Salvage sector

emerges as Salvage sector needs to raise trust, credibility and profitability

The salvage industry is under pressure in a tough market and the future of industry staples such as the Lloyd’s Open Forum remain uncertain. Adrian Ladbury reports on the latest news from the International Salvage Union and a recent meeting hosted by the Association of Average Adjusters and International Underwriting Association in London.

it is “credible and trusted” said Mr Janssen.

“We continue to promote the value of our members who enable world trade by providing services which save life, protect the environment, mitigate risk and reduce loss… helping others to recognise and appreciate the importance of a properly funded salvage sector is the job of the ISU and our focus for next year,” said Mr Janssen.

To help refine the union’s strategy and goals, last year the ISU commissioned research among some 100 international respondents to properly understand how the ISU and the industry is regarded.

The survey showed that the “overall satisfaction” level with ISU was 7.44 out of a maximum score of 10, a pretty good result overall.

The overall perception of the professional salvage industry – as opposed to ISU – generally found it to be competent, reliable and safe, a result that Mr Janssen said is clearly “very encouraging.” But, there were some lower scores for professional salvors focused on the critical topics of trustworthiness and value for money. Latest statistics from the International Salvage Union (ISU) show that revenues are falling and margins are under pressure in the face of intense competitive pressure. Richard Janssen, President of the ISU, said during the union’s annual year-end press conference that the focus in 2020 needs to be on raising the credibility and awareness of the value offered by the sector.

In reality this means that individual salvage firms need to be accepted by owners and underwriter’s as an important part of the risk mitigation chain. To help support this goal the ISU needs to strive to improve the sector’s image and ensure that chosen to diversify and offer other services in addition to their salvage work. This does not mean that the focus on high standards and technical excellence will be relaxed, he stressed.

This will also require continued investment in updating and renewing stockpiles of equipment with a focus on future needs and especially the investment in people; divers, naval architects, engineers, tug masters and salvage masters. The “lifeblood’ of the sector. This investment in skills and people is made more difficult to maintain than ever given the continued squeeze on margins in the sector. This challenge was clearly shown by the latest ISU statistics. Richard Janssen, International Salvage Union “We continue to promote the value of our members who enable world trade by providing services which save life, protect the environment, mitigate risk and reduce loss’’

These figures showed that activity levels had fallen in a tricky environment and the salvage industry overall continues to suffer reduced returns.

The latest annual figures for 2018 showed that gross revenue for ISU members were down to $409m compared with $456m the year before.

Activity levels were also down with 234 services against 243 services. Lloyd’s Open Form (LOF) cases were actually up – despite the continued debate about the future of the form – rising to 55 in 2018 compared with 46 the year before. LOF revenue rose to $104m almost double the $53m generated the year before.

Wreck removal income was not so healthy at $208m generated from 71 services compared with $264m from 116 services the year before.

The longer-term picture is a concern. The latest statistics showed an overall fall from 2017, but, they are up on the low point of 2016. The numbers are still, however, well below the levels of several years ago when annual income was typically more than $700m, a serious concern for the salvage sector.

DRIVE ETHICAL STANDARDS “Our interpretation of the results suggests that we need to increase our interaction with owners and insurers about their present and upcoming challenges and how salvors can support them in that. We also must continue our drive to ensure high ethical and operational standards. But, then again, it takes two to tango,” commented Mr Janssen, obviously suggesting that this drive should not only be pursued by the salvors alone.

The ISU believes that it has made good progress over the last six years that is reflected in the negotiated agreements and improved working relationship with IUMI, the International Group of P&I Clubs and Lloyds.

Mr Janssen said that part of the “re-positioning” of the industry was because many of the ISU’s members have

LOF DEBATE CONTINUES The fact that the statistics show that LOF continues to be an important contract was interesting given that this discussion continues to rage – notably at the annual autumn meeting of the Association of Average Adjusters (AAA) jointly held with the International Underwriting Association (IUA) towards the end of last year.

This discussion showed that the salvage and adjusting community are still not happy with the continued trend among marine insurers to push for so-called side agreements that supposedly undermine the effective operation of the 100 yearold contract.

Paul Cunningham, marine and energy claims manager for Talbot Underwriting, presented the case against the excessive use of the LOF that, as he pointed out, is really intended for use

a scenario in which Lloyd’s decided to wash its hands of the LOF, generating the risk of “tsunamis” of repercussions for shipping businesses.

