Insurance against builder going bust

[westernman]

I am toying with the idea of getting a boat built by a yard in Turkey. However, I am a little concerned about the possibility of losing my money if for some reason the builder goes t*ts up before finishing the boat.
I know usually contracts are arranged with stage payments - but I do not really want to recover a half finished boat.

So do any of you know if some kind of insurance is possible for this kind of risk?

 

[satsuma]

I am toying with the idea of getting a boat built by a yard in Turkey. However, I am a little concerned about the possibility of losing my money if for some reason the builder goes t*ts up before finishing the boat.
I know usually contracts are arranged with stage payments - but I do not really want to recover a half finished boat.

So do any of you know if some kind of insurance is possible for this kind of risk?

Typically you might get a performance or guarantee (refund) bond in place from the builder. This is usually in the form of a letter of credit. However if you go down that route, you can expect the builder to require the same from you, to ensure his own payment, and for him to expect you to carry the costs of this arrangement!

You can ask for bank references, references from other clients etc to give a little more peace of mind.
Failing that, I might be able to find out what their reputation is like in the Turkish market, if you send their name?

 

[rafiki_]

JFM is the forum expert on this sort of thing.

 

[Tranona]

I am toying with the idea of getting a boat built by a yard in Turkey. However, I am a little concerned about the possibility of losing my money if for some reason the builder goes t*ts up before finishing the boat.
I know usually contracts are arranged with stage payments - but I do not really want to recover a half finished boat.

So do any of you know if some kind of insurance is possible for this kind of risk?

There is always some risk attached to such activities, and perhaps greater when dealing with another country. However, the builders are equally aware that they need to give potential buyers confidence in their stability to attract orders. See what their proposed contract is and then make an assessment of where the risks lie and what the alternatives are to minimise the risk. Doubt you will get an insurance to take all risk from you to the point of refunding any money already paid if it goes wrong. Your intention is to buy a boat so all solutions will have that aim in mind. One solution already suggested is a bank guarantee that the yard will complete your boat, or that funds will be available to complete the boat should the builder go bust. Equally the builder will have just the same concerns about your ability to pay for the work they do so will want some form of guarantee, perhaps by an irrevocable letter of credit with agreed milestone payments and transfer of title.

It is unrealistic to think you could get an arrangement that allows you to just walk away and get your money back if things go wrong, but you need to ensure your title rights are protected and the builder has the resources and capacity to complete the contract.

If you don't feel confident in negotiating the contract yourself there are specialist project managers you can hire to look after your interests.

 

[MYStargazer]

If you don't feel confident in negotiating the contract yourself there are specialist project managers you can hire to look after your interests.

http://www.matrixlloyd.com/

 

[prv]

Doubt you will get an insurance to take all risk from you to the point of refunding any money already paid if it goes wrong

I don't see why not in principle, though the premium may not make it an attractive solution. It seems to be possible to insure against practically anything as long as it's not conducive to fraud.

My school had one week each year in which we were encouraged to do fundraising activities for a nominated charity. A tradition had developed of doing things out of the ordinary, not just rattling tins or straight-out asking for money. The modern style of "sponsor me to do X fun thing I'd like to do anyway" was frowned on as well, though someone did collect sponsorship in exchange for spending all day inside a chemical warfare suit and respirator. Anyway, when I was in the sixth form, one of my colleagues who had just turned 18 (and hence could sign the contracts) was able to run a dice-rolling game that actually offered a brand-new car as a prize. He had very enterprisingly arranged with a local garage to park one of their cars by his stall for a day (they got some free advertising, and potentially the sale of the car at list price), and with an insurance company to cover the risk that someone would win. All the insurers required was that he video each dice roll (he knocked up a baize-lined box with an old camcorder mounted above it) so he could prove that a winning roll was genuine. At a pound a go and even after subtracting the insurance premium, he comfortably won the informal competition for generating maximum money for that year's charity.

By comparison, insurance against a boatbuilder going bust seems pretty normal. Apart from the larger sums, it seems rather similar to the cancellation part of package holiday insurance.

Pete

 

[Tranona]

By comparison, insurance against a boatbuilder going bust seems pretty normal. Apart from the larger sums, it seems rather similar to the cancellation part of package holiday insurance.

Pete

The big difference is that the chances of holiday cancellations is small relative to the number of people insuring against it - that is the risk is spread over a large number of people. The probability of cancellation in any one year is predictable based on the statistical analysis of previous years' claims. So easy to price the risk.

The number of people buying custom built boats in Turkey is pretty small so very difficult to quantify the risk. Also unlike holidays which are a time limited intangible where once the time has passed it is worthless, a boat has a value at all stages of the process. So a typical contract will at least have some mechanism for determining the title to the asset at any given time, so the risk is in the builder not being able to complete the contract, and it is this risk that can be covered by a bank guarantee. This could be described as insurance, but it is not based on the probability related to the risk but ensures certainty of completion. It also makes sense for the buyer to insure the boat when it is in build against other risks such as fire.

If you have a look at the BMF model contract for new build you will see the typical conditions covering such things as transfer of title and who (buyer, builder) is responsible for what. That is why I suggested Michael gets a quote and contract from the builder and then assesses the risks and how best to minimise them, which might include renegotiating the contract or transferring the financial risk to the bank. Many builders, particularly in Scandinavia routinely offer bank guarantees, which in itself suggests financial stability and capacity to meet its obligations.

 

[westernman]

That is why I suggested Michael gets a quote and contract from the builder and then assesses the risks and how best to minimise them, which might include renegotiating the contract or transferring the financial risk to the bank. Many builders, particularly in Scandinavia routinely offer bank guarantees, which in itself suggests financial stability and capacity to meet its obligations.

Please explain how the financial risk can be transferred to a bank and also the bank guarantees offered by Scandinavian builders.

Thanks.

 

[Tranona]

Please explain how the financial risk can be transferred to a bank and also the bank guarantees offered by Scandinavian builders.

Thanks.

When you pay a deposit or a stage payment to the builder you potentially become an unsecured creditor should the builder go bust before you receive your goods/boat. The builder can make an arrangement with his bank to guarantee your payments so if he goes bust your money is secure as the bank will pay it to you. Clearly it is not cost free as the bank is taking the risk and the builder will include the cost in the price he quotes. It also has the effect of reducing the builder's borrowing capacity so they might be reluctant to do it. You may well have to offer a secure form of payment for the whole amount, perhaps through a letter of credit so that both the bank and the builder know they will get their money if they meet the terms of the contract.

An alternative is a contract such as the BMF model contract which transfers title in line with the value of your stage payments. However, this does not secure your deposit which you have to pay before work commences and it is likely to be messy if the builder does go bust leaving you with a part built boat which may not have the same value as the payments you have made. You also then have the problem of finding a yard to complete your boat. While this sort of contract is common in the UK I do not know whether Turkish yards use them.

That is why I suggested you see what sort of contract is offered so that you can determine what the risks are and how you might mitigate them. Clearly there are ways of successfully getting boats built in Turkey as many have been recently. Perhaps you need to find a project manager or surveyor who has worked with the yards to find out how best to proceed.