Contractual wreck removal

Background

Wreck removals are often very complex, lengthy operations which can be extremely expensive to complete. Some of the biggest P&I claims ever paid out have been wreck removals, and with technology improving and costs escalating, it is unlikely that this will change any time soon. Recent legislative changes have had an impact in relation to when wreck removals can and will be ordered, but offshore wreck removal is, to an extent, being driven by contractual requirements.

This article looks at how mutual and commercial P&I cover responds to both wreck removal and wreck removal liability in the context of offshore operational contracts and covers. It also provides some advice on identifying potential contractual wreck removal exposures which fall outside of the standard cover regime.

Mutual P&I cover for wreck removal

Mutual cover is designed to respond to the raising, removal, destruction or marking of the wreck of the entered or any other vessel and any attendant debris lost as a result of a casualty, where ordered by law or governmental authority or where necessary to remove a hazard or obstruction to navigation.

This cover has become even more important following the introduction in 2015 of the International Convention on Removal of Wrecks (“the Convention”). Under the Convention, party states have power to order the removal of a wreck from their territorial and internal waters. If such an order is made, the owner (and by extension insurer) is liable for all the costs of locating, marking and removing the wreck, subject to any exceptions and limitations provided in the Convention. For states which are not parties to the Convention, liability for wreck removal remains governed by their domestic law.

For conventional shipping casualties, wreck removal will typically be ordered on one of these bases. However, in the offshore sector matters are somewhat different as the circumstances in which wreck removal will be required is more often than not set out in the contract.

Contractual Wreck removal with Mutual Cover

As set out above, many offshore contracts contain a clause regulating the circumstances in which wreck removal will be required. Traditionally, these clauses simply narrated the circumstances in which mutual cover would respond.

“If the Vessel becomes a wreck and is an obstruction to navigation and has to be removed by order of any lawful authority having jurisdiction over the area where the Vessel is placed or as a result of compulsory law, the Owners shall be liable for any and all expenses in connection with the raising, removal, destruction, lighting or marking of the Vessel”.

However, more recently, there has been a trend toward extending the owner’s liability. Many contracts now contain wording which makes the owner liable for removing the wreck when the Company considers that it is now or may in the future interfere with their operations.

“If the Vessel becomes a wreck and is an obstruction to navigation and has to be removed by order of any lawful authority having jurisdiction over the area where the Vessel is placed or as a result of compulsory law, or the Charterers or their Client consider that it is now or may in the future be interfering with their operations, the owners shall be liable for any and all expenses in connection with the raising, removal, destruction, lighting or marking of the Vessel”.

Unfortunately for owners, wreck removal ordered only by the charterer falls outside the scope of mutual cover. That means that the owner has a commercial exposure to the cost of the wreck removal.

Stepping beyond contractual wreck removal

Not content with being able to order at their convenience the removal of the wreck of a vessel following a casualty, some charterers go even further and introduce “site clearing” requirements. These clauses impose on owner a liability to remove from the sea bed anything they lose operationally, rather than just following a casualty. These clauses can also require owner to provide that indemnity for their whole Group, which is an even more significant liability.

“The Contractor shall at all times maintain the Worksite free of waste material, rubbish and debris generated by the Contractor Group. The Contractor shall properly store all Drilling Equipment and Contractor Items at any time when not being used so as to maintain the Worksite in a clean, tidy and safe condition.”

These clauses are likely a consequence of the Licensee trying to pass down the contractual chain the liabilities they have assumed in their licence agreement. However, this fails to account for the relative time an owner is involved in the project and what they derive from it, as against that of the Licensee. This is particularly significant because such a liability is far beyond the scope of mutual cover.

Dealing with liabilities outside Mutual cover

As charterers continue to try and push more and more liability down the contractual chain, owners are faced with an increasingly difficult contractual environment, and rising numbers of liabilities which fall outside the scope of mutual cover. Rather than having to leave these as a commercial exposure for the owner, Skuld Offshore offer a range of additional, fixed-limit commercial covers which can respond to liabilities such as contractually ordered wreck removal.

These covers are specifically tailored by our underwriters to respond to risks accepted by owner under contracts that go beyond the scope of mutual cover. It is therefore important that there is a dialogue between owners, brokers and Skuld to ensure that a cover at a level commensurate to both the risk, and owners’ risk appetite, is put in place.

However, it is also extremely important to recognise that not all liabilities passed on under contract can be picked up under the P&I suite of covers. For example, full site clearing responsibility is not something to which the covers are designed to respond. 

MOU P&I cover

Vessels and units used for drilling operations in connection with oil and gas exploration or production cannot be covered mutually. Instead, Skuld Offshore provide a replica, commercial cover for those units, up to a pre-agreed limit. Although the mutual and MOU covers respond to the same heads of claim, there are some differences. 

One of the most significant differences is that, unlike mutual cover, and provided that it has been approved in advance by the underwriters, the MOU cover can respond, up to the policy limit, to contractually ordered wreck removal following a casualty. That is in line with typical exploration and production contractual wording.

“In the event the Unit becomes a total loss or constructive total loss following a casualty, Owner shall be responsible, at its expense, for the removal of the Unit, its equipment and any related debris in the event of such loss if required by relevant governmental authorities, or if wreck / debris preclude Contractor’s operations.”

Site clearing under MOU P&I cover

In practice, some exploration and production contracts also incorporate “site cleaning” wording, as discussed above in relation to the mutual cover. Although the MOU cover for wreck removal is, on one view, slightly broader than the mutual cover, it too is not designed to respond to broad site clearing requirements.

How can we help

Understanding the contracting environment, and the exposures under it, is key for both protecting owners’ balance sheets and ensuring that underwriters recognise the risks they are writing. This is one of the main reasons that Skuld Offshore provides a contract review service to all our assureds, potential assureds and their brokers. 

Each year, our team of offshore contract specialist lawyers review several hundred contracts at all levels of the contracting chain. In reviewing the operational contracts, we are able to identify the main contractual liability exposures and provide advice to our assureds from a legal and an insurance perspective. The review will also identify areas, such as contractual wreck removal requirements, where additional cover may be required, and will provide guidance on that. In addition, due to the number of contracts we see, we can give some more commercial feedback in relation to contracting trends. 

Through a flexible and solution-oriented approach, Skuld intends to ensure a gap free cover for our assureds. For this to be possible, providing Skuld with all relevant contracts is crucial. Only then can the assured and the Skuld Underwriter make sure that all necessary needs have been catered for. If you have any further questions in relation to wreck removal covers, please contact your Skuld Offshore underwriter.