The Captain and Crew Warranties in a Yacht Policy Are Important

Maritime lawyers are abuzz with a federal court case discussing highly complex admiralty versus state law concepts regarding the sinking of a yacht during Hurricane Irma. In a post last month, Aircraft and Marine Insurance Claims—Is The Pilot or Captain Qualified Under The Policy Terms?, I noted and warned that policyholders and agents should double-check to make certain these criteria are met:

The qualifications of pilots and captains under aircraft and marine policies are important. Aircraft policies and more significant marine policies have criteria that pilots and captains must meet for the policy to be fully in force at the time of an incident. For those of us who are not owner-operators, it is important to make certain that your paid crew are up to date with their licenses and that their credentials meet the policy requirements.

The recent federal case¹ noted the policy requirement at issue and the factual problem:

This case concerns the demise of the M/Y My Lady, a 92-foot Hatteras yacht. Ocean Reef, the owner of the M/Y My Lady, insured it with Travelers for a one-year term from October of 2016 to October of 2017. The 2016-17 policy, a renewal of annual policies issued in the two prior years, contained two express warranties that are at issue in this case. First, the captain warranty required Ocean Reef to employ a fulltime professional captain approved by Travelers: ‘It is warranted you employ a professional captain for the yacht . . . Such captain shall be full time and approved by us.’ Second, the crew warranty required Ocean Reef to have one full-or part-time professional crew member onboard: ‘You [shall] employ 1 full time or part time professional crew for your yacht[.]

…

Ocean Reef did not employ a professional captain for the M/Y My Lady in early September of 2017, when Hurricane Irma was heading towards Florida. Nor did it have any crew onboard.

…Mr. Gollel did his best to secure the yacht by, among other things, adding extra fenders and mooring lines. The extra mooring lines proved ineffective when a year-old dock piling—to which the port bow line was attached—gave way as Hurricane Irma struck land on September 10-11, 2017. The yacht drifted onto other pilings and hit the sea wall, before eventually becoming holed and sinking at the dock. The damage resulted in a total constructive loss under the Travelers policy.

Travelers filed suit disclaiming coverage, and the court noted the legal disagreement between the parties:

Travelers argued that federal maritime law requires strict compliance with express warranties in marine insurance contracts, and that a breach bars coverage even if it is unrelated to the loss. Ocean Reef countered that Florida’s so-called “anti-technical statute” should instead apply, and that under that statute the breaches did not preclude coverage because they were unrelated to the loss.

The Florida Anti-Technical Statute provides in part:

A breach . . . does not void the policy or contract, or constitute a defense to a loss thereon, unless such breach or violation increased the hazard by any means within the control of the insured.²

The legally academic part of this case is traditional warranty rules found in longstanding admiralty law and whether the United States Supreme Court precedent allows the Florida anti-technicality statute to govern the situation. One commentator, Thomas Belknap, in What Is the Insured’s Duty under a Marine Insurance Policy? It Depends…, noted:

At the heart of much of this wrangling seems to be the same concern that troubled the Supreme Court in Wilburn Boat: Is it really fair to allow an insurer to evade its obligations under an insurance policy where the insured has paid his premiums and suffers an otherwise covered loss, but has made misstatements to the insurer that do not actually bear on the risk? …

Certainly, historically, there were good reasons for such a rule: the insurer was being asked to assume a risk in insuring a vessel that could be halfway around the world, with no practical means of inspecting or surveying the vessel before agreeing to assume the risk. Strict enforcement of warranties, coupled with the overriding principle of uberrimae fidei (utmost good faith), which holds that a policy may be voided where the insured has failed to disclose all facts that may be relevant to the insured risk, were the means of inducing the insurer to act quickly in issuing the policy while ensuring that it was taking only the risk it intended to take, and nothing more.

But most states have eschewed these strict rules and have enacted various ‘anti-technicality’ provisions designed to protect ‘innocent’ insureds from the jarring surprise of having an insurer deny coverage for breaches of the policy that seem immaterial to the risk or the loss. And so the courts, when faced with the question of whether maritime law’s strict warranty rules should override these state law protections, are often conflicted, with the result that many such cases wind up with contorted or seemingly inconsistent rulings.

The bottom line is that the federal appellate court held Florida’s anti-technical law would apply:

All of this means that Florida law, specifically Fla. Stat. § 627.409(2), governs the effect of Ocean Reef’s breaches of the captain and crew warranties. On remand, the district court will need to apply § 627.409(2), and consider any other related arguments raised by the parties. See generally Pickett v. Woods, 404 So.2d 1152, 1153 (Fla. App. 1981) (explaining that § 627.409(2) was ‘designed to prevent the insurer from avoiding coverage on a technical omission playing no part in the loss’); Eastern Ins. Co. v. Austin, 396 So. 2d 823, 824-25 (Fla. App. 1981) (concluding that the term ‘hazard’ in § 627.409(2) ‘refer[s] to danger to the insured vessel itself’). It appears that, under Florida law, the burden of proving a breach and ‘a resulting increase of the hazard’ is on the insurer. See Fla. Power and Light Co. v. Foremost Ins. Co., 433 So. 2d 536, 536-37 (Fla. App. 1983).

My point of emphasis is that many of these disputes in maritime and aircraft policies can be avoided by careful underwriting and then maintaining the requirements of captains, pilots, and crew. Insurance agents should be careful to highlight these coverage obligations to affluent owners who are often busy running businesses rather than keeping track of the exact coverage provisions in their aircraft and yacht policies. Yacht and aircraft managers should double-check these coverage requirements.

Thought For The Day

I haven’t got the yacht any more. The cost of running it was crazy. But it was so much fun while I had it. I don’t regret it.
—Jenson Button
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¹ Travelers Prop. Cas. Co. of Am. v. Ocean Reef Charters LLC, 996 F. 3d 1161 (11th Cir. 2021).
² Fla. Stat. § 627.409(2).