The Role of Marine Insurers in the Salvage Process

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One of the most complete definitions of “salvage” is that given by Geoffrey Brice, QC in his book, Maritime Law of Salvage:
The right to salvage arises when a person, acting as a volunteer, preserves or contributes to preserving at sea any vessel, cargo, freight or other recognized subject of salvage in danger.

Although “salvage” has been defined in different ways, there are four common and essential features incorporated into all of the definitions: (1) a volunteer, (2) with the purpose of preserving, (3) a recognized subject of salvage, (4) which is in danger.

It is important to note that salvage does not require that the salvor act in a spirit of charity or social concern. “The fact that salvors have been motivated by the opportunity for material gain does not prevent them from receiving an award of salvage,” The Lee (Circuit Court, E.D. Louisiana. Dec 27 1884-US). This is later reinforced by Article 13 of the 1989 Salvage Convention (to which most countries are signatories), which states that salvage may be carried out by professional salvors.

A modern example of salvage is the rescue of the tug J.A. Orgeron and its tow by the tanker Cherry Valley in 1994. The Orgeron was caught by Tropical Storm Gordon off the east coast of Florida when she lost propulsion power. Sixty-knot gusts pushed the tug and its barge toward the coast when the Captain called for help. The Cherry Valley went to see if she could assist. While maneuvering at night in 20-foot seas next to shoal water, the Cherry Valley rescued the crew, tug and barge with its cargo intact. The cargo, a $50 million liquid fuel cell for NASA’s space shuttle, constituted a clear salvage case. Captain Strong and the crew of the Cherry Valley received the American Merchant Marine Seamanship Trophy for their actions and the largest salvage award in U.S. maritime history. A book was written about this salvage, In Peril: A Daring Decision, A Captain’s Resolve, And the Salvage That Made History.

Role of Property and Liability Insurers

Property insurers have a great interest in the salvage process because they will generally be the ones responsible for indemnifying the owners of salved property. Liability insurers also have an interest in seeing that there is adequate incentive for the salvage industry to be maintained and in particular that a salvor has a sufficient incentive to precede to a casualty which threatens damage. This interest by liability insurers exists because unsuccessful salvage operations could lead to not only property damage but also to potential large claims against the ship owner by third parties who were injured by the salvage failure (e.g., an oil spill creating environmental damage).

The measure of indemnity for salvage charges is exactly the same as general average contributions; but if the insured value is less than the salved value on which the salvage has been awarded, property insurers will only pay their pro-rated proportion of the insured value. In most jurisdictions that follow English Law on salvage cases, the award is assessed on the values of the interests at the place where the services successfully terminate, and the subsequent total loss of the ship and cargo will not affect a salvor’s opportunity to collect a reward.

Salvage Distinguished From Towage

During the sailing era, the distinction between towage and salvage was an important issue.

Screenshot 2016-09-10 07.21.55Nowadays, the distinction is rarely a concern since both salvage and towage are normally carried out under a formal contract. Modern towage contracts strictly exclude any claim for salvage. Nevertheless, any service outside those agreed to in the contract may eventually become salvage. For this, the claimant must prove that what he did was outside the scope of his pre-existing contractual relationship.

The 1989 Salvage Convention provided that no payment in addition to the contractually agreed-upon amount is due unless the service rendered exceeds what can reasonably be considered due performance of a contract entered into before the danger arose. For example, if during a contracted towage the towline breaks under heavy weather, it is expected under the contract that the tug should make all possible efforts to re-establish a new line. However, if the towline breaks without fault on the part of the tug and the ship runs aground before the new towline is made, no one would expect any subsequent service to re-float the ship to be governed by the towage contract since the event is outside of the contract’s intended purpose. Salvage could potentially be claimed for any subsequent service to re-float the ship.

It’s Not Always “No Cure – No Pay”

The principle of “no cure – no pay” was the focal point of salvage law for many centuries and stemmed from the premise that a salvor is only entitled to a proportion of the value of the property that is salvaged. In essence, the reward depended on the success of the recovery, i.e., “There are no prizes for trying,” whatever the expense of the operation. Under this doctrine, while the property has to be successfully salved, the success does not necessarily have to be performed by only one salvor. Everyone who contributes to the success may have a claim.

Screenshot 2016-09-10 07.22.03Today, the “no cure – no pay” compensation structure is more forgiving and takes into account several factors in order to determine an award amount. These factors include, but are not limited to, the value of the property salvaged, the effort exerted by the salvor, the equipment used and the expenses incurred. Interestingly, the compensation award ultimately determined will generally be split between the ship owner and the crew, in this way creating an incentive to carry out the salvage.

Several other important exceptions have been made to the “no cure – no pay” principle. Examples include the “safety net” provisions initially incorporated in the Lloyd’s Open Form of 1980, the remedy of special compensation under the 1989 Salvage Convention, and the right to recover under SCOPIC (explained below). It is important to note that the exceptions to the general “no cure – no pay” rule would not exist but for the lobbying efforts of liability insurers, who wanted to ensure that sufficient incentives existed for salvors who would otherwise not be compensated under the old “no cure – no pay” doctrine.

