What are the major types of Marine Insurance?
Some of the major types of Marine insurance:
- Hull and Machinery
- Protection and Indemnity
- Breach of Warranty
Hull and Machinery Insurance is to protect your vessel against physical loss and the dollar limit of coverage is normally determined by a marine survey. The policy provides coverage on a "valued basis" which means the value listed in the policy is the amount paid to the owner in case of a total loss.
This type of insurance may also pay for machinery losses arising from Latent Defect, Crew Negligence or Repairer's Negligence. Some vessel owners who are not concerned with this type of machinery loss may accept a modified policy form which reduces their hull premium typically about 15%.
NOTE: If you collide with another vessel and are found to be completely or partially at fault, the physical damage to the other vessel would normally be paid by your Hull and Machinery policy. If you do not purchase Hull and Machinery insurance, you should seriously consider obtaining Collision insurance separately through a Protection and Indemnity policy.
Protection and Indemnity (P&I) Insurance is protection from liability claims. This type of insurance will pay for damage that your vessel may cause to 3rd parties. An example would be if you collided with another vessel and were found to be responsible. If individuals aboard this other vessel were injured, payment for these injuries would typically be made from your Protection and Indemnity policy. If a guest onboard your vessel was injured and you were found to be responsible, your vessel's P&I policy would protect you from this type of claim. If you hit a dock or pier, this type of loss would also be paid by a Protection and Indemnity policy. This type of coverage would also pay if your vessel caught fire and damaged other vessels.
If you utilize paid crew on your vessel, and one of these individuals is injured or becomes ill, P&I insurance will respond to these types of claims. A crewmember on a US registered / Documented vessel is entitled to significant benefits. It is critical that you properly insure your paid crewmembers!
Another important aspect of P&I insurance is "Wreck Removal." If your vessel sinks, often one or more governmental agencies will require that you raise your vessel and dispose of it. This can prove to be very expensive. Obviously the loss of your vessel would be financial disaster, but imagine now facing the possibility of paying thousands of dollars to dispose of the wreckage!
Pollution Insurance is more than protection from the cost of cleaning up an accidental spill of fuel or lubricating products. Imagine your vessel sinks, and various governmental agencies insist you raise the wreck. The fact that there is fuel and lubricating products on board means that you are now facing not only a "wreck removal" claim but Pollution claim as well.
Many Protection and Indemnity policies that will respond to "wreck removal" specifically exclude coverage for Pollution losses. If your P&I policy does not include Pollution coverage, be sure to arrange for a separate Pollution Insurance Policy.
Some Pollution Insurance policies will also reimburse the vessel owner for the cost of fines and penalties arising from this type of loss, some do not! Ask your insurance broker about Pollution insurance, and if your policy will respond to fines and or penalties that you may be assessed due to your loss.
Cargo Insurance will pay for the loss of your product. So what is cargo? If you are a fishermen, fishing supplies, bait and catch is cargo (though keep in mind insuring your catch while on board is often difficult and expensive.) If you operate a non-marine business, and retain ownership of your goods once they leave your place of business; you may also need Cargo Insurance. Not all Cargo Insurance policies are the same! Ask your broker for their recommendation regarding the type of Cargo policy will best suit your needs.
Breach of Warranty Insurance is required by a financial institution that holds a mortgage on a vessel. As the term "Breach of Warranty" implies, this type of insurance pertains to the aspect of policy "warranties."
The policy that presently protects your vessel contains certain "warranties." This is the portion of your policy that specifies where and when you can operate your vessel. If for example, your policy requires that your vessel only operate in Alaskan waters, and you decide to take your vessel to Hawaii without first securing permission from your insurance company, what will happen when you hit rock entering Honolulu Harbor?
Unfortunately, there is an excellent chance your claim will be denied! When this occurs your lender, now facing the fact that their collateral is at the bottom of the ocean, obviously still expects to have their loan repaid. In this situation a Breach of Warranty policy will typically pay off the loan. If this occurs, the insurance company that paid off your loan will likely seek reimbursement from you! The lesson from all this is, make sure you comply with all aspects of your vessel's insurance policy.
