Due Diligence, Insurance and Boat Building

It was a devastating blow to all involved at Mullen & Wing shipyard when a fire gutted the largest construction hall, destroying the 50 metre Star Fish that was two-and-a-half years into her three-year build worth in excess of NZ$50 million. But imagine if this was your dream-build and after the event you learn you weren’t covered by insurance.

While this supposition may seem too far from the realms of reality, for a period in Australia’s boat building history it was common that insurance policies were not held by fibre glass boat builders as either the cover was not offered (due to a lack of understand of the industry by insurance companies) or when offered the premiums were prohibitively expensive. However, fibre glass construction has become the norm along with insurance policies that are tailored to meet special industry requirements in and industry where stringent legal requirements control the storage and use of chemicals.

From a boat owner’s perspective it’s sometimes hard to recognize the importance of insurance when all we can picture is the wind in our hair while sipping mojitos and cruising through the tropical waters of the Caribbean. And while there is no suggestion of the Starfish builders were not holding the requisite insurance the potential size of loss and damage that can be caused highlights the importance of making sure that the builder has the requisite up-to-date general and specific insurances being, for the owner/investor a question of due diligence.

Due diligence

Due diligence for those not familiar with the terms simply means carry out research that looks at a whole series of factors from a company’s viability through to talking with past customers and their experiences along with all the relevant legal searches to establish the viability of the business in question. The importance of carrying out due diligence on your prospective builder cannot be overemphasised and should form part of the process before any contracts are entered into especially, where the vessel is being constructed in a foreign country.

Often there may be cost benefits to build in certain countries and the reality is that the laws of that land where the build occurs will prevail as generally a jurisdictional clause will be pro-builder. However, the reality is that if the builder constructing your boat does not carry insurance and suffers significant loss through a fire or by other means, insolvency or bankruptcy may follow. But even if this sequence of events is not the case the cost of recouping your loss in a foreign country under their laws depending on the size of loss, may be commercially and legally not viable.

Mandating Insurance

While the practical reality to recoup losses may be very different to the legal reality, I would always argue that an insurance clause should form part of any build contract mandating the need for an up to date relevant insurance policy. For example often cost benefits are offset by high risk in a country where laws are applied arbitrarily and thus bringing into questioning the enforceability of a contract and any savings benefit. Equally in countries with developed legal systems risk may come in a different shape and form being such as the recent down turn in the European economy. According to a 2010 industry paper by Western Washington University called ‘Boat Building Snap Shot’ globally there is a shift toward larger and more expensive boats driven by high demand in Europe for luxury cruisers and mega yachts. While there were several factors contributing to this success such as technical research and development in design, a secure financial sector underpins this confidence especially as long lead times are required in the construction. However, the problems with Euro sector and austerity measures have certainly placed stress on the financial sector threatening the growth that was projected especially as boats are considered a luxury item.

Which Insurance

Armed with this economic, political and legal knowledge as well as practical thinking you’ve weighed up the positives and negatives of whom, when and where in respect to the build and now the question falls to what type of insurance should a builder have? Insurance coverage for a Boat builder should cover loss of or damage to the hull and machinery of vessels you are constructing (including materials in your possession). In addition you may become legally liable for loss of or damage to property belonging to others or for death or personal injury caused to third parties during the construction. Policies should also cover warranties and defects being beyond the build period and in some circumstance expand to include design and engineering faults.

Evolving law

In the United States of America the most recent catalyst for change is the Texas case where Brunswick the builder of Sea Ray and Mercury Marine was ordered to pay damages (money) and medical expenses due to a propeller striking a teenager’s leg causing it to be amputated. While this case may only be influential in respect to the law of other countries, it certainly highlights the question as to how far you want your builder’s insurance to extend when it comes to protecting you.

Legislated cover

Closure to home in 2010, the Federal Government’s Australian Consumer Law (‘ACL’) replaced the aging Trade Practices Act (TPA) and unified several different state consumer protection systems. This legislation sets down the legal standards when it comes to ensuring both the safety and quality of services and goods sold in the Australian marketplace, including imported goods sold in Australia. And while there are some limitations on who is considered a consumer in respect to the value of the purchase, much componentry would fall within the act giving rise to consumer warranties that you would want to be covered.

The ACL states that an ‘affected person’ may pursue damages against a manufacturer of goods, if the manufacturer has, in trade or commerce, supplied goods to a consumer that are not of ‘acceptable quality’. Goods here aren’t just referring to the finished product, but also include any accessory or component parts. This means a consumer is able to sue a person who makes, assembles or simply applies their own name, brand or mark on goods or imports goods, where the quality is not acceptable. So what is ‘acceptable quality’ as with most things in law it’s not black and white. The question is, would a reasonable consumer still have purchased the goods had they known about the flaw at the time of supply. In making this determination, the court will look at the nature and price of the goods, statements or representations made about the goods by the manufacturer, as well as any other relevant circumstances. These include whether the goods:

  • were fit for all the purposes for which they are commonly supplied, free from defects
  • are of acceptable appearance and finish
  • are safe
  • and finally are durable to the extent that a reasonable person would regard as acceptable.

The ACL has meant a shift in the balance of protection to consumers meaning that builders and manufactures will require broader insurance plans the cover warranty issue that may not reported for a number of years. But not all countries have the same level of consumer protection as described above thus highlighting the importance of due diligence, coupled with a good contract that mandates the relevant insurance from a reputable insurance company. And while due diligence is often considered a necessity when buying a business or a house and land but it’s often not considered when building a boat. Where I believe it’s equally important when considering your next boat-build. The practical reality is that it is much better to have also researched your boat builder so as to limit your exposure in the future given the legal mine field in each country coupled with economic and political uncertainty.