Risks covered - Rule 40: Liability for obstruction and wreck removal
The Association shall cover:
costs and expenses incurred, relating to the raising, removal, destruction, lighting and marking of the Ship or of the wreck of the Ship or parts thereof or of its cargo lost as a result of a casualty, when such raising, removal, destruction, lighting and marking is compulsory by law or the costs or expenses thereof are legally recoverable from the Member;
liability incurred by reason of the Ship or the wreck of the Ship or parts thereof, as a result of a casualty, causing an obstruction, provided that:
for the purpose of this rule, ‘casualty’ means collision, stranding, explosion, fire or similar fortuitous event;
recovery from the Association under this Rule shall be conditional upon the Member not having transferred its interest in the wreck otherwise than by abandonment; and
the realised value of the wreck and other property saved shall be credited to the Association.
Guidance
For more detailed commentary see Chapter 16 of the Gard Guidance on Maritime Claims and Insurance.
IntroductionCasualties and other incidents may cause a ship to become a total loss or at least inoperable pending salvage, towage and repairs. Over the past few decades, the increased focus on the protection of the marine environment has caused coastal states to implement regulations to ensure as far as possible that hazards posed by shipwrecks, or by ships that are otherwise inoperable, or by their cargoes or other pollutants that may be on board, are removed.
The Nairobi International Convention on the Removal of Wrecks (the Nairobi Convention) has been adopted by more than 50 states. It contains a set of uniform rules for the prompt and efficient removal of wrecks located outside the territorial seas of the respective signatory states. For states that are not parties to the Convention, it is necessary to consider domestic legislation to determine the scope of wreck removal liability, as this may differ from the provisions of the Convention.
The Nairobi Convention governs wreck removal operations within the Exclusive Economic Zone (EEZ) of the state that is a party to the convention and also enables contracting states to declare when adopting it that they extend its application to their territorial seas. Therefore, if a Ship becomes a wreck within the territorial seas of a country, it will be necessary not only to ascertain whether that state is a contracting state to the Nairobi Convention but also to ascertain whether that state has opted to extend its application to the territorial sea.
The Nairobi Convention imposes virtually strict liability on the registered owners of the ship that has become a wreck subject only to the very limited defenses that are found in the Nairobi Convention itself, CLC and other similar IMO liability and compensation conventions when these are applicable.1 Whilst the Nairobi Convention does not provide for any right to limit, it nevertheless provides that the registered owners are entitled to exercise whatever limitation rights they may have under general limitation conventions such as the 1976 Limitation of Liability for Maritime Claims Convention (“LLMC”) or any subsequent amendments and protocols. Finally, the Nairobi Convention requires a ship that is either registered in a contracting state or trading to a contracting state to maintain insurance to cover its liability under the convention and to carry an insurance certificate to evidence such insurance (so-called Wreck Removal Convention or WRC ’blue card’) serving the same purpose as 'blue cards’ issued pursuant to the CLC, Bunkers and Athens Conventions.
Cover is available under Rule 40 for liabilities, costs and expenses that the Member may incur in relation to wreck removal whether such liability arises under local law or international convention. Such liabilities etc., can be very substantial2 because of the technical and operational complexities of wreck removal including the high cost of advanced and specialized craft, equipment and engineering skills that are frequently applied. It is also relevant to remember that the Member may either not be entitled to limit his liability for such claims under applicable law, or that separate and higher limits may apply.
Cover is available under Rule 40 even if the incident that caused the Ship to become a wreck arose as a result of specialist operations.3 However, special rules apply in such circumstances (See (G) below).
(A) ...costs and expenses relating to the raising, removal, destruction, lighting and marking of the Ship or of the wreck of the ship or parts thereof or of its cargo lost as a result of a casualty... (Rule 40.a)
Cover is available under Rule 40.a for costs and expenses that are incurred in relation to the raising, removal etc., of the Ship, the wreck of the Ship or parts thereof, or its cargo. The Ship is the vessel that is entered in the Association for P&I risks and the wreck of the Ship means the Ship after it has been accepted under the Hull Policies as a total loss, whether an actual or constructive total loss.4
The phrase ‘or parts thereof’ is given a broad construction to include, not only the Ship’s hull, machinery and other equipment, but also the ‘apparel’ of the Ship such as, for example, navigational equipment, lifeboats and tackle. ‘Cargo’ is also given a broad construction to include, for example, not only the cargo that is stowed inside containers, but the containers themselves. Cover is available for liabilities, costs and expenses relating to the Ship’s cargo whether the cargo is still on board the Ship or the wreck or has become separated from the Ship or wreck because of the casualty.
