For individuals of substantial net worth, few pastimes offer more pleasure than cruising the oceans in the family yacht. With an onboard crew taking care of the actual sailing, and the ship's quarters as posh as a Manhattan penthouse, relaxation is the sole order of the day.
There is one responsibility that the captain and crew will not take care of, however. And that's ensuring that the complex risks of yacht ownership are carefully managed and expertly transferred to a specialized insurer. For this, one needs access to a savvy insurance broker like John J. Gaffney, who has spent his entire life around fine boats.
John and I enjoyed a recent discussion about his career and the unique perils confronting high-net-worth owners of yachts. For the past year, he has been senior VP of insurance broker Marsh's yacht practice. Before that, he sold the vessels and assisted his clients in designing and having them built. "This is a total relationship business, and I have a lot of relationships with the people in it," he said of his new role.
Sales of yachts, particularly those in the mega-size class, are up substantially in the last few years, as are the prices to buy them. But, John warned about the thorny risks in a new form of fast growing yacht proprietorship. Called fractional ownership, the financing strategy calls for two or more individuals to share in the ownership of the yacht, along with the commensurate risks.
When the titleholders are members of the same family—a father and adult son, for instance—this is a bit less of a concern, given the familial bond. But when they're friends or business associates, severe problems can arise, chief among them the threat of being uninsured for a major loss.
"Fractional ownership is one of the riskiest ways to experience yachting," John said. "Every scenario of disaster is essentially doubled up and further compounded when you add more owners to the mix."
Danger on the High Seas
Traditional yacht ownership is already rife with huge financial vulnerabilities, given the unpredictable nature of the weather and a patchwork quilt of international maritime laws. Yacht insurance policies covering damage to the physical hull of the ship and first party and third party liabilities contain various coverage exclusions, such as territorial limitations on where you can sail the vessel.
"The policy generally states the latitudes and longitudes in which you are permitted to take your yacht," John explained. "If you wander outside these limits and something bad happens, you can be out of luck, insurance-wise." Owners who plan to travel beyond the stated territorial limits must reach out to the applicable insurer and apply for an endorsement to the policy permitting the travel, he noted.
Other policy covenants govern the proper physical condition of the yacht, which must be ship-shape and seaworthy. Improper maintenance of the vessel can trigger a policy exclusion restricting insurance coverage in the event of an accident. Other policy exclusions may forbid the use of the yacht in a race or its operation by non-crew personnel.
These are very serious considerations. Unlike automobile insurance, which does not deny coverage if a car's condition is sub-par during the policy period, the owner of a damaged yacht found to have had a known degraded and rotting walkway or malfunctioning engine part will be denied coverage in a New York minute. "The onus is always on the owner of the vessel to constantly maintain the ship," John said.
By and large, these various risks are well understood in the exclusive world of yachting, thanks in large part to insurance brokers like John and expert maritime attorneys. And it is not like these financial exposures have taken the wind out of the sails of the business. After a slowdown during the recession, mega-yacht sales are up 80% in the past four years. The average price of these big ships was $9.6 million in 2014.
What is considered a "mega-yacht" is also shifting. In 1985, a mega-yacht was considered to extend beyond 100 feet in length. At the time, there were only 300 vessels of this size traversing the seas. Today, the largest 100 yachts in the world are at least 225 feet long. Even this size is starting to look a bit meager. Twenty-three colossal yachts, 300 feet long and counting, are under construction, at present. Incidentally, the largest yacht in the world, the Azzam, is 590 feet long.
Status in some circles is equated with size, which may explain the migration toward private vessels the size of small cruise ships. Size may also be a factor in the rise in fractional yacht ownership. Two high-net-worth individuals may not have the means to acquire a spectacularly sized yacht, but they can buy the vessel if they share ownership.
