A complainant has lost their challenge to overturn a claim denial for a yacht accident that left two dead after the Australian Financial Complaints Authority (AFCA) ruled the insurer was entitled to deny cover for the “unseaworthy” vessel.

The pleasure craft policyholder, referred to as RT, and a fellow crew member died after part of the insured racing yacht’s keel broke off, causing it to capsize while competing in a race on February 23, 2018. Four other crew members on board the ship were also injured in the crash.

The complainant sought compensation of $250,000 for damage sustained to the boat and $50,000 for personal injury to the insured, as well as an additional $50,000 for third-party liability, which was later withdrawn.

After assessing the ship, Club Marine denied the claim. It said its policy excluded incidents caused by “poor workmanship, lack of repairs, gradual degradation”, and the boat had been “unseaworthy” at the time of the accident.

The insurer relied on evidence from a marine architect from the Department of Transport (DOT), referred to as C, who examined the craft after it was towed to shore.

C investigated the vessel alongside police and government officials and consulted with expert builders and material technologists to assess the cause and extent of the damage.

The maritime architect said that due to the search size, only the keel’s head was recovered, while the bottom part of the keel could not be found. C said aspects of the investigation relied upon written records and technical analysis of found pieces.

C concluded that there was no evidence of impact damage on the keel and that water ingress from “substandard” modifications caused the keel’s structural integrity to deteriorate. The investigation noted that the keel was replaced in 2009 after it was damaged and that RT made further changes to it before the incident.

A DOT report to the coroner dated November 12 2018, said the vessel capsized due to “catastrophic failures of its keel” and that the retrieved part of the keel showed considerable damage believed to have occurred over time.

The report attributed the damage to the modifications and said the keel was “no longer capable of resisting the forces acting against it”.

The complainant argued that a combination of weather conditions and carbon fibre bonding issues resulted in the accident. They also said without the missing part of the keel, impact damage could not be ruled as a potential cause.

They maintained that the vessel had been in a reliable state before the event, noting that an insurer survey report from July 18 2017, described it as a “well-founded yacht in very good condition”.

The complainant also said the yacht was permitted for open race sailing by Australia Sailing and had been inspected nine times between 2013 and 2018, including two days before the race.

They referred to the DOT’s report that commented, “structurally, the design and further modification of the keel are not considered to be the cause of failure”.

The complainant alleged that the crash occurred due to resin not fully penetrating the carbon fibre of the ship’s keel, which reduced the material’s strength. They said this was a “latent defect” covered under the policy terms.

The AFCA panel said a key issue in the dispute was defining the term “unseaworthy” and interpreted a Macquarie Dictionary definition to determine the word as “not adequately and safely constructed and equipped to sail at sea”.

It noted that the Marine Insurance Act 1909 (Cth) defined the term “seaworthiness” but said that under the Insurance Contracts Act 1984 (Cth), this definition does not apply to pleasure crafts.

The panel said the overall evidence supported the insurer’s explanation for the accident, saying the information from the DOT’s report confirmed that the modifications led to water ingress that caused the ship’s “eventual failure”.

It acknowledged that the ship was inspected nine times but said this did not mean that the keel was “thoroughly inspected” or that the deterioration was not observable. It said it was not satisfied that the definition of latent defect had been met.

AFCA said that while wind and sea factors could have contributed to the crash, the water ingress caused the ship to be unable to withstand the conditions. It also noted that the weather was considered safe by race operators and that no other boat sustained similar levels of damage.

It commented on the event’s unfortunate circumstances but said the insurer was not required to cover the losses.

“The panel acknowledges the serious and tragic nature of the claim event and its consequences. However, the insurer is entitled to rely on the terms of the policy to deny the claim,” AFCA said.

Click here for the ruling.