Why Was This Insurance Claim Denied?

Our boat sank in the slip last month when the stuffing box shaft packing failed. I was shocked when our insurance company denied my claim, since we have faithfully paid our insurance premium for years. The company based the denial on our failure to maintain the boat, but we have kept the boat in fabulous condition since the day we bought her. We believe that the insurance company’s failure to pay the claim is just plain wrong. What can we do?
A contract of insurance is not a one-way street. The insurance company’s obligation to pay a claim is always subject to the insured’s compliance with a list of obligations, and the scope of the ’maintenance’ requirement extends well beyond a regular coat of varnish.

Marine insurance policies require a boat owner to be vigilant and involved in all aspects of vessel maintenance. A marine insurance company may take note of the level of cosmetic care and maintenance that an owner invests in a boat, since this may be an indicator of the owner’s attention to other maintenance issues. However, the insurance company is primarily interested in those things that may lead to an insurance claim. Twenty coats of professionally applied varnish will not keep a boat afloat.

When a marine insurance company denies a boat owner’s claim, the decision is usually based on one of four provisions in the policy.

First, the policy will require the boat owner to maintain the boat in ’seaworthy’ condition. When a boat sinks at a dock, the insurance company will look to this provision first, since it’s hard to argue that a boat was seaworthy if the vessel sank at the dock. And, the most common cause for a boat to sink at the dock is the scenario described by the reader’s question above. When a conventional shaft packing fails, the ’failure’ is almost always traced to a poorly maintained packing gland and an inoperable bilge pump. Packing gland and bilge pump maintenance are both considered by insurance companies to be routine and necessary for the seaworthy operation of the boat.

Next, a marine insurance policy will expressly exclude a claim that arises due to normal wear and tear. A claim may be denied under this provision for everything from worn-out engine parts to a rig failure on a sailboat caused by corroded fittings.

Another common basis for insurance companies to deny a claim is the ’latent defect’ provision of the policy. Under this provision, the insurance company will not pay to replace a component of the boat that failed due to an open and obvious long-term problem, or due to poor design or construction by the boat builder. However, if the boat is still under warranty, the owner may be able to pursue a separate claim against the builder. And, where a component is determined to have failed due to a latent defect, the policy typically will cover any losses that involved other components of the boat that were damaged as a consequence of the latent defect.

A marine insurance company may also deny a claim based upon a failure by the boat owner to truthfully prepare his or her insurance application at the beginning of the policy period. This falls under the requirement for all parties to a marine insurance policy to deal in ’utmost good faith,’ and we covered this issue in more detail in a previous installment of this column (see ’Disregarding Survey Recommendations Could Lead to Insurance Denial’ in the Oct. 18, 2006 issue of The Log).

The list provided here is a sampling of the most common reasons for denial of a marine insurance claim. A claim may be denied for many other reasons, and prudent boat owners will review their insurance policies carefully to confirm that they fully understand their obligations under the policy. A denial of a marine insurance claim may lead to a catastrophic economic loss for the boat owner, and a little attention to detail can go a long way.

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