Cover is available for costs and expenses that are incurred in relation to expressly itemised measures to eliminate or minimise the risks that are associated with the Ship or wreck etc., i.e., the marking, lighting, raising, removal, or destruction of it. The precise type of measure that will be necessary depends on the risks that the Ship, wreck or cargo represents and the orders that may be given by the governing authorities, and can, therefore, differ substantially from case to case. A grounded Ship may only require additional lights, whereas a Ship that is temporarily submerged may need to be marked with buoys. However, some Ships that are grounded or submerged may have to be removed in whole or in part,5 or, in extreme cases, they may have to be destroyed. Similar measures may be necessary where a Ship’s cargo causes an obstruction, e.g. where a large, prefabricated construction carried on deck falls overboard and blocks a berth or channel, or where a ship loses a cargo that is deemed to be ‘dangerous’ or a pollutant overboard.
The terms ‘lighting’ or ‘marking’ refer to measures that are taken to alert other ships and craft of the presence and position of the Ship, wreck and/or cargo and may include the attachment of lights, buoys, radar beacons or other appliances to the wreck, or on the water surface above and/or around a submerged object. Cover is also available for costs and expenses that are incurred in taking reasonable measures to locate the wreck, or parts thereof, or lost cargo to ensure proper lighting or marking. The term ‘raising’ refers to the activities that are undertaken to bring a sunken Ship, wreck and/or cargo to the surface whilst the term ‘removal’ refers to measures that need to be taken to move the Ship, wreck and/or cargo, whether or not in one piece, from its current position to a designated place of disposal. Finally, the term ‘destruction’ means the demolition of the Ship, wreck and/or cargo, whether at the casualty site or elsewhere, following removal.
However, cover is available for such costs and expenses only where they have been incurred as a result of a casualty as defined in Rule 40.i and referred to under section (D) below.
(B) ...when such raising, removal, destruction, lighting and marking is compulsory by law or the costs or expenses thereof are legally recoverable from the Member... (Rule 40.a)
Cover is available if the Member is legally obliged to bear the relevant costs and expenses, i.e., where the raising, removal, destruction, lighting, and marking is compulsory by law and the Member is ordered6 to take such measures. However, cover is available only for those costs and expenses that are necessarily and reasonably incurred in order to comply with the relevant order. Therefore, if the Member wishes to retain control of the wreck removal, if this is possible, in order to ensure that whatever value is left in the wreck and/or cargo is preserved, the Member is required to keep in close contact with, and to consult, the Association since the Association may well wish to take an active role in the planning and preparation of the operation by, for example, nominating suitable contractors and negotiating the terms of the wreck removal contract7 in order to minimise the cost of the removal and to maximise the residual value to which the Association is entitled pursuant to proviso ii (see (F) below). In all cases, the Association should be kept actively involved in order to ensure that the Member’s legal rights in relation to the wreck removal order, including any right to limit liability in relation to wreck removal, are fully protected. If the Member incurs wreck removal costs that exceed the applicable limitation amount and the Member is entitled to limit his liability, cover may not be available for liabilities that exceed such limit.
However, in some instances, the governing authorities may incur the relevant costs and expenses themselves in the first instance and then claim reimbursement for them from the Member. Alternatively, if the Association has provided the Ship with a ‘WRC blue card’ pursuant to the requirements of the Nairobi Convention, the authorities will have the right to claim such costs and expenses directly from the Association. Cover is also available in such circumstances to the extent that the costs and expenses are legally recoverable from the Member under the applicable law even if the Member would not have been obliged to take such measures himself.
