Fine art and luxury yachts: plain sailing for insurers?
The UK luxury yacht market is booming. The fall in the value of sterling has made purchasing yachts from UK sellers even more attractive to overseas buyers. The fine art market is similarly buoyant, delivering growth rates outstripping other assets.
All this should be good news for builders, designers, banks, brokers, and specialist yacht and high net worth (HNW) insurers. But, when fine art and luxury yachts combine, there are some hazards to navigate.
Hull values alone far exceed many commercial vessels. The 92 metre Aquarius, delivered in 2016 and owned by avid fine art collector Steve Wynn, has a reported value of US$215 million. Combine this with fine art and other toys with which high-end yachts can now come and aggregate values can reach the US$500 million mark, in respect of a single yacht.
Mr Wynn’s previous 67 metre Aquarius had a value of around US$75 million, but several of his artworks are worth substantially more – in 2008, he famously put his elbow through a Picasso he was about to sell for US$139 million. Where the value of the art substantially exceeds the value of the yacht, insurers may not be willing or able to take on the additional fine art exposure; and the marine risk may be difficult to add to the fine art cover.
Recent marine market casualties such as Tianjin have highlighted the need to focus on wider aggregation issues which, for yacht insurers, will consist of exposures in marinas, particularly to fires, weather events and pollution, or for racing events and regattas.
Fine art afloat is subject to specific risks, such as water damage, sinking, collision damage and piracy, to which it would not be subject ashore. Special precautions are required to ensure the art can withstand swell, and rolling and pitching of the vessel at sea. Sunlight, humidity and temperature fluctuations can easily damage artworks and pose particular problems afloat because the art will change geographical location as well as its position relative to the sun.
Just as with fine art, the valuation of yachts is highly subjective and often problematic. Comparators can be difficult to find. Vessels may well be unique. Second-hand values can fluctuate considerably, depending on what other yachts are available on the market at the same time.
Getting valuations right is crucial. In 2015, an insured failed to recover a total loss claim by declaring a value of €12 million when the yacht was up for sale at €8 million. Not every over-valuation will amount to a misrepresentation and, now that the Insurance Act 2015 is in force, the insurer’s remedy for any misrepresentation will be proportionate, so it is more likely that claims will have to be paid (at least in part).
Compensation for late payment of claims
The yacht and HNW market prides itself on claims service excellence. Disputes between insurers and their insureds are rare. The pressure to make quick claims settlements will only increase. Insurers need to be alive to the potential exposure to pay damages for late payment of claims. As from 4 May 2017, s.13A of the Insurance Act 2015 implies a term into every contract of insurance that the insurer must pay claims within a reasonable time. What is reasonable will depend on the circumstances of each case.
Contracting out of the term is not permissible as against consumer insureds, which will catch many yacht, fine art and HNW policies. That may encourage more insurers to make use of provisions - such as those in the American R12 form - which require the insured to file a sworn proof of loss within 90 days of the event giving rise to a claim. The reasonable time to pay a claim cannot start prior to filing of such a proof. If the policy terms make filing the proof in time a pre-condition of liability, a failure to do so may give insurers a complete defence to a claim.
Subrogated recoveries for yacht and fine art claims are seldom straightforward. What is required by way of policy indemnity may far exceed what any responsible party would be liable for in law.
Owners of ships can usually limit their liability by reference to the tonnage of the ship. Recourse against yacht builders and equipment manufacturers is often limited to the cost of replacement parts, and exclusions of consequential loss are commonplace.
Until recently, the English courts have given such exclusions a very narrow interpretation.
A decision in a recent shipbuilding case Star Polaris LLC v HHIC-Phil Inc.  bucked the trend and could see the start of a return to a more commercial interpretation in these contracts. This will benefit shipyards and their liability insurers, by greatly limiting the scope of financial loss recovery available to yacht insurers for defect claims.