I Sold My Boat But Retained the Title — Then Came the Accident

I sold my boat several months ago and agreed to allow the buyer to pay off the purchase price by making monthly payments to me for one year. To protect my collateral, we agreed that title would remain in my name until after he paid off the boat. I also added him to my insurance policy as an additional operator and I gave him a notarized “sailing letter,” which authorized him to operate the boat. We ran into problems when, soon after he took delivery, he lost control of the boat in a marina and damaged a number of moored boats. The owners of the damaged boats are looking to me for payment because the buyer of my boat has no money. The last straw came in the mail last week, when my insurance company denied the claim because they believe that I was not truthful on my insurance application. Do I have any recourse against my insurance company? How could I have protected myself?
At the risk of sounding like a legal advertisement, the reader could have protected himself by seeing a lawyer before entering into this convoluted transaction.

When a vessel purchase is financed, lenders should protect their collateral by allowing title to transfer to the buyer and recording a mortgage on the vessel in favor of the lender. For a state-registered boat, this will require the parties to provide the lienholder information to the Department of Motor Vehicles. For a U.S.-documented vessel, the lender will record a preferred ship mortgage with the Coast Guard. In either case we encourage the parties to work through a documentation service that is a member of the American Vessel Documentation Association (for details, visit americanvessel.com).

The reader, in this case, took a shortcut. He assumed that repossession would be easier if title to the boat remained in his name, and he could save a few dollars by avoiding the title transfer and lien recording paperwork that would otherwise have been required. These shortcuts effectively misrepresented the vessel’s ownership to the insurance company and to the general public.

An owner’s liability (as we discussed in our last installment of this column) may be limited to the value of the vessel if he is not aboard at the time of an incident. This is, however, determined on a case-by-case basis, and we don’t have enough information regarding this incident to draw any conclusions. The bigger problem in this case concerns the denial of insurance coverage.

In previous installments of this column, we have also discussed the doctrine of uberrimae fidei, which requires all parties to a marine insurance policy to deal in “utmost good faith.”

In this, case the reader’s insurance company apparently believes that he failed to deal in utmost good faith, because the buyer was inaccurately described as an “additional operator.”

After the delivery of the boat to the buyer, he was, in fact, the only operator. Further, since the question of “ownership” is determined by the agreement between buyer and seller, the buyer in this case would probably have been deemed to be the owner at the time of the incident, regardless of whether the formal title transfer documents had been recorded. These issues would all have been relevant to the insurance underwriters in evaluating their risk, and it is not surprising that they chose to deny this claim.

The parties to a transaction will invariably run into problems if the transaction paperwork does not accurately reflect the relationship between the parties and their respective rights and obligations. Transaction paperwork can be complicated under the best of circumstances, but the problems are compounded when the parties enter into an agreement that is purposefully inaccurate or misleading. An attorney who is experienced with drafting legal documents similar to the proposed transaction should always be consulted.

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