Consequential Damage Coverage

Years ago, we had a near sinking on one of our test boats due to a failed 0-ring on the speed sensor through-hull installed by a previous owner. The sinking would be attributed to the failure of an O-ring, and because the sinking was consequential to the failure of a maintenance item and we did not have consequential loss coverage, the insurance would not have paid the claim. In fact, most boats sink at the dock due to failure of some minor item, and most policies don’t cover the damage consequential to the failure of that item. In other words, we are sailing bare, without insurance coverage for our most serious exposure.

Consequential Damage Coverage

There are several motivations for reading this article. You may want to learn of poor repair practices so that you can avoid both the loss and the claim. You may want to better understand what insurance does and does not cover. Finally, you may want to learn how to weasel around the rules so that your loss is covered, even though you may not have paid for the right coverage.

We didn’t write the article for the latter group, who are partly why we couldn’t get straight answers from insurance companies to many of our questions. Too many times they have published a story about a claim resolution, and then been beaten over the head with it in court about a case with superficial similarities but important differences.

We interviewed two insurance companies regarding several cases that represented questions readers have presented. Some are hypothetical, some relate to actual incidents.

We got some answers, but mostly we got a blanket response that you need to read YOUR policy, talk to the service department of the insurance provider, and even then, not expect a straight answer until it is an actual claim. The legal department basically said that, If we put anything in writing, someone will twist it around into something we didnt mean.

What follows are examples. Some of the claims were denied. Some are hypothetical, but the response from insurance professionals we spoke with was that technically they would probably be denied unless the policy included consequential loss coverage, or the insurance company chose to pay them to maintain a good reputation, or because they are too small to fight over… but don’t bet on it.

Often an owner will add a check-valve to the bilge pump to reduce the amount of water running back to the sump when the pump shuts off. Perhaps the run to the transom is long, the sump capacity small, and as a result, the pump cycles on and off repeatedly. Perhaps they were replacing hoses and simply thought it would be an upgrade. Although it is not permitted to use a check valve to allow discharge of an automatic sump pump below the water line, there is no USCG or ABYC restriction against installing them in above-waterline discharges. However, the risk is that the check valve could either clog with trash or freeze in cold weather. A low-loop that remains filled with water can also freeze. In this case, the pump was still running when they found it in the morning, but the hose was frozen solid.

Result. The loss was not covered. This probably would have been covered by a policy with consequential damage coverage.

Case 2. Improper solder

ABYC does not allow solder-only connections-a mechanical component is required. The USCG, aircraft, and NASA allow soldered joints (with strict quality control). A solder-only connection could separate during overload, but is acceptable in aircraft and by NASA. A solder-only connection can fail if overheated, resulting in a fire.

Result. A neighboring boat burned to the waterline, the result of a bad sump pump connection. Sloppy wiring practices and generally poor maintenance, combined with no consequential damage coverage, resulted in a denied claim. Although the specific practices were not identified, it was mentioned that best practices were not followed.

Case 3. Lithium iron batteries.

There is no ABYC standard at this time for lithium batteries (LiFEPO4). Lithium batteries have caused laptop fires, but LiFePO4 (a different chemistry from laptops) have built-in battery monitoring systems and are generally accepted as safe. Insurers and the ABYC will have to decide on this.

Result. This remains an open question. The insurance companies have had very few claims and managers we interviewed were not aware of specific policies. However, the loss would be consequential to battery failure.

Case 4. Rotten backing plate

A through-hull fitting on a 36-foot sailing catamaran has a rotten backing pad. The boat is otherwise in good repair, but a prior owner had air conditioning installed by a contractor in a sub-standard way. Specifically, the contractor used non-sealed plywood as a backer for the through hull, it has rotted, and the fitting now wobbles noticeably, although the leakage is limited to a slight dampness of the plywood. The owner is aware of the problem, but since there is no requirement for periodic survey, his knowledge of the situation is not documented. The boat has no installed automatic sump pump and could sink.

Result. The boat has not sunk… yet. If an insured contractor had been used, and the work was very recent, coverage through the installer might be available. However, as is often the case, the history of installations is lost. Because the loss will result from an obviously prolonged lack of through hull maintenance, the loss may not be covered.

Although regular surveys are not required, we think more owners should have their boats surveyed as a part of diligent maintenance. Depending on age and complexity, a survey every five years is not unreasonable-and after any significant re-build.

Case 5. Leaking Speed sensor

The 32-foot sailing catamaran was surveyed and purchased. After the haul-out phase of the survey, but before the sea trial phase, the previous owner replaced the speed sensor plug with the paddle wheel. The O-ring presumably slid out of position during installation, but a bit of Vaseline applied at the time was apparently enough to make a temporary seal. However, after a few hours of pounding, the Vaseline washed away, perhaps the O-ring shifted more, and the fitting began to gush. Without the bulkhead to limit flooding, the boat would likely have sunk. The owner had every reason to believe the boat was seaworthy, but apparently it was not.

