Saturday, June 23rd, 2012

Underinsuring the Hull

Sometimes, to reduce the cost of marine insurance the vessel owner will consider undervaluing the hull portion of the policy.

For instance, if the boat is worth $200,000 and costs $4000 per year to insure, maybe it would only cost $2000 per year to cover the same boat but for only $100,000.

After all, the chance of a total wreck is much less than the chance of a $25,000 rogue wave or striking a submerged object casualty, and the policy would still pay the full $25,000 for the smaller claim, less the deductible, right?
That is correct; the snag is, many underwriters refuse to insure vessels for partial value because they realize the same thing; only they have half the money coming in that they should have had, were the vessel insured for its full value. In fact, we have acquired accounts from other companies who demand the vessel be insured for the amount a surveyor states the vessel is really worth, after insuring the vessel claims free for some years at a lower agreed value.

We will insure your boat for less than it’s worth, but the rate per $100 of insured value will be adjusted upward to reflect the continuing same cost to repair the smaller claim. In the example above, perhaps the cost to insure for $100,000 would not be half the cost of $200,000 of insurance, but 65% instead, or $2600. It still saves $1400 for the vessel owner but the insurance company has a bit more money available for the typical claim. An added benefit for the underwriter is that the insured now bears some of the risk himself, and it is thought that, say in the event of an impending hurricane, the boat owner will be extra diligent in trying to prevent the loss of the boat.

There is another consideration here. Say the boat owner goes to great lengths to prevent hurricane damage but the boat still gets some serious damage anyway; maybe the damage is about $100,000, or half the true value of the boat. In the case where the vessel is insured to full value, the claim gets paid, less the deductible and the claim is closed.

But in the case of the underinsured boat, the same damage results in a total loss. The owner gets $100,000, no deductible. But the insurance company now owns the boat and can sell it to whomever they want, for whatever they can get. It’s possible the can get $100,000 for the “wreck”. Then the net cost to the underwriter is just the paperwork, investigation, some storage and maybe some work on the boat to prevent aggravated damage (like dewatering the machinery and pickling it).

To save on the cost of insurance by underinsuring the hull somewhat is a consideration, but to grossly underinsure is taking more of a chance than it’s worth.

The thing is, the liability part of a marine insurance policy is a guaranteed loser, and the fact is the the hull part of the premium helps to mitigate the losses from the P&I.

That’s one reason why all the domestic insurance companies will only provide P&I coverage if there’s a hull policy to go with it. Foreign companies do sell P&I only, but the price is comparable to buying American and getting the boat coverage too.