The Lloyd’s Open Form (LOF) and the Salvage Convention

The 20 century brought in the world’s first international salvage contract, the Lloyd’s Open Form (LOF). The contract was subject to English law. It was subject to arbitration and based on the “no cure – no pay” principle.

Following the Amoco Cadiz tanker oil spill in 1978 off the coast of France, which resulted in monumental damage to fisheries and tourism, the 1989 Salvage Convention made fundamental changes to, and was intended to replace, the 1910 Salvage Convention. In the 1989 Convention particular emphasis was put on the protection of the environment and incorporating a new element into the salvage compensation structure called special compensation. The 1989 Convention also required the ship owner, servants and agents to cooperate fully with the salvor not only in the salvage operation but also in obtaining entry to a safe port.

Screenshot 2016-09-10 07.22.10The LOF 90 was introduced after the 1989 Convention and incorporated many of the Convention’s changes, with a special focus on the protection of the environment. The concept of special compensation was incorporated into the contract as well as an affirmative obligation on the part of the salvor/contractor to prevent and minimize damage to the environment while performing the salvage service.

Subsequent to the LOF 90, there was a move to modify the form into a more simple and concise document. Consequently, the prior six-page, closely printed form was revised into a new two-page document known as the LOF 2000. In addition to making the form less complicated, the LOF 2000 incorporated important new elements. For example, it contains the option for SCOPIC (“Special Compensation of P&I Clause,” defined below) as well as “Clause K,” which clarifies that the LOF is not a contract between the ship owners and cargo owners. Rather, it is an agreement between salvors and the owners of the property. Any dispute between the ship owner and cargo owner has to be resolved under the terms and conditions of the contract of carriage. Lastly, the LOF 2000 contains a security clause that requires the owners of the vessel to notify the owners of the property on board that the agreement has been made. It also requires all parties to provide security promptly in accordance with the LSSA (“Lloyd’s Standard Salvage and Arbitration”).

Special Compensation

Today, the concept of salvage has moved beyond the “no cure – no pay” principle to reflect the public interest in preventing environmental damage. To promote this new objective, the 1989 Convention imposes a new affirmative obligation on the salvor to exercise special care to prevent and minimize damage to the environment. The new revised concept also creates a new system of compensation, called special compensation, whereby an award can be obtained in those instances where there is a threat of damage to the environment and the traditional “no cure – no pay” award is insufficient.

The special characteristic of this compensation is that it is not necessary for the salvor to achieve any success in preventing or minimizing damage to the environment to recover an award at least equaling the expenses incurred plus, in some instances, 30 percent uplift depending on the level of effort exerted. Further, if success is achieved, a greater amount of special compensation may be paid, again depending on the level of effort, which can range from 30 percent to 100 percent uplift.

A traditional award under Article 13 (“no cure – no pay”) of the 1989 Convention is generally split among all the interests saved by the salvage operation (i.e., vessel, cargo, freight and bunkers), and any salvage award is generally paid by the property insurers. However, an award under special compensation of Article 14 is generally paid by the owner’s liability insurers subject to any dispute on coverage. Time Charterers have their salvage contribution with respect to bunkers and freights at risk, which award will be paid out either by the ship owner’s liability insurer (in the event that there is an extension of coverage to include the Time Charterer’s liability) or by the Charterer’s own liability insurer.

Special Compensation of P&I Clause (SCOPIC)

As explained above, the 1989 Convention, under Article 14, provided that salvors could receive special compensation in certain circumstances. The SCOPIC clause in the LOF 2000 expanded this concept by introducing a tariff to calculate the salvor’s special compensation together with an uplift fixed at 25 percent (instead of the 30 to 100 percent referenced in Article 14). The SCOPIC clause also eliminated the need for a salvor to affirmatively prove a threat to the environment in order to recover the compensation.

Screenshot 2016-09-10 07.22.25Special Casualty Representatives (SCRs) and representatives for hull and cargo were introduced under the SCOPIC clause to gather information on the salvage operation, ensure that the LOF 2000 form is respected and increase the marine property and liability insurer’s access to information. The SCOPIC clause’s introduction into the LOF 2000 was well received by the maritime industry as a simplified method in comparison to the solution provided by the general special compensation provisions under Article 14.

The experience gained during the first years with the LOF 2000 brought up a number of issues with respect to the wording of SCOPIC that needed to be resolved, particularly in Appendix A (Tariff Rates). The new rates, agreed to by the International Salvage Union and the International Group of P&I Clubs and endorsed by property insurers and owners, took effect on July 1, 2007 and will continue until December 31, 2010.

Conclusion

Salvage is a very ancient concept that has evolved with time and adapted to technological and human changes, particularly with respect to environmental damage. After the Amoco Cadiz stranding off the coast of France in 1978, major attention was put on the environment both by the international salvage conventions that were to follow and also by the introduction of specific clauses in the Lloyd’s Open Form. It is expected that with the introduction of new technologies and changes in the way we protect our environment, the doctrine will continue to evolve. Property and liability insurers will continue to play a crucial role in creating and maintaining proper incentives. An insurer’s ultimate liability through basic principles of risk transfer assures that it is an ultimate interested party who maintains an incentive to lobby and fight for fair and evolving salvage concepts.

By |2018-07-02T13:56:24-06:00June 27th, 2016|Insights|0 Comments