Frédéric Denèfle explains why the International Union of Marine Insurance supports Lloyd’s Open Form for ship salvage, but why its use is decreasing
Without question, salvage is a vital element of the marine industry. It responds to vessels in distress, saving lives and property and safeguarding the environment.
Integral to marine salvage is the Lloyd’s Open Form (LOF), which has been used for more than 100 years with infrequent revisions. However, today many would argue its use is not as widespread as it should be.
Historically the LOF was the most used salvage contract, providing salvage services on a ‘no cure-no pay’ basis, but in recent years we are seeing fewer LOFs being signed.
With fewer marine casualties being suffered year-on-year, it is not commercially sensible for salvage companies to maintain powerful tugs on station across the world to respond to an incident.
Traditional salvage companies have expanded their operations and now include fixed price towage services as well as other related services to ensure they stay competitive and commercially relevant.
At International Union of Marine Insurance (IUMI), we fully support and encourage the use of the LOF as the best way to finding a solution to a casualty.
It is a simple contract which benefits the vessel owner, cargo owner and the environment as it offers a legal solution, a technical solution and a financial solution.
In 2011, IUMI established a salvage forum to gather and reflect the views of the world’s hull and cargo insurers in the context of the development of the LOF, including Special Compensation P&I Club Clause (SCOPIC), and the wider treatment of salvage as it impacts upon marine property insurers.
However, we are now seeing an interesting conundrum. Nearly all stakeholders that would play a role if there was a maritime casualty agree that the LOF is the best salvage contract, but most would choose another agreement over the LOF. Why is this?
In my opinion it is because of the fundamental uncertainty within an LOF agreement. Many questions arise after signing an LOF and there is no clear termination to the agreement.
Questions include how much will it eventually cost? Will the LOF be challenged? Should other routes have been explored before signing an LOF?
After signing an LOF there is the possibility local authorities might refuse the stricken vessel entry to their waters or a local port of refuge. This has the potential to greatly increase the cost of the salvage operation.
Therefore, it is important the owner is fully supported by hull and machinery, and protection and indemnity insurers once they have taken the decision to sign an LOF. Some salvage awards have been considered too high and led to marine insurers facing marine casualties to look for alternative contracts whenever possible.
Although we are seeing fewer casualties in recent years, there is concern this trend might reverse when trade returns to full capacity post coronavirus.
Vessels being used following a post-Covid bounce back may suffer and experience machinery problems leading to salvage needs. The LOF contract will be very valuable in these situations.
IUMI believes the LOF is an appealing preformed contract designed to make an unfortunate and challenging incident easier for everyone.
It is important to ensure there is support for owners when they sign this contract, and that more confidence is built around the use of it. And during its execution, all stakeholders must remain reasonable and focused on the contract.
Frédéric Denèfle is an executive committee member of the International Union of Marine Insurance and managing director of Garex