A Member may be obliged to comply with an order to mark, raise, remove, or destroy a Ship, wreck, or cargo pursuant to the provisions of an international convention or local statute or local laws that regulate navigation in, and the use of, ports, channels, canals, locks, and waterways. The order that is made by the governing authority is normally prompted by the fact that the Ship, wreck, or cargo is considered to represent a hazard to marine safety, or to the environment, or an obstruction to navigation or to other commercial interests. In some instances, a country may have the legal right to order the destruction or the removal of the Ship or the wreck of the Ship, even though it does not in fact pose such a hazard or obstruction. Nevertheless, if the Member is legally liable in such instances, cover is available under Rule 40 unless the destruction or removal is considered to have been caused by a war risk.8
The Member may also incur liability for such costs and expenses by virtue of the terms of a contract that he has concluded for the use of a terminal, berth or offshore site.9 However, cover is available for liability that arises solely as a result of such contract terms only if the Association has given its prior approval to those (or materially similar) terms.10
(C) ...liability incurred by reason of the Ship or the wreck of the Ship causing an obstruction... (Rule 40.b)
There may be circumstances in which the Ship, or the wreck or parts thereof, and/or its cargo is deemed to be causing an ‘obstruction’ and, therefore, needs to be removed. Such an occurrence can also mean that the Member becomes liable to pay damages to third parties who have suffered financial losses because of the obstruction. In most cases, the obstruction will merely affect the safe navigation of other ships, but it may also affect other commercial or public interests, e.g., a subsea pipeline, a power or telecommunications cable, a seawater inlet to a waterfront industrial site, an aquaculture site etc.11
Cover is available for legal liabilities of all kinds that are incurred by the Member because of the fact that the Ship, or wreck or parts thereof, and/or its cargo is deemed to be causing an obstruction to safe navigation for other ships or causes an obstruction for other interests. This includes liability for costs and expenses that are incurred in order to comply with an order to remove the Ship etc., and liabilities to third parties that arise, for example, because of a collision or other contact with the Ship or wreck,12 or for purely financial losses that may be suffered by third parties, e.g., demurrage and delay costs caused by the inaccessibility of the port or berth. However, as in the case of Rule 40.a, cover is available only if the obstruction has been caused by a casualty in the sense discussed in (D) below.
When a Ship becomes a wreck within the territorial waters of a particular country because of a casualty, the governing authorities of that country will invariably make use of their legal powers to order removal of the wreck if it is causing an obstruction and/or if it is a hazard to the environment. If so, the Member can, in consultation with the Association, decide whether to undertake the wreck removal operation or allow the authorities to undertake that task.13 However, even if a wreck is deemed to be causing an obstruction or to be a hazard to the environment outside territorial waters, or such other waters as are claimed by the littoral state, the owner may, nevertheless, still owe a duty of care to ensure that the wreck does not cause loss or damage to third parties, including other mariners and operators of sub-sea platforms, pipes and cables. Should the problem arise within the Exclusive Economic Zone of the littoral state, the law of that state may oblige the shipowner to remove the wreck. Furthermore, this obligation is explicitly imposed by the Nairobi Convention and several of the contracting states have extended the application to their territorial waters as well.
In all cases, the Association should be kept actively involved to ensure that the Member’s legal rights in relation to the wreck removal order, including any right to limit its liability in such circumstances, are fully protected. If the Member incurs wreck removal costs that exceed the applicable limitation amount and the member is entitled to limit his liability, cover may not be available for liabilities that exceed such limit.14
(D) ...for the purpose of this rule, ‘casualty’ means collision, stranding, explosion, fire or similar fortuitous event (Rule 40proviso i)
Cover is only available under Rule 40 where costs etc. have been incurred as a result of a ‘casualty’ as defined in proviso i. The list of examples of what may constitute a casualty is not exhaustive but is limited to unplanned events of a similar accidental nature to the specified events such as.
the Ship striking against a fixed or floating object as a result of negligent navigation. Conversely, cover will not be available in the case of Ships that have become wrecks as a result of planned or non-accidental events such as a prolonged lay-up or a lack of maintenance15 or as a result of abandonment by the Member. However, depending on the circumstances, the Association may be prepared to cover costs and expenses that have been incurred by the Member in order to comply with an order to locate and recover a lost anchor, a lost container or similar items even though the circumstances that have caused the loss may not be considered to amount to a collision, stranding, explosion or fire in the strict sense.
