Parties to these transactions will often explore the use of a “bareboat charter” to transfer the operation and management of the vessel without transferring title. We discussed bareboat charters in greater detail in a prior installment of this column (“Should I Let a Boat Buyer Take Over My Loan Payments?” Ask a Maritime Attorney, The Log, July 10, 2008), and we pointed out that there are many risks associated with this form of “creative financing.”
Any arrangement that transfers possession of the boat to someone without transferring title may amount to a default or breach of the boat’s mortgage, or insurance policy, or slip rental agreement . . . or all three. Whether a particular proposal would breach one of these contracts will depend on the language of each agreement and the circumstances of each particular case, but we can nonetheless offer a few universal observations.
The parties to these “creative” title transfers are usually looking for a way to circumvent the prohibitions against transfer found in most slip rental agreements and/or vessel mortgages. Regardless of the structure of the transaction, the biggest concern of the parties should be the vessel’s insurance policy. Will both parties be covered if the boat is involved in an accident when the owner is not aboard? Will the owner be protected if insurance coverage is denied? Who should pay for repairs?
In recent years, insurance companies have successfully narrowed the definition of an “insured” party to the point that anyone who is not the actual boat owner should read the policy before making any assumptions regarding coverage.
The definitions of “named insured,” “additional named insured” and “additional insured” may vary significantly from policy to policy, and a person described as an “additional insured” may find that he or she has no coverage at all. At a minimum, a non-owner who regularly operates a boat should be identified in the policy as an additional named insured (this analysis would be different for a hired captain, who should be covered under a separate type of insurance).
Certain types of transactions, such as bareboat charters, may be drafted to help protect the owner against liability when he or she is not involved in the operation or management of the boat. If properly drafted and carefully observed, a bareboat charter may, in fact, protect the owner from personal liability. But even if the owner is protected, the boat itself may be at risk if an insurance claim is denied. Whether these transactions will be found to violate the language of an insurance policy or a mortgage, or a slip rental agreement will, again, depend on the precise language of those documents.
If the buyer and seller of a boat are considering a “creative” transaction such as we have discussed, they should be aware of the significant risks that always accompany these deals. Talk to a maritime attorney and your insurance broker for more information.