Mr Evans highlighted the costs of running a professional world-wide salvage response in a declining LOF market. He said that the top three salvage companies start each year with a combined overhead of $100m running costs. There had been a fundamental shift downwards in revenues and, without the LOF when a big casualty occurs this leaves the salvage company in a difficult position, he said.

Mr Evans conceded that there is a valid concern that LOF could be abused by salvors for non-emergency cases only when a vessel is in dire straits and needs substantial salvage equipment and services. In these cases the LOF is the “absolute go-to contract” that should be used, he said.

However, according to the AAA report on the event, Mr Cunningham added that even historic supporters of the LOF are regularly tempted to deal with marine emergencies by means of bespoke amendments to the form or agree alternative commercial terms. This is because it often makes commercial sense for all parties.

He said that it has to be recognised that many London marine insurance market practitioners are closely looking at the approach of international insurers in other markets that arrange contracts on behalf of their assureds and negotiate directly with salvors.

“I accept that some of these [international insurers] may be accused of causing the current problems with side-agreements and attempts to mitigate an LOF contract, but, they actively involve themselves in any casualty their owner has. This is something we aren’t very good at in London,” pointed out Mr Cunningham.

“I feel that London insurers should not be the ones to take the decision, but we should be assisting and supporting our owners by providing them with upfront claims procedures [from specialist bodies] who have full knowledge of tugs and kit available in most locations around the world and are therefore able to provide straightforward commercial assistance and guidance to owners,” he continued.

“If a commercial contract and terms can be agreed in good time, so be it, but, if the vessel does need emergency LOF assistance, then this is what should be done and hopefully insurers can take comfort around the arbitration process, but, it will only be with effort and time, that benefits will be seen,” he pointed out, referring to the “no cure, no pay” form that provides remuneration for salvors based on arbitration carried out by Lloyd’s Salvage Arbitration Branch.

Mr Cunningham said that he recognises the potential pitfalls of side agreements, reported the AAA. He said the LOF is supposed to be a stand-alone and all-encompassing contract when, once signed, allows salvors to go get on with their job and mitigate losses for all. The use of side-letters or agreements incorporated into the salvage contract can raise complications and concerns. LAST LINE OF DEFENCE Roger Evans, secretary general of the ISU, gave a strong defence of the LOF and also called for “co-operation instead of polarisation.” Mr Evans reportedly warned that many operations are already unviable for salvors and asked the audience to imagine when a casualty could be dealt with via a commercial tow or other fixed price arrangement.

The ISU man stressed, however, that salvors are often the last line of defence arriving on the scene when the incident has occurred and the underwriter is exposed to potentially rapidly mounting losses if not handled quickly and professionally. Failure to make best use of what salvors offer to mitigate exposure just does not make sense, said Mr Evans. NON-EMERGENCY CASES The ISU supports the use of the unchanged LOF and not the ‘LOF Light’ concept. “The so-called non-emergency cases where LOF is used suits most shipowners as a good contract basis. However, in my view in these such cases the award should be comparable to a commercial terms basis with minimal enhancement to take into account LOF terms and conditions. But, this is down to the arbitrator system understanding the needs of the current market and what is available on a commercial basis,” explained Mr Evans.

Mr Evans said that he believes that the proposals for sideletters are coming from underwriters, as salvors compete for what they can in a tough market. Mr Evans reportedly said that, in his view the market is potentially on the “slippery slide” downwards and further consolidation of the salvage industry is a big concern.

This situation will be exacerbated by the ever-increasing size of bigger ships in the merchant fleet leading to ever larger liability levels, he pointed out.

Rising scale, complexity and regulatory requirements in the shipping sector clearly brings challenges for all parties involved, but, there is occasionally a ‘silver lining’. Mr Cunningham said, for example, that the strict new IMO regulations that limit the amount of sulphur in fuel oil could lead to more cases of engine failure with ships drifting at the mercy of weather. He said that this is “an insurer’s worst nightmare, but possibly… a salvor’s cash cow!” Paul Cunningham, Talbot Underwriting “I accept that some of these [international insurers] may be accused of causing the current problems with side-agreements and attempts to mitigate an LOF contract, but, they actively involve themselves in any casualty their owner has.’’