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What Is the Purpose of a Flag State?

Posted June 16 2015


flag stateEver wonder why a yacht or ship had a certain flag on the back of it? Or a certain city and country under the name of the ship? No, it’s not just a flag of their favorite country, or where they are headed next. Believe it or not, those flags and countries have a significant purpose in the maritime industry. A flag state, or flag of convenience, is the state that a yacht or ship is registered or licensed under. Meaning that they have to follow the laws of that state. 

 

Why Do Yachts and Other Vessels Need a Flag State?

If there were no flag states, then who would regulate vessels traveling through the seas? Where would their jurisdiction begin and end? Typically, a vessel needs to be registered under a flag state for international voyages. It’s considered illegal to sail the seas without being registered, much like it is illegal to drive without a license, so think of flag states like the DMV in the United States, or the DVLA in the United Kingdom. 

Why Is Choosing the Right Flag State so Important? 

Choosing the right flag state is very important. There is a reason many commercial vessels register their flags offshore. It can impact how successful you are as a business, by having to follow certain employment and tax laws and other variables that can keep money from reaching your bottom line. It can also have an impact on your liability and privacy. This is why it is typical for many vessels to register offshore with a flag state that may be more “lenient” with certain laws, in order for them to make their business as successful as possible, or for owners to save as much money as possible.

Open Registry vs. Closed Registry

There are different types of registries, open and closed. Open registries allow vessel owners to be registered under their flag of convenience, and can staff a crew of many different nationalities. A closed registry is open only to vessels of that particular nation and must employ crew from that nation. 

The Most Popular Flag States 

The most popular flag state is Panama, with almost a quarter of ocean vessels registering there. Other popular flags include Liberia, Marshall Islands, Malta, Singapore, and Hong Kong. For those that are curious, the most popular flag state for yachts is the Cayman Islands, and the most popular flag state for cruise ships is the Bahamas, with many cruise lines having their ships registered there. Part of the reason yachts and cruise ships are registered in these countries is because the Cayman Islands and the Bahamas have open registries, allowing them to hire large groups of people from around the world, while not having to follow strict employment laws, like the ones that exist in the U.S. or Europe. 

Do you work onboard a yacht or cruise ship and do you have marine crew insurance? Read our blog, “5 Things You Should Know About Crew Insurance.” If you do happen to have the insurance you need, do you know that you may need to precertify to make sure you have the coverage that you thought before heading into a procedure? Read a previous blog, “What Is Precertification?” for help. For specific medical questions or emergencies you should always contact your insurance carrier directly. If you have any general questions about precertification, your current plan, or are interested in purchasing marine crew insurance, contact us at mhginsurance.com or call us at +1 954 828 1819 or +44 (0) 1624 678668. Our insurance specialists have the knowledge and experience to assist and guide you to the best coverage for your budget.