Boat insurance: an evaluation
A voyager looks at his insurance needs
One of the first things that most boat owners look for when they buy a new boat is insurance. Depending on the size of your boat and your planned cruising grounds, there can be anywhere from zero to 20 companies offering coverage, with rates varying from 1 to 5 percent of your boat value per year. That’s quite a range. Some companies are subsidiaries of auto and home companies, while others only sell marine insurance.
Last summer I decided to go bare — bare of boat insurance, that is. The reason is neither long nor complicated; indeed it is based on the same sort of actuarial and statistical computations that insurance companies use to set premiums. Basically, the price is derived from risk analysis, statistics and ROI (return on investment).
In my travels, I have come across many cruisers who don’t carry insurance. When asked for the reason, most just shrug and say, “Too expensive.” Granted, most of these are live-aboards who reside on their boats full time and on a very limited budget. Many of these boats are simply not worth insuring anyway.
But what about my 10-year-old trawler that set me back $300,000? Should I insure it? For what amount? What deductible? What are my navigation limits? What are the real risks? What about liability? These are all questions that you need to answer before plopping down thousands of dollars on insurance.
Pretty much all marine insurers require a survey before they will insure a boat. This gives them an idea of the boat’s potential value as well as condition, so this factor is pretty much out of your hands. You can always “suggest” a lower or higher value, but generally this will still be within 10 percent of the surveyed value.
The main reason that I decided to drop my insurance was that my premiums jumped from $5,500 a year to $9,000 a year, and my deductible went from $5,500 to $50,000. Why? Because I was exactly 31 miles south of the line that the company decided was the “hurricane belt.” Of course this “belt” is completely arbitrary — pretty much every marine insurance company has a different set of lat/long coordinates to define it — and beyond that, fairly absurd.
Yes, based on the past 70 years of data, most hurricanes (typhoons, cyclones) occur within a certain area during a certain time of the year. The operative word here is most. In 2011, there was a full-on hurricane (Irene) in Vermont. It destroyed major buildings and caused massive flood damage. For those of you actuaries reading this, Vermont is not located on or near any ocean.
The hurricane zone
In the Atlantic, the hurricane belt generally falls between 12° N and 30° N latitude from June 1 to December 1. Of course, there can be hurricane-force storms anywhere and at any time of year, but statistics show that they are more likely to occur in this area during this period than at other times. Some companies start hurricane season as late as July 15 and ending November 1.
My situation was that the only reasonable East Coast marina that could haul and store my 47-foot catamaran was located 31 miles too far south to be considered “safe” during hurricane season, and that made a huge difference in my premium, deductible, conditions and coverage. So, I did the math and decided to take the risk.
There are six main ways that a boat will get in trouble: hitting something hard; hitting something floating in the ocean; a catastrophic system failure; fire; major storm or rogue wave; and lightning strike.
A yacht in Antarctica, on balance a higher risk area than many tropical locations.
Insurance companies know this, and they rate the chances and severity of each of these based on statistics that, as we all know, are not always accurate. While I don’t have the volume of statistics that insurance companies have, I do have 15 years of offshore experience as well as something many insurance companies don’t have since they rely solely on data: common sense.
Many wealthy people self-insure. They usually base their decision on insurance cost vs. asset use. For instance, if someone has 10 cars valued at $40,000 each, they might pay $2,000 per car per year for insurance, or a total of $20,000 per year. But, they can only drive one car at a time, making the actual cost of insuring the car they are driving $20,000, or 50 percent of its value. It doesn’t take much brainpower to see that this doesn’t make good financial sense.
When my insurance company demanded an additional $3,500 for just 3.5 months of coverage, I assume they based it on risk. And I was prepared to pay it until they also increased my deductible. Then I started doing the math.
I am very careful where and how I keep my boat during hurricane season. My boat would be out of the water (far safer than in the water) with all sails and rigging taken down to reduce any possible windage during a storm, securely tied down to large concrete blocks embedded 4 feet in the ground so it wouldn’t fly away, and — something often overlooked — not placed near any monohull sailboats since these tend to blow over during a storm, damaging the boats around them.
I started my hurricane season regimen in La Paz, Mexico, in 2003. When Hurricane Marty staged a direct hit in September of 2003, more than 100 boats were damaged or destroyed, but my boat was untouched. So, I am convinced that with preparation a boat can survive a hurricane with minimal damage. Based on my empirical but not thorough research, I’d say my boat has a 95 percent chance of surviving a big storm.
