Hold Harmless Forms? Hold The Phone! A Yacht's SOP Can Lead To Yacht Owners And Charterers Being SOL

This post is a bit lengthy but it’s a very important topic that all parties to a charter contract need to read and understand.

I was talking shop last week with a charter broker and she asked, “What if my client has to sign a water toy indemnification form on the yacht?”  My response was, "Why are guests being asked to amend charter contracts by yacht crew?" 

If you are a captain or crew on a boat and you are reading this, pay attention and please contact me if you have any questions on this topic and I'll gladly give you a detailed explanation as to why what you are doing is wrong and potentially dangerous.

People think of water toy indemnification forms/hold harmless agreements as standard operating procedure that are just matters of formality - which could not be further from the truth. These “harmless” indemnification forms can be dangerous if they are not understood.  And having charterers sign them AFTER the charter contract has been consummated can have disastrous consequences. 

Okay, let's start by defining terms. 

1. Indemny/indemnification:  to make a party whole or to (financially or monetarily) restore that party to their pre-loss position.
2. Hold harmless:  releases one party from responsibility or liability, regardless of which party is negligent.
3. Negligence:  an act or a failure to act that causes property damage or bodily injury to a third party.  
4. Third party; anyone other than the insured or the insurance company.

Most hold harmless/indemnification forms I've seen usually read, "(Party A) agrees to hold harmless AND indemnify (Party B)," with Party B being defined as - in the case of yacht chartering -  the owner, the captain and crew, the management company, charter agent, charter brokers, yacht broker, all contractors and subcontractors, all provisioners, all board members of the owning entity, family members of the board, the family dog and that crazy guy from high school… just to name a few.  So what this says is that the only person who bears legal/financial responsibility is the charterer.  And still they sign...

Now, when it comes to water toy indemnification forms the one thing we must all understand that is vitally important is this:  when a charterer signs a water toy indemnification form they are not simply agreeing to pay for the water toy or pay the yacht owner for any damages; they are agreeing to be personally financially responsible to anyone affected by any damages AND they are assuming liability once held by the yacht and her insurer. Basically, the charterer is now the insurance company.  Does this sound "harmless" to anyone?

Let's look at a scenario:

The bosun of a 50m yacht reports to the first officer that the throttle on waverunner A sticks a little. The first officer takes the report and delivers it to the captain. The captain authorizes the first officer to call for a service tech to come repair the waverunner.  The service tech arrives.  The bosun is off the boat so the first officer takes the service tech to the waverunners and mistakenly shows the tech to waverunner B.  The tech opens the engine compartment, checks the throttle cable and throttle body, makes some adjustments, tests the throttle, shows the first officer the throttle works properly, signs off on the service, gets paid and leaves.  The service is logged in waverunner A's log - but waverunner A was never serviced.

Next week a charter boards.  Prior to launching waverunners the captain has the charterer sign a water toy indemnification form. Waverunners A and B are launched, guests board and off they go.  While enjoying the day waverunner A's throttle sticks and the waverunner is now out of control. The operator bails off. The waverunner bounces of a boat, hits a person on a kayak then screams onto shore killing a person laying on the beach before burning up the engine.  

So, the negligent act of the yacht crew failing to service the waverunner has now lead to third party losses.  Who pays? 

Well, the insurance company will investigate and upon being notified that the charterer assumed all liability they can walk away leaving the charterer to deal with the claims.  The charterer then turns to his charterer liability carrier only to find out that signing the water toy indemnification form voided his CL cover, so the charterer may now be liable for:  damage to the other boat, damage to the kayak, damage to the person in the kayak, civil and criminal penalties, compensation for the death of the sunbather, etc… and he owes the yacht owner a new waverunner.  

A possible (and I'll say "likely") scenario is that the yacht owner's policy will step in and defend the yacht owner, but - and this is very important - any amounts the insurer spends defending the owner from third party claims for which he was held harmless by the charterer and which are the result of the negligent acts of the charterer may be claimed against the charterer - and the charterer's liability insurance will more than likely not defend the charterer.  Why? Because he signed the water toy indemnification form.

I've asked FYBA reps, AYCA reps, MYBA reps, CYBA reps, charter agents, charter brokers, etc… why these forms are there in the first place and no one can give me a solid answer.  The only answer I can come up with is that the authors of these contracts don't fully understand what these hold harmless forms do and how they can impact an insurance policy.  I understand the concept and in some cases hold harmless agreements work;  just not here.

Furthermore, yacht crew who ask guests to sign these forms on board have no clue what they are asking guests to sign and should not ever have a hand in independently negotiating this particular aspect of a charter contract - EVER - because here's the deal:  If the vessel is properly insured and if the water toys are properly insured and the guests are instructed as to their proper use and they are properly instructed by one qualified to instruct them and they are monitored, then there should be no need to release anyone from liability.  

So when you're negotiating charters and a captain requests the indemnification forms be signed ask them, "Why?"  If he/she responds, "Because we don't want to be responsible for the damages," tell them, "That's why the vessel has insurance and charter contracts have loss/damage clauses."  If they tell you it’s “boat policy” have them provide you written documentation of the boat’s operations manual, the boat's insurance policy and an insurance policy endorsement allowing them to negotiate terms of coverage without insurance company approval.  Better yet, have them call an insurance professional who can evaluate the policies and inform them of the impact these forms could have on the charterer's insurance policy and the yacht owner's policy.

I am not trying to make insurance specialists out of charter agents, brokers or captains – but what I AM trying to do is to help everyone understand the variables in play so that mistakes do not happen.  This is a very sensitive issue and the relationship between contract and policy is delicate at best which is precisely why charter brokers/agents, captains/crew, yacht managers, etc… should not be automatically requesting indemnification forms or hold harmless agreements be signed as a matter of SOP.  I'm not telling anyone how to do their jobs, I'm just letting you all know to let attorneys and insurance professionals do theirs.

Next week I'll give you the brutal, no nonsense reality of insurance terms and charter contracts.

As always, I am here to help so please call or email and we’ll take good care of you and your clients!