18 December 2013

Losses and Lessons: Underinsuring your boat can cause an unfortunate ripple effect

Accidents happen. That’s why we work to ensure that our clients’ prized vessels are properly covered should disaster strike.

Occasionally, one of our clients requests that we insure their boat for less than its market value. Beyond simply saving on premium, the reason some policyholders underinsure is based on their own calculation of what it would cost to address any major repairs in the event of an accident. As the following example will demonstrate, the reason we strongly advise against underinsuring is not to collect more in premium but because there are several other factors that need to be considered when a boat is declared a total loss.

One of our new policyholders had recently purchased a beautifully restored Boesch runabout for $50,000. Figuring that the odds of the boat being stolen or completely destroyed were low, our client decided, against our advice, to insure the boat for only $25,000. This was enough, he figured, to pay for any accidents that were likely to occur. After a enjoying the boat through the summer, the owner borrowed a friend’s truck to tow the boat to a storage facility near his home. Not being familiar with the truck, he caused an accident when he made contact with a car while entering the expressway. Although no one was injured, the boat slid off the trailer and suffered a very large gash down one side of the hull. Coincidentally, total damages came to approximately $25,000, the limit of his policy.

Had the boat been properly insured for $50,000, this loss wouldn’t have been a problem. Hagerty would have paid to repair the boat. However, because the boat was underinsured, it was deemed a total loss. This left the policyholder with two options. He could accept the total loss payment of $25,000, which would leave him far short of the $50,000 needed to purchase a replacement boat of similar kind and quality, or he could retain salvage on the boat and accept a reduced payment. While the salvage value of a boat will vary significantly based on the type of loss, in this instance the boat was still structurally sound, resulting in a salvage value of $10,000. That meant that if the client opted to retain the boat, he would have only $15,000 to use towards repairs.

Unfortunate situations like this can be avoided by insuring your boat for its full market value. It’s important to remember that the more underinsured a boat is, the quicker a loss will reach the total loss threshold, at which point the insured will have to choose between taking a total loss payout for less than the actual value of the boat or paying to retain salvage and having even less to use for repairs.

To find out more about Hagerty's Classic Boat Insurance, click here.

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