I own a sailing catamaran that is in a charter fleet in Florida. The yacht is booked through a professional management company that is also responsible for maintenance and for arranging for insurance and paying the insurance premium. Last year the boat caught fire and was severely damaged after their crew installed a shore power connector with the wrong voltage. The management company submitted an insurance claim on my behalf, and I was advised that the boat was declared a constructive total loss by the insurance adjusters. I was prepared to accept the payment from the insurance company and walk away from the boat, but the management company had a different plan. They advised that, after discussing the claim with the insurance company, they had chosen to pursue the “repair option,” which called for us to accept payment from the insurance company that was thousands of dollars below the insured value of the boat and to keep the boat and repair it, hopefully within the budget established by the reduced insurance payment. The charter management company referred to this as the “repair option” and they contend that they have the right to make this decision because they pay the insurance premiums. This entire process has me completely confused. This is my boat and I want to accept the insurance payment and walk away. Why is this not my decision to make?
Our reader is being mismanaged by his management company. Let’s start by examining the concept of a “constructive total loss.”
When an insurance company declares that a yacht has suffered a total loss, they are saying that the cost of repairs will approach or exceed the insured value of the vessel. Even when the repair estimates don’t quite exceed the boat’s insured value, they recognize that repair estimates may be revised upward in the course of a project, and they choose instead to limit their risk by declaring the vessel to be a constructive total loss (CTL) and paying the full insured value of the vessel to the owner.
The purpose of a CTL declaration is to limit the insurance company’s financial exposure. This differs significantly from a decision to repair the vessel. When they decide to authorize repairs, they are obligated to return the boat to its pre-incident condition, without regard to the cost. In those cases, the insurance company bears the risk that repairs may exceed the insured value of the vessel. A CTL therefore will not include a “repair option” as suggested by our reader’s charter management company. It is either a total loss or a repair. It can’t be both. The management company’s proposal is, therefore, more accurately described as a “salvage option.”
A declaration of total loss requires the boat owner to transfer the title of the damaged boat to the insurance company when he or she receives the check from the insurance company. The insurance company will then dispose of the damaged boat by selling it to a salvage company or, in some cases, selling it back to the boat owner. The offer that has been presented to our reader includes a substantially reduced payment from the insurance company because he is actually being asked to buy the salvage value of the damaged boat back from the insurance company. Our reader and his charter management company would then be free to undertake repairs on their own, using the remaining insurance funds and with the insurance company otherwise completely out of the picture. This option is, therefore, more accurately described as a “salvage option” and it would require the boat owner to absorb all of the risks of the repair costs.
Our reader has recognized the financial risk associated with the salvage option, but his charter management company has chosen another path. The reason for this is unclear, but they cannot make this decision for our reader regardless of their motivation.
The charter management company acts as an agent for the boat owner in this insurance claim. They may speak for the owner under certain circumstances, but they have no ownership interest in the boat, and after reviewing their agreement we found nothing that would allow them to make decisions concerning the disposition of the boat in connection with an insurance claim. The scope of their agency may be expanded, reduced, or terminated by the boat owner, and our reader has advised the insurance company that the management company is not authorized to speak on his behalf for this insurance claim.
Our reader is now faced with two possible legal disputes. First, with the insurance company if the adjusters choose to listen to the charter management company rather than to our reader as the boat owner. And second, with the charter management company for exceeding the scope of their authority as our reader’s agent. Readers of this column should of course consult with legal counsel experienced in marine insurance matters if they find themselves in a similar situation.
David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508, through his website at www.weilmaritime.com, or via email at email@example.com.