The superyacht sector has, in the last 36 months, been rocked by the extraordinary number of fires, including recent the devastating fire on board the 45m ISA m/y “ARIA SF” just a few weeks after her delivery. The ISA was a very public total loss. In this article our superyacht and insurance lawyers consider the legal and insurance issues superyacht owners and presumptive owners need to be thinking about to help ensure that they are protected should the unthinkable happen on board their superyacht afloat or in a shipyard.
The risk of fire on board a superyacht during its construction can be considerable, for example, whilst hot works are being carried out and during and after the installation of electrical systems and batteries.
Presumptive superyacht owners should should ask their specialist superyacht lawyers to explain what will happen should the worst happen. We set out below some key points to consider when negotiating any superyacht construction agreement.
Insurance during the build: The builder should be responsible for insuring the yacht during its construction continuing through until delivery to the owner. Presumptive superyacht owners should be certain that the yacht construction agreement clearly sets out the requirements of the builder’s insurance, including that it is:
A. placed with a first-class insurance company, that you can verify;
B. upon terms equivalent to/ not less extensive than the Institute Clauses for Builders' Risks (1/6/88) – which are the most widely used international form of insurance coverage for vessels under construction. Ask your lawyer to explain how these work; and
C. for a sum not less than the purchase price, plus the sum of any items supplied by the owner to the builder and installed on the yacht (commonly referred to as ‘owner’s supplies’).
Presumptive superyacht owners need to make sure that they are named as co-assured on the builder’s insurance policy and that they can request evidence of such insurances from the Builder on demand throughout the build and be part of any claim should the unthinkable happen. Your owner’s representatives need to be mindful that the yard is a safe place and that the yard are not doing anything which might void the policy. Although you will be relying on the policy you need to make provision should the policy not pay out in the event the policy becomes void or voidable. This becomes an issue where there is a partial loss during the build, perhaps smaller damage that can be easily repaired. The owner’s team would need to be involved in the decisions to continue the build following the fire and understand the cause.
Force Majeure: Yacht owners should be aware that most yacht construction agreements will include fire as a force majeure event, meaning that if the yacht’s construction is delayed because of fire, the builder will be entitled to postpone the delivery date to when the rebuild can happen, without being liable to pay liquidated damages to the buyer for delay, unless the fire was caused by the negligence or default of the Builder. How that will work against a typical clause which allows the presumptive owner to cancel the yacht construction agreement if the build drifts past a drop-dead date regardless of cause, needs to be contemplated.
Total loss or constructive total loss: If a yacht is destroyed by fire during its construction and deemed to be a total loss, actual or constructive then the owner should be entitled to a refund of all sums it has paid to the Builder on demand.
Although it would be prudent for presumptive superyacht owners to ensure that any payments they make to the builder are secured by way of refund guarantees, and that they can claim under such refund guarantees in the event that the builder fails to refund any amounts owed, the reality is that very few builders offer full refund guarantees. That fact elevates the importance of Builder’s All Risk Policy If you are lucky enough to get some kind of refund guarantee, they are only as good as the guarantor offering the guarantee. The refund guarantees should ideally be issued by a first-class international bank. Builders will usually be responsible for arranging the issuance and maintaining the refund guarantee as they will have longstanding relationships with banks in their jurisdiction. More often than not the price is factored into build price, however sometimes some presumptive owners want price transparency and want the cost of the refund guarantees separately invoiced. Builders will usually be responsible for arranging the issuance and maintaining the refund guarantee as they will have longstanding relationships with banks in their jurisdiction and the cost will be factored into the contract price of the yacht under the yacht construction agreement.
Sub-contractors: Given the technical nature and complexity of superyachts nowadays, Builders will inevitably need to sub-contract elements of the construction to specialist sub-contractors. However, owner’s team should ensure that the builder remains fully responsible for all work carried out by its chosen sub-contractors, and that such sub-contractors are adequately insured to enable the main superyacht construction.
Following delivery of a new-build superyacht, or after the sale of a second-hand superyacht, risk transfers from the builder / seller to the owner. Whether the owner intends to use the yacht privately, or to charter the yacht out, the safety and insurance considerations are paramount:
Insurance: The precise extent of the cover available for damage caused by fires on superyachts will always depend on the specific wording of the relevant policy. However, the standard form wordings commonly adopted will invariably provide some form of cover for damage resulting from fires. Is that cover enough for you? For example, the Institute Yacht Clauses (1/11/85) specifically list fire as an insured peril. Fire would also be included within all risks cover provided in the American Yacht Form R12. What kind of procedures need to maintained onboard to ensure the insurances are not voided.
