Can ignoring equipment failures become a problem for marine insurance coverage?

My boat was out of the water last week for some bottom work and an insurance survey. My marine surveyor told me something about marine insurance coverage that did not make any sense. We were talking about insurance claims that arise from equipment failures. He said that a boat owner who knows about a problem and ignores it may have more success with the claim than a boat owner who has no information at all about the problem. This seems counter intuitive.

Our reader and his surveyor have strayed into an obscure feature of marine insurance practice. They are describing a scenario where an insurance claim made by a boat owner who has no idea that a problem exists may be denied, while an identical claim made by a boat owner who ignores a known problem may be paid. The irresponsible boat owner seems to be rewarded in this case while the innocent boat owner is punished.

The explanation for this anomaly is found through an understanding of one of the basic components of any insurance policy: Insurance is designed to protect us from our negligence.  Whether a claim arises from a rear end accident in a car at a stop sign or running a boat aground in calm weather on a sunny day, it provides coverage for a long list of indiscretions.

Of course, insurance policies do not cover everything. Marine insurance policies in particular are subject to numerous exclusions, most of which are related to the physical condition of the boat at the time of the claim. A marine insurance policy is a contract between a boat owner and the insurance company. The terms of that contract require the boat owner to maintain the boat in a seaworthy condition, and in fact the most common basis for denial of a marine insurance claim is the failure of the boat owner to properly maintain his or her boat.

This brings us to our reader’s question. A boat owner who fails to conduct regular maintenance might be unaware of a developing problem, but his ignorance of that problem does not make him “innocent” under the terms of the insurance policy. Conversely, a boat owner who knows about a problem but fails to respond to it may be found to be negligent, in which case the claim may – under certain very specific circumstances – be paid. A recent case handled by our office may provide an example.

In our case, a fire started aboard a large motor yacht after one of the two main engines overheated. The overheating was caused by a failed impeller in the engine’s raw water cooling pump. The insurance company initially denied the claim because the owner could not prove that he serviced the impeller at regular intervals as required by the engine service manual. We disagreed with their interpretation of the service requirements but the insurance company would not budge. So we took another route.

On the day of the fire, during the thirty minutes prior to the start of the fire, the engine temperature alarm had sounded on three separate occasions. On each occasion, the owner shut down the engine and waited for the needle on the temperature gauge to drop, then restarted the engine without investigating the cause of the overheating. The fire started after the third overheating incident.

We took the position that a reasonable boat operator would have investigated the cause of the overheating prior to restarting the engine. Based on that observation, we successfully argued that our client’s failure to take that action amounted to negligence. A loss caused by lack of maintenance is not covered by insurance, but negligence is covered. We settled the case before going to trial and a substantial percentage of the claim was paid.

The responsibilities of a boat owner under a marine insurance policy are significant, and the failure to comply with those obligations will likely lead to the denial of an insurance claim. Boat owners should spend some quality reading time with their marine insurance policy, and any questions or confusion about their rights and responsibilities under the policy should be discussed with an attorney experienced in marine insurance claims.

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