Builder’s Risk Insurance: There When You Need It Most?

Ensuring appropriate builder’s risk insurance is in place when undertaking a new build or a substantial refit, repair or conversion is a crucial element of the effective management of the risk associated with such projects.

Entrusting a shipyard to undertake significant work, often valued in the hundreds of millions, is a big decision. Builder’s risk insurance helps mitigate that risk by ensuring that, should the yacht be damaged during the course of the works, insurance will respond to that loss. The HFW yacht team has been instructed on most of the major shipyard yacht casualties in the past decade. Many of these have been caused by fire and several have resulted in the total loss of the yacht. However, other unforeseen circumstances can arise during a project, such as shipyard insolvency, which can be equally challenging, even where the yacht is not lost.

Whilst builder’s risk insurance is intended to make the owner whole after an insured event, not all policies offer the same level of protection. There is enormous variance in the policy wording, the effect of law and jurisdiction on the policy coverage, the quality of the brokers and the standing of the underwriters. Of crucial importance is that the nature and placement of the policy aligns with the terms of the shipbuilding or refit and repair contract. It is critical to know that the insurance will respond in a way that is meaningful and valuable to the owner.

After a major loss, an owner may wish to simply receive the insurance proceeds directly rather than via the yard, and then consider next steps, rather than being compelled to rebuild or continue any future projects at the same yard. This is especially important when the underlying incident has put the yard’s solvency in the balance.

Shipyards often have very long-standing relationships with their builder’s risk insurance providers and may be unreceptive to suggestions for change and requests for greater transparency about the true cost of builder’s risk insurance. This can make it hard for an owner to make an informed decision about whether to arrange the insurance itself. The fact that this might be an option is often overlooked, and generally unpopular with builders, but can result in a cost reduction for an owner and allow greater flexibility to secure cover on terms and with stakeholders of its choosing.

It should also be remembered that there are things that builder’s risk insurance cannot fix. It cannot ensure yard capacity or slot timings to start a replacement project. It cannot source a replacement yacht for that season’s sailing. It cannot replace the thousands of hours of lost design, management and procurement time. It will not always fully compensate an owner for lost owner’s supplies, materials and possessions (often including custom built tenders and other high value equipment) which were not provided by the yard. It cannot ensure that a design, which was historically compliant with the rules of flag and class at the time of approval, is still compliant when a replacement vessel is built.

Whilst builder’s risk insurance is clearly a critical component, it is also important to understand its conceptual limits and its specific implementation to a contract. The policy terms, placement and integration with the build contract should all be scrutinised, as these elements are all crucial to the successful risk management of a new build and the overall outcome of the project.