My boat is listed for sale through a California broker and I recently accepted an offer from a prospective buyer. The offer is contingent on a sea trial and survey, which will require the boat to be hauled out of the water at a local shipyard. Unfortunately my broker warned me that the fine print on the yard’s contract will probably include language which absolves them from liability for damage which may be caused by their negligence. Is this enforceable?
A: Most shipyard work orders and repair estimates include two very powerful clauses that are designed to protect the yard from liability. These clauses are generally enforceable and it is important for boat owners to understand the legal effect of these contractual provisions.
As noted by our reader, the first of these provisions is designed to relieve the yard of liability for their own negligence. The clause is known as an “exculpatory clause” or “red letter clause,” and if it is properly worded it will absolve the yard from liability for everything short of a reckless or intentional act. Exculpatory clauses in marine contracts are seen in many transactions, ranging from yacht brokerage agreements to salvage contracts, and the Ninth Circuit Court of Appeals has expressly held that they are enforceable in shipyard contracts.
Our reader asked only about the legal effect of an exculpatory clause, but he needs to consider another provision that is probably in the fine print of the shipyard contract or work order. Most shipyards include a “subrogation waiver” in their agreements with boat owners.
When an insurance company pays a claim to a boat owner, the company steps into the shoes of the boat owner with regard to any possible legal action against a third party who may have caused the loss. This process is known as “subrogation.” A subrogation waiver in a shipyard contract calls for the boat owner to agree – on behalf of his or her own insurance company – that the insurance company will not pursue the boatyard for negligence after they pay a claim to the boat owner.
A subrogation waiver may come into play in a case where a boat is damaged because of the negligence of a shipyard worker. The boat owner has no recourse against the yard because of the exculpatory clause in the yard’s contract, so the boat owner may decide to file a claim with his or her insurance company. Under most circumstances, the insurance company would then pursue a subrogation claim against the yard. But that’s where the problem surfaces.
Since the insurer “steps into the shoes” of the owner when a claim is paid, the insurer can have no greater rights than the owner, and the insurance company will probably be bound to an owner’s agreement to waive his or her claims against third parties. For this reason, most marine insurance policies include language which prevents the boat owner from waiving or otherwise interfering with the insurer’s subrogation rights. For example, the “Helmsman Yacht Policy” issued by Markel American Insurance Company includes the following language: “If you, or anyone acting on your behalf, take any action that impairs our right to recover, we may consider this policy void and without effect as to such loss.”
So, going back to our reader’s question, shipyard agreements typically include two very powerful provisions that are designed to protect the yard, and those provisions are generally enforceable. But they may leave a boat owner with no recourse in the event of a loss caused by the yard.
The best solution for a boat owner is to contact his or her marine insurance agent or broker well in advance of the yard visit. Ask the agent for clarification of the policy language to determine whether a subrogation waiver will in fact void the policy. The Markel policy referenced above, for example, includes several exceptions which allow a boat owner to sign a subrogation waiver in a slip rental agreement or a yacht racing registration form. An exception such as this may extend to a shipyard agreement, but written clarification should be sought by the boat owner through the agent or broker.
If the policy does not provide for any exceptions, or if the exception does not extend to a shipyard agreement, the insurance company may provide additional coverage for additional premium. In any event, this issue should not be ignored and an experienced marine insurance broker or maritime attorney should be consulted for more information.
David Weil is licensed to practice law in the state of California and, as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (weilmaritime.com) in Long Beach. He is an adjunct professor of Admiralty Law at Loyola University Law School, is a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. He is also one of a small group of attorneys to be certified as an Admiralty and Maritime Law Specialist by the State Bar of California. If you have a maritime law question for Weil, he can be contacted at (562) 438-8149 or at email@example.com.