Monday, March 5, 2018

"It's a standard yard contract - nothing in it that I'm worried about."

That was a quote from a captain during a recent conversation about a client's upcoming yard period.

It amazes me how diligent captains can be regarding safety training, project management, situational awareness and passage planning - but they'll slap their names on any old contract without reading it; not knowing that their signature could be just as financially ruinous as running hard aground or sinking the vessel.  And it doesn't matter who signs the contract because it's the owner's assets that are on the line - so people signing yard contracts need to be sure what they're doing is correctly.

I'll use a hypothetical scenario to show you just how simple it is to let an insurance company off the hook.

Captain Einstein hauls out at XYZ Yard and prior to hauling he/she signs a standard yard contract containing a provision stating the yacht owner releases the yard from liability and assumes the yard’s liability and also says (for all intents and purposes) the yard won't be sued by the insurance company or the owner - even if the yard is negligent!  Put into layman terms, the yard is saying, "Even if we screw up - we're not responsible and we're not paying."  Why would anyone sign this without an insurance company giving them the okay?

During the yard period the captain uses a piece of yard equipment which malfunctions, strikes a transformer starting an electrical fire that quickly spreads and ultimately ignites and destroys several boats, injures a number of people and does significant damage to the yard.  The root cause of the accident was determined to be that the piece of equipment had not been properly maintained by the yard - not user error.  The yacht insurance company investigates, finds the yard contract, goes right to the section with the hold harmless/indemnification/release of liability, checks for a signature and:

  1. Reduces the claim 
  2. Denies the claim or 
  3. Voids the yacht’s policy 
The insurer has these options at their disposal based upon the fact that the captain did not have the authority to assume the yard’s liability (or act on behalf of the insurer) and the captain did not have the authority to release the yard from liability or waive the insurer’s rights of recovery - without written permission from the insurer. 

"But Gary, it was the yard's negligence in maintaining the equipment that caused the loss."  You are correct; BUT - when the captain signed that yard contract it may be argued that the captain assumed the yard's liability which means the captain assumed the yard's negligence thinking that his yacht policy would cover him automatically; and the captain does not have the authority to do this - and the insurer does not have the obligation to perform based upon the captain's actions.

Insurance policies are very clear as to what they will and will not cover and what they will and will not do or allow.  Here are examples taken straight from the exclusions section of a company's yacht policy regarding assuming liability without prior written consent:
  • (The policy excludes) Any liability assumed by an insured person under any contract or agreement without our prior permission.
  • No assignment of or change of interest in this policy or in any amount payable under it will be binding on or recognised by us without our prior written consent.
  • No one covered under this policy or acting on their behalf shall waive, limit or impair our right to recover and/or the amount to recover against a third party before or after a loss.
If a yard contract is signed without insurance company consent the yacht owner could be held personally financially liable for the damage to his yacht, other yachts, the facility, employees, crew, subcontractors, damage to the environment, civil/criminal penalties, etc... and the owner may not have an insurance company to defend him - even though the damage was the result of the yard's negligence.  

This is a very rough and basic example but it illustrates just how serious this situation can be - and it is entirely avoidable.  

This is why I strongly offer this little bit of advice: Defer signing third party contracts until you receive written consent. Send the contract to the owner/manager/attorney and let them confirm the terms with the insurer before signing.

And captains, remember:  get it in writing FIRST.  Because the ass(ets) you cover just might be your own(ers)!