Guidance on a salvage operation becoming a wreck removal from Campbell Johnston Clark director Alistair Johnston
It is easy to think that when a salvor is contracted to salve a vessel and its cargo and the vessel becomes a total loss under its hull insurance, the contract moves into a wreck removal contract seamlessly.
However, discussions between owners, hull insurers and P&I insurers could mean the salvor is left in limbo while decisions are made behind the scenes.
The shipowners’ will want to move events moving along as fast as they can and ensure that a total loss vessel is removed as efficiently and economically as possible. However, there could be complications.
As an example: a 20-year-old general cargo vessel in ballast has grounded on a coastline in bad weather. Its market value is around US$3M, but its insured value is US$5M under an English law hull insurance policy.
Ship market value is around US$3M, but its insured value is US$5M under an English law hull insurance policy
Salvors attend promptly and enter into a Lloyd’s Open Form (LOF) contract with the owners. The vessel’s damage means it is not impossible to salve, therefore salvors invoke SCOPIC. Initial hope to refloat the vessel is hampered by bad weather and the vessel’s ground reaction increases. It becomes clear that this vessel is going to become further damaged with repair and salvage costs increasing significantly.
Owners’ surveyors are not sure how much repair work is going to be needed as due to weather conditions and a dive survey cannot be carried out. Owners take the view that the vessel is almost certainly going to be uneconomical to repair in terms of its commercial value.
Their question is whether the repairs are going to exceed the insured value of the vessel and therefore whether it is a constructive total loss under the hull insurance policy. Its owners submit Notice of Abandonment under the hull insurance policy to their underwriters for consideration and notify their P&I insurers. But, the hull underwriters need time to assess whether the vessel is actually a constructive total loss under its hull insurance.
In the meantime, the salvage contract continues to run, SCOPIC increases daily and salvors continue to make every attempt to salve the vessel under the LOF contract. Though salvors should accept that notice will be given by P&I of five days to terminate SCOPIC, or the salvage contract itself could come to an end as there is no prospect of successfully salving the property with value.
Salvors need to ensure good dialogue with the owners, hull underwriters and P&I insurers to constantly assess costs
Local authorities may insist the LOF contract remains in place. Salvors need to ensure good dialogue with the owners, hull underwriters and P&I insurers to constantly assess costs, project progress and what spread of equipment should remain on site.
In this scenario, after a week, the underwriters accept the vessel is a constructive total loss under the hull policy and agree to pay its hull insurance value to the owners. The P&I club will then want involvement in the wreck removal and to discuss with the salvor bringing the LOF contract and SCOPIC to an end.
Different factors impact the speed of that decision and local authorities will play a significant part. A salvor involved in the project does have an advantage over other potential bidders for a wreck removal contract and the P&I club will be aware of this.
Familiarity with the status of the casualty and having equipment already mobilised and on site can result in a financial saving for P&I insurers funding the wreck removal. If the P&I insurers and the owners decide to put the entire wreck removal contract out to bid then some of that advantage falls away.
The key for salvors and subcontractors is to ensure full and proper dialogue with owners and their insurers throughout, to anticipate likely scenarios and offer alternative services with a view to keeping outlay down. The salvor also needs to ensure sufficient equipment is available if a decision is promptly made for wreck removal.
It is disappointing for a salvor with an LOF contract if that contract comes to an end because of bad weather causing further damage to a vessel unexpectedly. That is one of the risks, but salvors can counter the financial impact by using their presence on site and familiarity with the vessel to their advantage when bidding for any resulting wreck removal contract.