Result. Since there was no damage, there was no claim. The O-ring was repositioned, and the leak never recurred. Sorting out who-hit-who would have been a mess and the pros we interviewed suggested this type of claim would be denied.

Liability only

Lacking consequential damage loss coverage, it seems your insurance is unlikely to cover most sinkings and fires. All that remains is theft (very unlikely with sailboats), hurricane (if you are covered for that and it was not a consequence of a maintenance item, like a failed dock line), and liability. Most marinas and boat yards require liability coverage, so thats hard to avoid. Since the covered risks are unlikely for many of us, perhaps liability coverage is all you need.

The afford to lose test is fairly obvious. Insurance companies make a profit while providing risk pooling. Insurance is a good value if:

1. 1. Risk. Your risk is higher than the insurance companies perceive. For example, if you are a bad driver, drive a lot, or drive in high risk areas, full coverage makes a lot of sense your car. For sailors, towing insurance along the Intracoastal Waterway is a good value, since soft groundings are common.
   2. Ability to pay. You cannot pay the highest realistic loss. This is why we need liability insurance; there is practically no cap on personal injury or damage to a string of high-buck yachts in a marina.
   3. Significan’t loss. The loss would be somewhere between catastrophic and very painful to your lifestyle. For example, most of us need home insurance, but might be better off without full coverage on our cars. We can afford a new car. If we had lost our cruising cat, that would have spoiled retirement plans, but if we lost our daysailer or one of our kayaks, its not a big deal.
   4. Anxiety. Insurance is worthwhile if risk keeps you awake at night.

On the other hand, if you are not accident prone, avoid high risk sailing, the boat is a small part of your net worth, and you are a relaxed person, you can save money by going with liability-only coverage. Over a lifetime, your losses will be less than your premiums. If a company insures boats for 1.5 percent of agreed value, they are betting that less than 1 in 60 will experience significant covered loss in any year. In some places that sounds like a very safe bet, in others not so much.

We’ve noticed another curious thing. The difference in cost between many liability-only policies and some full-coverage policies with numerous exclusions is not very great. Now you know why that is; without consequential loss coverage, full coverage is liability plus a few very unlikely events.

Standards

Every critical system on your boat is covered by construction standards, both US Coast Guard and ABYC. USCG rules are mandatory and are available on-line. ABYC standards are voluntary, but more comprehensive and about 90 percent of boat builders claim to follow them. Most service providers will only work to ABYC standards, which is a good thing.

ABYC standards are copyrighted and available only for a significant fee, making them inaccessible to most sailors. Excerpts of many sections of the standards can be found with a Google search, others are difficult to find. Its a shame that all of the standards cannot be public domain, but our tech editor has participated in standards development with API and ASTM, so we understand why they are so protective: standards development is a lot of work and is expensive. That said, there is a certain common sense that any standard that becomes part of a law or regulation must be public domain, since it is part of the law.

In the case of insurance claims, the dispute involves a contract, not standards, but the role of standards could easily become important should they come up in other court cases. Thus, there is a growing legal effort to force public access to such standards. Well be watching this closely.

One approach is to always repair in the same manner as originally constructed, but this can be prone to pitfalls. Perhaps it failed due to poor practice. We’ve also seen new boats with substantial code violations, including improperly vented propane lockers, battery installations lacking conductor protection , and fuel lines without chafe protection.

Conclusions

If you don’t have consequential loss coverage, you are sailing mostly bare. If your car gets a flat in the driveway, you can take a cab to the office or fix it and show up late. By comparison, if a through-hull starts leaking, you get a call from the marina asking you to arrange salvage (which probably isn’t covered by insurance either-that is another exclusion).

We harp on inspection, every time you sail, seasonally, and by a professional surveyor at some regular time interval. Your car receives an annual safety inspection, including brakes, tire tread, soundness of suspension, and at least 15 other important points. Doesnt your boat deserve the same? Maybe you feel capable of doing this inspection. Maybe you should get a second set of eyes on it. Don’t dread that he might find something; instead, be glad that he did.

A boat stored in the water through the off-season deserves a walk-around inspection at least monthly, including all through hulls, dock lines, security of lines, covers, and all openings. A boat stored on land also deserves a few visits, particularly if there is a cover that might blow loose.

Our examples didn’t cover nearly all the possibilities, and not all failures result in a total loss. The loss of a single wire or pin generally results in the loss of the mast, torn sails, cabin and rail damage, and all too often, serious injury. The boat may be abandoned and lost. Drive seal or coupling failure can result in sinking; a friend lost a propeller shaft because the coupling failed; the resulting hole was pretty big and even with a rag shoved deep inside, the sump pump was losing ground. A towing contractor supplied a pump and they made it to a travel lift.

Now its time to dig out your insurance policy and read it cover to cover, including every clause and addendum. Yes, its about as much fun as reading those quarterly fund statements your broker sends, but make yourself do it. You wont sleep as well tonight, but you’ll sleep better once you get it sorted out.