Ask A Maritime Attorney: How “broad” is the insurance coverage of physical damage to my boat?

Question:

I have a question concerning the physical damage insurance coverage on my boat.  The policy defines the phrase “caused by” quite broadly, stating that it means “any loss that is contributed to, made worse by, or in any way results from particular peril in question.  The policy then goes on to exclude coverage for “any loss caused by wear and tear, gradual deterioration, galvanic corrosion, lack of maintenance, fiberglass osmosis, blistering or marine life.”  I interpret this to mean where a sinking or other catastrophic loss is “caused by” the failure of a small part due to one of the listed exclusions, the entire claim will be denied.  I also read somewhere that most policies will cover the resulting damage from the failure of a small part, even if the part itself is not covered.  Can you clear this up for me?

Answer

First, I’ll tip my hat to our reader for taking the time to read his insurance policy.  A marine insurance policy may take a while to read from cover to cover, but it’s important for boat owners to have a thorough understanding of what may be covered or excluded under their policy.  With that in mind, let’s answer our reader’s question with an overview of some of the more obscure provisions of a marine insurance policy.

Marine insurance policies for recreational boats are usually “all risk” policies, meaning that the policy covers all losses unless the cause of the loss is specifically listed in the policy as being excluded from coverage.  This differs from the “named risk” policies which are used for many commercial boats, and which cover only the risks specifically listed in the policy.  The good news in the recreational boating world is that the policies are generally written in plain English without a lot of “legalese,” and the exclusions from coverage are usually clearly defined and listed separately in the policy documents.

Our reader’s question concerns one of those exclusions.  He is concerned that the failure of a small component part may lead to a catastrophic loss of the boat, which would not be covered by insurance if the component part failed due to an excluded cause, such as corrosion.  His interpretation of the policy is correct.

As noted above, recreational marine insurance policies are generally written in plain English and as such they are relatively easy to read.  His policy defines the phrase “caused by,” and then lists a collection of potential events or actions for which a loss would not be covered by the insurance.  If a boat sinks due to a corroded or worn-out part, the entire claim would probably be denied.

Our reader may be thinking of a loss caused by “latent defect” coverage in the policy.  A latent defect is an unknown defect that is not discoverable by a reasonable and prudent inspection.  Most yacht insurance policies exclude latent defects, but – as suggested by our reader – they cover damage that results from a latent defect.  The policy language will typically exclude the cost of replacing or repairing any item having a latent defect that causes damage to the yacht, but any damage resulting from the failure of that part would be covered.  For example, if a boat ran aground due to a metallurgical failure in the structure of the rudder, the failure of the rudder may be found to be a latent defect.  Under those circumstances, the replacement of the rudder would not be covered, but the damage to the rest of the boat from the grounding would be covered.

The real problem with a latent defect is in defining this term, as it is remarkably broad in scope.  The defect must be undiscoverable under an inspection that a reasonable and prudent person or entity would undertake to evaluate the seaworthiness of the boat.  And, a latent defect is usually defined to mean a hidden defect that existed from the time of manufacture.

Complicating things even further, most marine insurance policies expressly exclude coverage for “manufacturing defects.” And, unlike latent defect coverage, the exclusion for manufacturing defects will not include the extended language used to cover the damage that may result from the defect.

A manufacturing defect is defined in most policies as the improper, incorrect or inadequate manufacturing process of the insured yacht’s hull or machinery or any of its components.  The exclusion of a manufacturing defect from the boat owner’s marine insurance policy makes sense, since the policy would otherwise be providing a warranty for the defective product, and as such, free insurance for the manufacturer.

The problem for the boat owner is that, in many cases, a hidden defect can be viewed as both a manufacturing defect, in the sense that it was due to a mistake of the manufacturer, and a latent defect, in that it was hidden and it existed from the time of manufacture.  Insurance adjusters may deny coverage if it is a close call or if the cause is actually unknown, but seems like a manufacturer’s defect.  The courts that have reviewed such cases have reached a wide range of decisions.

As you may conclude from this discussion, marine insurance claim processing tends to be a lot more complicated than the processing of claims for other types of insurance.  So it’s important for a boat owner to be fully informed in the event of a claim.  Read your policy before getting underway and again after the accident.  And hire an experienced maritime attorney if you need to go to battle over a significant claim denial.

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 dweil@weilmaritime.com.