Similarly, cover is not available where the removal of the Ship is ordered because it is unlawfully anchored in a busy waterway and is, thereby, jeopardising navigational safety. In such circumstances, the liability has not arisen as a result of an event that is similar in nature to the express events specified in the Rule.
Finally, cover is not available if the casualty is the result of the conduct that is described in Rule 72.
(E) ...recovery...shall be conditional upon the Member not having transferred his interest in the wreck otherwise than by abandonment... (Rule 40 proviso i)
The Ship is considered a wreck when its hull insurers have accepted that it is a total loss. This means that the owner of the Ship is then entitled to claim the sums insured under his Hull Policies.16 Upon payment of the sums insured to the owner, the hull insurers have the right to assume title to the wreck, in which case the owner will be required to abandon, i.e., relinquish, his interest in the wreck. If the hull insurers assume title to the wreck, they will concurrently assume the liabilities that are, or may become, ‘attached’ to the wreck, e.g., the liability to raise, remove and/or destroy the wreck or any parts thereof, e.g., oil trapped inside the wreck, as ordered by the governing authorities.
Cover is not available from the Association for wreck liabilities in such circumstances since such liabilities will be the responsibility of the hull insurers and not those of the Member. However, in practice, the hull insurers will rarely assume ownership of the wreck. The normal practice is that the hull insurers will abandon their interest in the wreck concurrently with the payment of the sums insured, which means that whatever liabilities that have arisen, or that may arise, in respect of the wreck, will remain those of the shipowner.
For similar reasons cover is not available for wreck liabilities, costs and expenses that may arise after the Member has transferred his interest in the wreck to a third party, e.g., by selling the wreck on an ‘as is – where is’ basis to a salvage company. However, local authorities may still hold the party that was the owner of the Ship at the time of the casualty liable for wreck removal costs to the extent the new owner of the wreck fails to remove it or to otherwise deal appropriately with the hazard that the wreck is perceived to represent. In such circumstances, cover is still available provided that such liability flows from the casualty which caused the Ship to become an actual total loss or a constructive total loss.
(F) ...the realised value of the wreck and other property saved shall be credited to the Association. (Rule 40 proviso ii)
If cover is to be made available for the costs and expenses that are incurred in removing the wreck or parts thereof or cargo which has been lost because of a casualty, the Member is obliged to credit the Association with the proceeds of the sale of the wreck and/or any other property that has been saved in order to enable the Association to minimise its overall liability for the wreck removal. The ‘realised value of the wreck’ is deemed to be the best price that can be obtained for the wreck in the market less the cost of the sale and any other realisation costs such as the costs of towing it to the place where it is agreed that title shall pass to the third-party buyer. The Member is obliged to use his best endeavors to afford all necessary assistance to the Association and to provide any information that may be necessary to maximise the realised value of the wreck.17
(G) Specialist operationsVessels that are engaged in the offshore industry are often involved in operations that are classified as ‘Specialist operations’ for the purposes of Rule 59.
Rule 59 draws a distinction between “liabilities, losses, costs and expenses incurred by the Member during the course of performing specialist operations” (which are excluded from cover) and “liabilities losses, costs and expenses incurred by the Member in respect of the wreck removal of the Ship” (which are not excluded from cover). This distinction reflects the fact that a Ship, whether specialist or otherwise, may be operating as a normal cargo or equipment carrier whilst transporting equipment to the specialist operations site and may then be operating as a vessel that is engaged in specialist operations once it has reached the specialist operations site and is engaged in performing such specialist operations. For example, a specialist offshore Ship that carries specialist drilling equipment to the exploration site or a more traditional vessel that is carrying pipes or cables to the site can be considered to be operating as normal cargo carrying vessels whilst carrying the drilling equipment, pipes, cables etc., to the exploration site but may then be considered to be engaged in specialist operations once they have reached the exploration site and have started to deploy the equipment, pipes, cables etc., pursuant to the instructions of their contractors and end clients..
