurance industry seems to be that (1) most people have homeowners policies that cover cameras, binoculars, fishing rods, clothing, etc., and (2) people who are careless enough to drop those items overboard would be too embarrassed to blame the boat operator and claim compensation. These assumptions may or may not be correct, but be sure to know what personal effects coverage is included, and decide if more is warranted. A personal effects policy is another good "damage control" measure to ensure that no one leaves the boat unhappy.
Breach of Warranty Coverage
Breach of warranty coverage is designed to protect the mortgage holder of the boat. It pays off the loan (up to the limit of the policy) even if a loss occurs when the boat is being used at a time, in a location, or for a purpose that is not covered by the policy, a condition that would otherwise void all coverage.
A Word about Assumption of Risk Forms and Liability Waivers
Assumption of risk is a form that the client reads and signs, signifying that the client understands the boat trip is an inherently dangerous activity. Some marine insurers say that the assumption of risk form may, in litigation, contribute to the perception that the operator is cautious and prudent, which may result in a final settlement lower than would otherwise be the case. The liability waiver is a form that attempts to get the client to agree not to sue if an incident occurs. Marine insurers generally agree that the liability waiver form is worthless in most cases, and most don't require it. One exception would be a hold-harmless contract for unaccompanied shore excursions, as mentioned above.
Passenger Vessel Insurance Checklist
Picking a Policy
- Pick a U.S. domestic company, with at least an "A" rating.
- Get a Hull and Machinery policy that pays on agreed value.
- Determine whether Hull and Machinery coverage is all risk (other than specified exclusions) or named hazards. The former is more inclusive and usually a better deal.
- Check deductibles. The higher the deductible the lower the premium, but in the case of minor damage you may end up paying most or all of the claim.
- Check operating limits, and mandatory lay-up. Five months is typical.
- Try to check the underwriting company's claims payment history with other operators.
- Remember that policy terms are flexible and negotiable.
Selecting P&I Coverage
- Assess your own exposure, and what assets you have to lose. Unless you have little in business and personal assets, go for the highest P&I available. Inquire about excess coverage. Consider $1 million minimum or more if exposure is greater.
- Get passenger personal medical on top of the full liability coverage.
- If you have inboard engines, be sure to get pollution coverage.
- If passengers will leave the boat during the trip, get shore excursion coverage.
- Don't forget crew coverage for any employees on the boat.
Why Choose Anchor Marine
- The agents at Anchor Marine have extensive marine insurance experience, and also have experience as charter boat operators. In short we know your business and will do what it takes to get you a policy that not only suits your needs, but one that is cost effective. We are independent agent and will actively shop the market place to make sure you are getting proper coverage at the right price.