Yacht Insurance 101 What Does Latent Defect Mean

Yacht Insurance 101:
What Does Latent Defect Mean?


The second most important aspect of boat buying, aside from making the purchase itself, is insurance. These days, you can never go around buying things without at least some guaranty that you will be covered in case of loss or damage.

Insurance is your safety net. When you make an investment, there are risks involved. Having insurance is similar to providing yourself some protection against those existential risks.

Perhaps the single biggest investment you have to make is a yacht. For most people, it is either a home or a car, but for boaters and lovers of the sea, it is a yacht or a mid-size powerboat.

Now, when you make an investment, you leave yourself open to all sorts of risks, which could leave you financially handicapped if not managed properly. Having yacht insurance is your way of keeping those risks down to a more manageable level.

Depending on the type of coverage you want and your insurance company, you have several options when it comes to yacht insurance coverage.

The types of yacht insurance coverage include the following:


* Medical Payments Coverage

A medical payments insurance policy offers coverage of medical expenses incurred due to injury in a boating accident. Some companies offer coverage not only for you, the boat owner, but also for passengers as well.

* Watercraft Liability Coverage

This policy offers protection in case of an accident, causing injury to a person in the water. This is the marine insurance counterpart to third person liability in car insurance.

The situation contemplated is an accident in the water, which results in injury to a person, such as a water skier or a swimmer. Not only that, it also includes coverage for damage to another boat or a dock.

* Physical Damage Coverage

This type of coverage contemplates several situations which could result in damage to your boat, such as collisions, breakdowns while in the water, damage to boat equipment, damage while transporting your boat, as well as protection from theft.

But regardless of the type of yacht insurance you have (whether you have all or just some of them), you will most likely encounter the term "latent defect."

Most insurance policies for yachts and powerboats include a latent defect clause – that is a specific provision for coverage in case of latent defects in the vessel.


Latent Defect Clause: What is Covered

Now, for laymen who are unfamiliar with a lot of legal terms, the phrase "latent defect" is a constant source of question. What does it mean? What does it involve? What is its extent?

The term itself is very broad, and it is very difficult to pin it down into a single context. In legal parlance, a latent defect is any defect that could not be known nor discovered in an inspection or test as the law may reasonably require under the circumstances. That is, the defect cannot be detected despite an inspection by a reasonably prudent man.

To put it simply, the defect is simply not apparent to the eye even after a thorough inspection.

It is important to understand that a latent defect clause in your yacht insurance is not meant to cover a defective vessel. The reason is that doing so would be the same as providing a warranty for a defective product, which has never been the responsibility of insurers.

Rather, this responsibility falls under the warranties of a manufacturer who needs no paper to sign in order to make those warranties binding since these same warranties are implied.

The moment the manufacturer sells you his product, he is making a warranty that the product is in good condition and that he shall be liable for any defects, whether in the form of replacement with a new product or payment for damage or loss you incurred as a result.

On the other hand, the insurer typically provides coverage for damages and losses incurred due to causes other than inherent defects in the product. Even so, many insurance companies provide coverage for losses and damages that are incurred as a result of a latent defect.

In short, the policy covers the resultant damage but not the defect itself.

To illustrate, let's take, for example, a vessel with an erroneous hull lamination. Because of this latent defect, the hull breaks open while the vessel is at sea, causing it to sink. In such a case, if your policy has a latent defect clause, your insurance would cover the damage and loss you suffered.

Now that you know what latent defect covers, let us further break the term down to even simpler terms by going through the different aspects of damage covered by a latent defect clause.


Components of a Latent Defect Clause

The main reason for much confusion with the term "latent defect" is the fact that it is a very broad concept. Its definition is not only exclusive to all defects that are unknown and undiscoverable because as time goes, many of these latent defects will become apparent. As such, the latent defect becomes an apparent defect.

Courts have held time and time again that any kind of wear, deterioration or normal stress does not constitute a latent defect. Since every material naturally tends to age, deteriorate and wear out, what then constitutes a latent defect?

A latent defect includes fault in the workmanship or the material itself. Thus, it may include faulty design but only in so far as damage results from such faulty design but not for the correction of the faulty design.

Are you confused yet?

Don't worry. You are not the only one. To stave any confusion, let us go through each component covered by a latent defect clause, as follows:


* Error in Design

Design means all specifications involved in how a vessel is to be built as well as repaired. Thus, design is primarily concerned with the form and function of a vessel, the choice of materials used, and lastly, the manufacturing process to use in building the vessel.

If you notice, all of these factors are considered before manufacture of the vessel. As such, design errors or faulty design involve any defects that are present before the vessel was even built.

For example, after a short time at sea, a boat with a balsa cored bottom becomes saturated with water. This could be an error in design if: (1) faulty lamination; or (2) balsa was an improper choice of material for the core.

* Faulty Material

By "material," we are referring to something which is used to fabricate something else. Thus, it can be said that a material exists in three states: raw, processed, and finished.

For example, let's take a log cut from a tree. This is a prime example of a raw material. When you cut the log into planks, it becomes a processed material. Make the planks into pre-finished plywood and you have a finished material.

Making a distinction between the three states of material is relevant because at each point in the manufacturing process, an error could occur.

* Premature Failure

As the term itself indicates, premature failure occurs when the material does not achieve its expected service life under normal circumstances.

This can be quite tricky as disputes may arise as to whether the premature failure is due to an error in design or faulty material used.

To properly determine the real cause of the premature failure, it would have to be taken on a case-to-case basis, considering all the facts attending in a given situation.


Damage

It was mentioned earlier that yacht insurance covers the damage or loss and not the defect itself. So what is damage? Again, here is another broad term that we have to grapple with.

To eliminate useless dialectics about what damage constitutes, let us just focus on damage as contemplated in a latent defect clause of your yacht insurance. Most policies would include the following lines, which covers latent defects:

"…excluding the cost of repairing or replacing the defective part."

If that is the case, then does this mean that if the part is damaged by the defect, it is not covered by insurance? So what then is the purpose of having a latent defect clause? One might ask.

However, the former statement is erroneous. As you supposed, if the clause is taken in that context, it would render the same practically useless because there would be nothing to cover when the clause itself excludes that which should have been covered.

Instead, let's approach this from a different angle. Taking the above example of a swamped vessel with a balsa core bottom, the defect causes the plies to separate, which leaves the hull vulnerable to the damage caused by hydraulic erosion, thus damaging the bottom.

To constitute a latent defect, the part itself must not be defective and the material itself must not be defective. Rather, the defect must be due to other circumstances, such as an error in design because of faulty choice of material, where the material is defective because of an error that occurred during its processing.

In other words, this latent defect is the primary reason why the water got into the core in the first place and got the hull damaged. The means by which the water leaked into the core is the defect.

To put it in yet a different context, the defect is not the use of a specific material for a particular part of the vessel. Rather, it is how this material was used, which constitutes the defect. In such a case, the damage that results from that defect is covered by a latent defect clause.



Now, remember that normal wear and tear can never give rise to a latent defect. The term is wholly confined to any manufacturing errors in the materials, design and workmanship.