Should the Ship become a wreck whilst engaged as a normal cargo or equipment carrier on a voyage to the specialist operations site, cover is available for the removal of the wreck of the Ship or any parts thereof, or its cargo pursuant to, but subject to the restrictions that are imposed by, Rule 40. However, once the Ship reaches the specialist operations site and commences work, a distinction is drawn between the wreck removal of the Ship (for which cover remains available under Rule 40 pursuant to proviso ii of Rule 59) and the recovery of any parts of the Ship or the cargo that are lost overboard from the Ship whilst performing such work (for which cover is excluded under Rule 59). The rationale for this distinction lies in the fact that once the Ship has commenced to be engaged in the specialist operations, the Member is vulnerable to additional risks that are different from those that have traditionally been considered by the mutual Members of a P&I club to be risks that they are prepared to share inter se. The wreck removal of the Ship is considered to be more of a normal marine risk that is traditionally covered by the P&I Rules whereas the loss of parts of the Ship or the cargo is normally the result of the specialist operations in which the Ship is engaged at the time. Therefore, whilst the mutual Members are prepared to share the risk of the wreck removal of the Ship, they are not prepared to share risks that arise purely and simply because of the specialist nature of the activity in which the ship is engaged after she has commenced work at the specialist operations.
A Member that is engaged in special operations may also be covered for wreck removal liabilities, costs etc., whether arising during the transportation to the contract works site or whilst engaged at the site by the terms of a separate insurance such as a Constructions All Risks policy that is applicable to the whole of the construction project. In such circumstances, cover is not available under Rule 40 pursuant to the provisions of Rule 71.b.
Finally, cover may not be available pursuant to Rule 55 if the liability that is incurred by the Member for the wreck removal of the Ship whether arising during the transportation to the contract works site or whilst engaged at the site arises purely because of the terms of a contract that the Member has concluded with a third party and which would not have been incurred but for the terms of that contract, unless such terms have been approved by the Association or the Association exercises its discretion to reimburse the Member.
1 For more detailed commentary see Chapter 12.4.1.1.1.3 of the Gard Guidance on Maritime Claims and Insurance and the Gard Insight article of 7 May 2014 titled “Wreck Removal Convention will enter into force on 14 April 2015”
2 For example, in the 2006 Policy Year, several claims were made under the International Group Pooling Agreement concerning, inter alia, wreck removal costs. Some claims exceeded the combined Pool retention of USD 50 million.
3 See (H) in the Guidance to Rule 59.
4 For more details on the definitions of these terms and how they are applied in different hull conditions, please see Gard Handbook on P&I Insurance, 5th Edition (2002), Chapter 2, paragraph 2.4.1.
5 For example, parts of a submerged wreck, e.g. the accommodation and funnel, may be cut and disposed of under water in order to ensure sufficient under keel clearance for other ships to pass over the wreck.
6 The Member is obliged to ascertain whether a wreck removal order is legally valid under the applicable law.
7 See the Guidance to Rule 82.
8 See the Guidance to Rule 58.
9 See the Guidance to Rules 37 and 38.
10 See the Guidance to Rule 55.
11 In one case, a Ship that was entered in Gard grounded near to an airport and was alleged to be blocking the safe arrival of airplanes approaching from the direction of the sea. As a result, all incoming air traffic had to be re-routed so as to approach from another direction, which allegedly reduced the landing frequency and caused the airport to lose landing fees.
12 When the Ship becomes a wreck cover will cease pursuant to Rule 25. However, despite Rule 26.2, cover is available under Rule 25.6 for liabilities, losses, costs and expenses that flow from the casualty which gave rise to the total loss or constructive total loss of the Ship.
13 See Rule 82.c.
14 See the Guidance to Rule 51.
15 See Member's duties pursuant to Rule 8
16 This will usually be the sum insured under the Hull Policy as well as the sum insured under the hull interest (IV) Policy.
17 See the Guidance to Rule 82.
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