The marine insurance industry has pointed to a growing trend among yards undertaking refit or warranty work requiring, as a term of the refit contract, that the owner procures a waiver of subrogation rights. From our own experience, and that of a number of our contacts in the marine insurance industry, this is now effectively standard practice.
In some quarters, a waiver of subrogation rights is viewed as tantamount to transferring the shipyard’s liability under the contract to the owner. We beg to differ. What is really happening is a re-allocation of liabilities between the two sets of insurers. By waiving its subrogation rights, the owner is forgoing the right of its insurers to step into its shoes and take action against the shipyard where the shipyard is responsible for causing a loss. In other words, the owner is not shouldering the yard’s liabilities, but restraining the rights of its insurer. In our view, there is little reason to treat such a waiver with much trepidation. In this short article we set out a few reasons why.
First, let us consider the yard’s position. Any reputable yard will carry liability insurance of several million, perhaps tens of millions, of Euro. But in a world where superyachts can quite easily tip the scales at €100m or even €200m in value, that level of cover may well not be enough, and could leave the yard exposed to further claims in damages of a size which could, quite literally, wipe them out. With this in mind, it is not difficult to understand why a yard may want to do away with the possibility of the owner’s insurers commencing proceedings against them.
From the owner’s side, it should be borne in mind that provided your insurance broker and legal team have done their job, any liability which could arise out of a refit should be an insured risk. The practical effects therefore, of a waiver of subrogation rights should only stretch as far as to alter the allocation of risk assumed by the respective insurers; this allocation being the essence of any contractual liability regime. Any adverse effects should therefore be limited to a potential increase in premium made payable by the waiver.
The real risk is in badly worded, and excessively onerous, waivers signed in haste by the captain or the vessel managers on the owner’s behalf. This is a risk easily avoided with the assistance of the owner’s superyacht lawyers or brokers, who should be consulted well in advance of the arrival of the vessel at the yard – an issue we have worked on recently on behalf of one of our owner clients. Aside from the cost provisions of the contract, there are a few other points that an owner would do well to consider:
1. Reciprocity – Where an owner is required to waive its subrogation rights, this provides good grounds on which to negotiate a reciprocal waiver by the yard. Admittedly the likelihood of the owner being the cause of an insured loss under the yard’s insurance is low, but this can be of value nonetheless.
2. We have heard of circumstances in which captains are presented with disclaimer forms which give up the owner’s subrogation rights when their yacht is at the yard’s door. This underhand tactic can rob the owner’s legal team of the time to negotiate a reciprocal waiver, as discussed above, and put the captain at risk of signing up to other onerous terms.
3. Lastly, it is essential that the owner’s team ensures that the yacht’s underwriters are promptly informed where a waiver of subrogation is contemplated, as a failure to do so would constitute a material non-disclosure, leading to a denial of cover by underwriters in the event of a claim.
This blog post first appeared as an article in the September 2012 edition of “The Superyacht Owner” magazine, co-authored by Quentin Bargate and Adam Ramlugon.