Boatyards and their liability - can they contract it away?

by Des Ryan on 30 Apr 2011 If you sign a work order with a shipyard that absolves the shipyard from liability, what are the ramifications? Could this void the boat's insurance policy? Can the shipyard really be absolved from negligence? Des Ryan here discusses some of the issues in a cautionary and awareness-raising article for all yacht owners:

Obviously the answers depend, to some degree, to which country you are in, but in general these these provisions seek to shield the service provider from negligence, or alternatively, limit their liability to a small fixed sum.

The bottom line is, if the protective language is properly worded, it is fully enforceable in most countries - but what is 'properly worded'?

As a general rule, maritime law recognizes the rights of parties to enter into maritime contracts on the terms they choose. However, not all the terms they choose are enforceable under every circumstance. Some may be recognized and enforced as the product of bargaining between the parties to the contract. Others may be invalidated as against public policy regardless of the parties' agreement.

When a shipyard enters into a contract to repair a vessel, it is exposed to three different types of liability. It can be liable for breach of contract, that is, the failure to perform the work as stated in the contract. It can be liable for breach of the implied warranty of workmanlike performance. And, it can be liable for negligence.

Because of the potential financial consequences to the shipyard and/or its insurer for improper repairs, shipyards more often than not put clauses commonly known as 'red letter' clauses in their contracts, which attempt to disclaim or limit liability. Unfortunately, the courts around the world where these kinds of cases occur do not take a uniform approach when determining whether such clauses are valid.

While it is sometimes enforceable to absolved from liability for negligence, a clause 'relieving the shipyard from loss or damage from any cause whatsoever may be unenforceable in the case of negligence of the shipyard or its employees, because such negligence was not specifically mentioned. There is also sometimes a difference drawn by courts between 'negligence' and 'gross negligence'.

Another important issue is that boatyards sometimes also require the boat owner to protect the yard against anyone else who may want to sue them for that damage.

After waiving the right to sue the boatyard for damage, a boat owner may be inclined to file a claim with his or her own insurance company, which leads to another of the questions. How is a claim like this handled, and can it void the insurance policy?

We can’t answer this question without looking at the particular facts of a case and reading the boat owner’s actual insurance policy, but we can make some general observations.

When a marine insurance company pays a claim to a boat owner, the owner is generally required, under the language of
the insurance policy, to assign back to the insurance company his or her right to sue the party responsible for the damage. This is known as an insurance company’s right of 'subrogation.'

Marine insurance policies also include language that prohibits the boat owner from doing anything that would compromise the insurance company’s right to subrogation.

As noted above, most boatyard work orders which require a waiver of any claim against the yard, do so in the event that the boat is damaged at the yard. The contractual language often takes this waiver a step further by including a waiver of the insurance company’s subrogation rights.

These waivers are usually enforceable — and since the waiver impairs the insurance company’s subrogation rights, it
amounts to a breach of the insurance policy by the boat owner, which will result in a denial of the claim.

So, if a yard may absolve itself from liability through the language of its work order, and if the boat owner is breaching
his or her insurance policy by agreeing to the provisions of the work order, what can a boat owner do?

1. First, every boat owner should read his or her insurance policy carefully, to fully understand the circumstances under which an insurance claim may be denied. When shopping for insurance, try to get a copy of the policy before deciding on one insurance company over another.

Many of us select an insurance company simply by looking for the lowest premium, but the language of the policy may vary considerably between companies.

2. Next, boat owners should talk to their insurance broker before going to the yard. The insurance company may offer a policy rider that is available for an additional premium, to provide coverage in the event that the yard agreement seeks to waive claims against the yard for damages.

If a boat is moored in an area with several boatyards to choose from, the owner may want to shop around to compare the contractual language used by the various yards. Unfortunately, this contractual language tends to be fairly standard from yard to yard.

If, however, the project is big and the yard is hungry, a boat owner may be able to negotiate the offending provisions out of the work order — in which case, the insurance policy won’t be affected at all.

The most important thing to take from this discussion is the need to be informed. Boat owners tend to look at insurance policies and yard visits as being fairly routine events, but this is often not the case.

Boat owners should read their insurance policies and the service agreements with all of the vendors that work on their boats. If any of the provisions in these agreements are problematic, they should be discussed with the service provider and a qualified marine insurance broker.

3. Finally, if the legal effect of the language is in question, a qualified lawyer experienced in marine insurance coverage should be consulted.