What types of insurance am I required to have by law?
Many governmental agencies require your vessel have some sort of Pollution insurance, though in most cases these entities have no system to verify if vessels smaller than 300 Gross Tons are properly insured, but typically these agencies do not require that you purchase Hull and Machinery or Protection and Indemnity insurance. We are seeing an increase in requests from moorage facilities requiring proof of insurance from their tenants that their vessels are adequately insured.
We rarely encounter a situation where a third party is asking for proof that a vessel owner is properly insuring their crew. Though remember your crew is entitled to significant benefits if they become ill or are injured while working on your vessel. If you do not have adequate insurance coverage, these claims will be made against you and your personal assets. In some cases, an injured crewman has actually been awarded the vessel as compensation for their injuries, leaving the owner with his mortgage but no vessel! For this reason, many marine lenders are now asking that vessel owners purchase not only Hull and Machinery insurance, but Protection and Indemnity insurance as well.
Do I have to insure my crew?
Legally, you do not have to insure your crew, but you are responsible to provide the benefits they are entitled to. These benefits may include medical treatment, lost wages, and portion of their living expenses while they off the vessel and recovering. A portion of these benefits are due regardless of the circumstances surrounding the claim. In other words, if your crewmember becomes ill or injured, it is extremely likely you will be facing sizable expenses. Whether these expenses are paid by you or an insurance company is the best way to answer "do I have to insure my crew?" If the vessel is found responsible for a crewman's injury, and this injury results in a long term disability the vessel owner could be responsible for a large settlement, in some cases amounting to hundreds of thousands of dollars.
Should I insure my crew if they are family members?
Once again, there is no legal requirement for you to insure family members that work on your vessel but they are entitled to the same benefits as a "non-family" crewmember.
Most of our customers who utilize their children as crew do not typically insure these individuals. However, most of our clients opt not to insure their family that work on their vessel because they feel a family member won't sue. Remember, if your relative is seriously injured, someone is going to have to pay their medical expenses, lost wages, etc. Better an insurance company pays than you.
What is a Trading Warranty?
A marine insurance policy typically contains a "Trading Warranty." This is the geographic area that your vessel is allowed to operate. Insurance companies want a guarantee that, if you tell them you fish in Bristol Bay, you won't decide to take your vessel down to Mexico. A Trading Warranty is included in a marine policy so that everyone understands and agrees where the insured vessel will operate. If your trading warranty states that you only fish in Southeast Alaska, but your vessel sinks anywhere outside of this area, the insurance company will possibly deny your claim. This is why it is very important to communicate with your Agent or Broker and be sure that the correct Trading Warranty is on your policy. Also, be sure to contact your Agent or Broker immediately if you need to operate outside of your Trading Warranty.
Why am I required to have a survey and how often do I have to get one?
Every insurance company seems to take a different view regarding surveys; however, presently most companies require that you have a survey performed on your commercial vessel every 3 years. The question most vessel owners ask is "why?" One reason is so the insurance company has proof that you are keeping your vessel in good repair and sea worthy condition. A surveyor will make "recommendations" regarding a piece of equipment or a specific condition of your vessel that needs modification or repair. Your insurance company will often require you comply with these recommendations for coverage to remain in-force. The second reason for surveys is to establish the current market value of your vessel. An insurance company will rarely insure a vessel for more than its actual market value, and because of this, they require an independent party establish what this market value is. For this reason is it important you discuss the subject of market value with your marine surveyor at the time the new report is prepared.
Another reason to have a survey performed, even if your insurance company has not asked for one is that if you make any changes or modifications to your vessel that increase its value, your insurance company is hesitant to increase the insured value of your vessel without a new survey.
Also, Marine Insurance Policies contain what is known as an Implied Warranty of Sea Worthiness. An insurance company expects you to keep your vessel in good repair and in safe operating condition. There have been cases where insurance companies have denied a claim on the basis that the vessel was not in "Sea Worthy" condition. A survey can protect the vessel owner by establishing what the condition of the vessel was prior to the loss.