In addition to hull cover, both standard form wordings also provide forms of third-party liability or protection and indemnity insurance as well (although such cover is sometimes provided under a separate policy with, for example, a P&I club). That cover may then respond in circumstances where, for example, a fire spreads from the insured vessel to multiple other vessels. However, cover may vary depending on whether the insured vessel is in commission or laid up and out of commission. As such, careful consideration should always be given to the precise wording of the relevant policy.
Policies also commonly include warranties requiring yachts to be manned “at all times”. If a fire was to break out with no one onboard the insured vessel, there is a question as to whether and, if so, how, the policy would respond. Ultimately, this will depend on the specific wording of the warranty. Numerous decisions of the courts have demonstrated a flexible approach to the interpretation of “at all times” warranties which will depend on the natural and ordinary meaning of the warranty along with its commercial purpose and the practical context. For example, “Owner and/or Owner’s skipper on board and in charge at all times” was found to be primarily focused on protecting the vessel from navigational hazards and, therefore, did not preclude a claim for loss by fire whilst the crew were onshore with the vessel moored up in port. However, “fully crewed at all times” was construed more narrowly and was found to require at least one crew member on board the vessel 24 hours a day save for certain limited exceptions.
Following the Insurance Act 2015 coming into force in England, Insurers’ remedies for breaches of warranties (including “at all times” warranties) will turn on specific facts. If an insured is in breach of a warranty, the remedy will depend on the nature of the warranty. Many insurance policies are governed by English law and as a consequence the Insurance Act will be relevant, regardless of where your superyacht is.
If the relevant term defines the risk as a whole (for example, a requirement that a vessel is not used for commercial purposes or that a vessel shall be limited to specific navigable waters) cover is suspended for the period of breach and insurers are not on risk for loss during that time. Few warranties define the risk as a whole.
If the relevant term does not define the risk as a whole, it will be for the insured to establish that the breach did not increase the risk of the loss which occurred in the circumstances in which it occurred. So, for example, if a policy contains a warranty requiring the insured to maintain the onboard fire equipment, insurers will be able to rely on an insured’s failure to do so if the insured is unable to demonstrate that the breach did not cause the loss or contribute to the extent of the loss.
In either case, if the breach is remedied prior to loss, insurers will be on risk for that loss.
During a charter: Yacht owners should note that if a yacht is destroyed (i.e. an actual or constructive total loss) by fire during the course of a charter then, under the Mediterranean Yacht Brokers Assocation (MYBA) Charter Agreement terms , providing the fire was not caused by any act or default of the charterer, the owner would be required to refund the charter fee for the proportion of the charter period outstanding after the date when the loss occured. The charterer would also be entitled to recover from the owner its reasonable expenses of returning him/ her and his/ her guests to the place of re-delivery plus reasonable accomodation expenses incurred.
During refit/ repair/ warranty works
As with during the construction of a yacht, when a yacht returns to the builder’s yard or to another shipyard for refit, repair or warranty works, there are always potential fire risks, for example when carrying out hot works and electrical works as well as fires spreading from other yachts at the yard.
Insurance: Under the ICOMIA Standard Refit/ Repair Contract or the BIMCO REPAIRCON – common forms of standard contract used for repair and refit works on yachts – the owner is required to maintain hull and machinery and liability insurance in respect of the yacht and the owner’s representative, captain, crew and any other personnel for whom the owner is responsible during the period whilst works are being undertaken either at the contractor’s yard, or its subcontractors’ other facilities. The contractor is also required to maintain Ship Repairer’s Liability insurance, and the cost will be factored into the contract price under the refit/ repair contract.
Insurers will look to protect their position when it comes to risks of fire during refit / repair / maintenance works and, in particular, during hot work undertaken at shipyards. Whilst policies will often respond following such incidents, insurers may require additional premium for the increasedrisk associated with refit / repair / maintenance works. Insurers may also mandate the protection of their right to recover the indemnity paid from any responsible third party, however, it is now common practise for builders undertaking warranty work at their facilities to seek to protect themselves by asking owners and their insurers for a waiver of subrogation this is a clause which prevents the owner and its insurers from pursuing the yard in the event of a loss. Because causes like this remove the owners insurers right of recourse against the yard should (should the owners policy payout) such waivers should never be signed without the insurer's prior approval. Occasionally, the waiver of subrogation is subject to a cap. Repair yards also often seek waivers in respect of any liability for repair or maintenance work in excess of the limits of liability in the in the yards Ship Repairers Liability policy.
Further policies often include requirements for the insured to: (a) give insurers advance notice of schedule refit, repair or hot work; (b) ensure that the shipyard (or the relevant contractors) have operative liability insurance up to a particular value; and/or (c) as already discussed,ensure that no contractual exclusions, limitations of liability and/or waivers of subrogation have been agreed with the shipyard (or the relevant contractor).
Ultimately, insurers will often look for additional protection, whether by requiring additional premium or otherwise, to account for the additional risk associated with refit / repair / maintenance works.