Lightning struck twice
What about a lightning strike? That’s a tough one. I’ve owned four boats (two sailboats and two trawlers) and both of my sailboats have been struck by lightning, both times frying all the electronics. In both cases they were surrounded by many other sailboats as well, none of which got struck. The cost of damage in both situations was around $25,000 — so, not catastrophic. Again, based on my experience, I’d give my boat a 95 percent chance of not getting struck by lightning.
Hitting something hard? I’ve done that as well, and both times the damage was minimal, perhaps $1,000. Granted I haven’t lost my steering while entering a crowded anchorage, nor my reverse when docking, but I believe that with reasonable caution the chances of me hitting something hard enough to cause severe damage is 95 percent in my favor.
It’s the same with hitting something out in the ocean. I don’t travel at more than 12 knots, so even if I do hit something it probably won’t sink me. I say probably, not definitely. I’d give myself a 95 percent chance of not hitting something.
That goes for having a major fire on board as well. I have at least a dozen fire extinguishers on both of my boats, as well as mounted automatic fire suppression systems in the engine rooms. The only real danger is if another boat near me catches fire and the fire spreads to my boat. So I’d say there’s a 95 percent chance I won’t have a fire.
Finally, what are the chances that I will cause damage to someone else or their boat? Yes, it could (and does) happen, but I’ve been driving boats and cars for more than 50 years and have not had any kind of accident involving anyone else yet, so I’m going to rate my chances of not having an accident where I am liable at 95 percent.
A boat heavily damaged by fire in a yard at Anacortes, Wash.
How often will you need it?
So, a quick calculation shows that there is only a 5 percent chance that I will have a major problem with my boat. This means that I can expect to need insurance beyond my deductible only once every 20 years. Of course, I actually think it is much less than that, but I’m trying not to meddle with my karma.
Year-round full-hazard insurance, including liability, for my catamaran will cost me $9,000. That’s with a $5,000 deductible (more on that later). So right off the bat, if I don’t have a problem I’m $14,000 ahead. Then I look at what it might cost me if I do have a problem. Based on the six most likely scenarios and my 95 percent chance of not encountering any of them (as well as taking my two lightning strikes and two groundings into account), I’m going to take a wild stab and say that an accident might cost me $20,000. Which means I’m really only $6,000 out of pocket. If I’ve gone two years without any problem, I’m $23,000 ahead, meaning even if I have a $20,000 problem, I’m still $3,000 ahead.
Since I only expect to need insurance once every 20 years, that means I will have paid $180,000 for my insurance. Add in the $5,000 deductible, plus a one-time $50,000 deductible if there is hurricane damage and another 5 percent since I am sure that insurance costs will rise over that period, and my savings is now somewhere around $250,000 over this 20-year period. Enough, in my mind, to cover my risk and make it a reasonable gamble.
Deductibles are one of the ways that insurance companies really stick it to boaters. As I said, my deductible for a named storm during hurricane season went from $5,500 to $50,000. A named storm? What is that? If ever there was an ambiguous legal term, that has to take the cake. It used to be that only major hurricanes had names, which were assigned by NOAA in collaboration with most other international weather agencies. But with the encouragement of the insurance industry, NOAA started naming minor storms and now even tropical depressions. And since most weather anomalies also carry numerical identifiers, can’t these be considered names as well? You can bet the insurance industry wants it that way.
Furthermore, there is no real clarification of a time period between when a storm is named and when the damage to your vessel actually occurred. For instance, what if your boat was damaged by an unnamed storm that then became a named storm? Are you covered?
Where insurance is required
Liability is one of the real conundrums with going bare, especially when it comes to marinas and boatyards that usually require a vessel owner to carry insurance. Since I seldom stay at marinas, this hasn’t been an issue in the past. Again, I look at the chances of a $300,000 liability claim (the limit on my old policy) and, based on my experience and record, I’m not worried. Of course, I’m not the worrying type; if I were, I’d have full insurance. As far as haul-out facilities, it’s possible to buy a bond to cover you for much less than an insurance policy, or you might be able to get specific insurance just for a haul-out or storage.
If I can find a company that will insure my boat for a reasonable price and deductible (1 percent of value for both), and consider my experience, location and preparation, I would jump on it. Until then, I’m going bare.
Eric Sanford lives in White Salmon, Wash., when he isn’t on one of his boats.