Recently, a client wanted to purchase a tall ship at a bargain price. Our dilemma was this: What is the vessel really worth?
He asked me to insure the vessel at replacement cost, a perfectly normal request. But logic told me that if the vessel were destroyed, my client would reap a huge profit because of the difference he paid for the vessel and the true replacement cost to build her from scratch at today’s prices.
I asked my client to get a current condition and value survey from a marine surveyor who really knows wooden vessel construction (most tall ships have wooden hulls). This is a tough assignment because few surveyors are familiar with wooden vessel construction. These surveyors tend to know the value of these ships because they are a small and unique fleet, with an equally small number of unique building and repair facilities.
The survey shows the value in two ways. The replacement cost in today’s dollars and an estimate of the current market value of the vessel. This will hopefully be based on comparable sales of these vessels.
My task is finding out what an experienced ocean marine insurance company underwriter will accept as the value for this vessel. Generally, underwriters want to insure for the market value even though this creates a dilemma because market value is not what insurance policies say. The usual ocean marine hull insurance policy pays on a “new for old” basis — the replacement cost for any damaged part of the ship without depreciation. But aren’t we insuring it for the depreciated market value?
In the insurance company’s logic, they do this because they don’t want the insured to benefit in case of a total loss. If they insured the entire vessel for replacement cost, the insured would get a lot more than they have invested in the vessel.
So the insurance industry takes a hit for partial losses to avoid the bigger hit for total losses. Go figure.