The Steam Packet's flagship has been out of action since July
The repair bill for Manxman is expected to exceed £2.5m.
Documents released to Manx Radio following a freedom of information request reveal the Treasury and the company's board approved the sum in July.
The documents describe the damage as significant wear to both propeller shafts and associated seawater-lubricated shaft bearings, requiring removal and refurbishment of the shafts.
They also show that the predominant working theories on what caused the damage to have been contamination through debris or silt entering the seawater-lubricated bearing system or a material or manufacturing defect in the bearings or liner.
In the ministerial decision notice, it is stated that the company is 'seeking to mitigate costs by way of insurance and latent defect testing'.
The Steam Packet's flagship has been out of action since July with shaft bearings and associated liners being taken to Denmark for repairs.
She is due to return to service by the end of November.
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