Most recreational vessels are insured under an “agreed value” policy. This type of insurance calls for the payment of an agreed amount in the event of a total loss, without any deduction for depreciation. The agreed value is based upon a good faith estimate of the value of the boat at the inception of the insurance policy.
A boat may also be insured under an “actual cash value” policy. Premiums for an “ACV” policy are generally lower than for an agreed value policy, because the benefits under the policy are not as generous. Claim payments are calculated by subtracting some amount for depreciation from the replacement value of the boat or the damaged component.
Regardless of whether the boat is insured under an agreed value or ACV policy, the insurance company will evaluate its risk, and therefore will base the premium amount on the objective information that is provided by the boat owner on the insurance application, including the value of the boat and/or the purchase price.
This may create a problem for a boat owner who plans to embark on a major renovation project. If the boat owner discloses the actual value of the boat before the start of the project, he or she will risk under-insuring the boat if a loss occurs after a substantial investment has been made in the renovation.
On the other hand, if the boat owner states a value to the insurance company based on the condition of the boat upon completion of the project, the insurance company may void the policy and reject a claim if they find that the project was not completed by the time of the loss.
Under these circumstances, the boat owner’s best approach is to maintain a dialogue with his or her insurance broker and, if possible, with the insurance company itself. This will allow the insurance company to keep up with the value of the boat as the project evolves.
It will also ensure that they are aware of the project, which may present certain risks of its own. As they consider this information, they may require the boat to be surveyed at various stages during the project and the value of the boat to be re-stated from time to time.
Another area of concern for a vessel owner is the definition of “insured vessel” in the insurance policy. This definition is important, since it may or may not bring certain components and equipment under the insurance umbrella, and boat owners should be familiar with this definition when they discuss the value of the vessel with their insurance broker.
The disclosure process may seem a bit cumbersome, but when compared to a possible rejection of a claim, the accurate description of a boat on an insurance application is a small price to pay. Talk to your insurance broker or a maritime attorney for more information regarding your particular circumstance.