Logic & Language and Forms & Facts Homeowners Coverage for Watercraft

It’s now boating season in most parts of the country, so let’s explore some watercraft coverage issues under homeowners insurance. For the educational and illustrative purposes of this article, we’re using the 2011 ISO HO 00 03 (hereinafter, the HO3). Needless to say, if you have a different edition or a proprietary insurer form, you’ll need to consult it. Even in the case of the HO3 form in question, my explanations below are, to some extent, paraphrasing the policy language so, in the case of a particular claim or coverage question, you always want to carefully read the exact form language.

There is some coverage in the HO3 form for both damage to the watercraft and liability for bodily injury or property damage to a third party. So, first, let’s quickly examine the coverage for damage to a watercraft.

The form has a liability definition of “Watercraft Liability” that says a “watercraft” means “a craft principally designed to be propelled on or in water by wind, engine power or electric motor. However, there is no definition of “watercraft” in Section I Coverage C for damage to a watercraft.

Damage to a watercraft is covered if caused by an insured peril but there is a sublimit of $1,500 for “watercraft of all types, including their trailers, furnishings, equipment and outboard engines or motors.” In addition, in the Coverage C broad named perils, damage caused by windstorm or hail is only covered while this property is inside a fully enclosed building. In addition, the theft coverage only applies while the property is on the “residence premises.”

Coverage C in Section I of the HO3 applies to any property you own or use. Therefore, the very limited coverage above applies to watercraft you own, rent, or otherwise use. In addition, with regard to nonowned watercraft, in Section II there is coverage for Damage To Property Of Others without regard to liability, but it applies only to damage “caused by” an insured and it specifically does not apply to the “ownership, maintenance, occupancy, operation, use, loading or unloading” of watercraft.

In other words, if you want to cover damage to a watercraft, owned or nonowned, under an HO3, you need to look at the liability coverage in Section II of the policy. Unfortunately, there you will find exclusions for damage to any property owned by, rented to, occupied, or used by, or in the care of an insured. So, to summarize, you are limited to $1,500 of coverage for owned and nonowned watercraft for damage caused by a covered peril, with limitations for the windstorm, hail, and theft perils.

Bodily Injury

So, let’s turn our attention to bodily injury liability. As mentioned earlier, the HO3 has a definition for “Watercraft Liability.” This means liability arising out of the ownership, entrustment to others, or failure to supervise or negligent supervision of anyone by an insured involving the watercraft. In addition, it means the maintenance, occupancy, operation, use, loading or unloading, or vicarious liability for a minor by anyone.

Section II excludes the “Watercraft Liability” (i.e., ownership, maintenance, use, operation, occupancy, etc.) for watercraft rented to others, used to carry persons or cargo for a charge, or used for any business purpose. There is also a racing exclusion, though it has a few exceptions (e.g., sailboats).

For any other exposures, there is no coverage other than those listed. In other words, as long as they are not involved in “racing,” rental to others, transportation for a fee, or business purposes, the ownership, maintenance, use, operation, occupancy, etc., of the types of watercraft listed below are, absent any other HO3 exclusions, covered by the policy.

Let’s examine the coverage by type of watercraft.

All watercraft in storage. Liability arising from any watercraft in storage is covered, again absent any of the aforementioned exclusions.

Sailing vessels. Owned or rented sailing vessels are covered if less than 26 feet long. If you don’t own or rent the sailing vessel (e.g., you’re operating a friend’s sailboat or you’re a passenger), it can be any length.

Inboard watercraft. Owned inboard vessels are excluded, period. Rented inboard watercraft of 50 hp or less are covered. Similar to sailboats, if you don’t own or rent the inboard watercraft, there is no exclusion here. So, if you and a friend rent jet skis at the lake or coast, you’re covered only if the jet skis are 50 hp or less. However, a literal reading of the policy indicates that, if you each rent a jet ski, then swap them, since you’re operating an inboard watercraft that you don’t own or rent, you have coverage. Explain that to an insured.

Outboard watercraft. Any outboard motor-powered watercraft of 25 hp or less is covered, even if owned. Any nonowned watercraft (rented, borrowed, using, riding in, etc.) and any owned watercraft acquired during the policy period is covered regardless of horsepower. For owned watercraft acquired before the policy period, the vessel must be declared at inception or the insured’s intent to insure it must be reported in writing within 45 days following acquisition.

So, to summarize, the watercraft liability exclusions in the HO3 apply mainly to certain owned and rented vessels. Needless to say, owned watercraft should be insured for both hull and liability coverage under a boatowners policy. In addition, because of the seriousness of exposures, the boat should be added to the insured’s personal umbrella policy. I own a pontoon boat and the cost to add it to my umbrella is $7 per year.

Speaking of umbrella policies, a more difficult exposure to insure is the rental exposure for insureds who do not own a boat or have a boatowners policy. While the liability exposure for the rental of vessels other than inboard watercraft may be covered by the HO3 policy, there is no coverage for damage to the rented watercraft. However, you may have umbrella policies that will cover that exposure. If not, then the insured is possibly incurring a significant uninsured property damage liability exposure.

Docks

One last thing related to watercraft before we leave involves insureds who live by water and have their own dock. In my case, our lake home is on a bluff with two flights of stairs down to a covered dock. The entire structure would now cost about $50,000 to replace. While my HO3 policy covers Other Structures, it only covers structures on my “residence premises.” My dock is not on my residence premises. It’s on property under the auspices of the Army Corps of Engineers. So, for HO3 Coverage B, I need to add the coverage and, if needed, ISO has a couple of endorsements to do this.

Just recently, someone posted on the NextDoor social media app in my neighborhood that they were looking for an unused slip on someone’s dock to keep their new pontoon boat. Another issue with the HO3 Coverage B is that there is no coverage for rented structures. Again, another exposure that must be addressed by endorsement. There is also a general business exclusion that could apply.

These are just some of the exposures involved in the ownership and/or use of watercraft. Some are covered by an HO3 policy, some are excluded but can be insured by endorsement or separate policy, and others may not be insurable at all.

If you have customers with these exposures (and you almost certainly do), it’s important to educate yourself to minimize the likelihood they’ll have an uninsured loss and you’ll potentially have an E&O claim.