COLUMN INSURANCEThe Importance of the Lloyd’s Open Form Salvage Contract By John A. Witte Jr., Executive Vice President at Donjon Marine Co., Inc.The importance of shipping to world ports and promotes the use of LOF because it believes that trade hardly needs stating, carrying it has great bene? ts for all parties including the owners and as it does more than 9 billion tons of insurers: LOF is a clear and simple contract and enables cargo each year in some 4,500,000 ves- rapid intervention in an evolving casualty situation. There sel movements. And while there have is no need to negotiate terms “upfront.” The contract can been major improvements in ship and be quickly agreed with a verbal agreement that is legally operational safety over the past decades, binding. It can be signed at a later stage.casualties do still occur and will con- The integrity of the contract is assured by Lloyd’s, a tinue to do so. Engine breakdowns, ? re, bad weather and, world scale insurance market with considerable resources. of course, the human element can cause serious incidents There is a de? ned process and resources to administer use putting a vessel, its crew, cargo and the environment at of LOF and it is a fair contract and has a clear dispute reso-risk. Marine salvage is the business of providing services to lution process using Lloyd’s Arbitrators.casualty vessels with the objective of saving life, protecting For owners and insurers, one key bene? t is that the risk the environment and saving property. of the salvage operation is carried by the salvor alone. Sal-The salvage industry has evolved over the centuries and vors are adept at managing such risk and yet other forms one of its underlying principles is that salvors should be en- of contract used in a casualty situation can mean that the couraged by the prospect of a fair reward to go voluntarily owner and insurers bear some of the risk of the operation. to the aid of a casualty vessel. The principle of “no cure, no Despite these bene? ts it is well recognized that there is pay” is long established and widely accepted: the salvor will a decline in the use of LOF that goes beyond the overall only receive an award if the job is successful. The award is decline in all salvage operations due to improved ship and largely based on the nature of the services provided, the operational safety. In recent years, there have been some 50 conditions and the value of the property saved from peril. LOFs annually, down from 200 LOFs each year 20 years Marine salvage is governed by the 1989 Salvage Conven- ago. There are various theories about the disproportionate tion and can be conducted under a variety of contracts in decline in the use of LOF such as the idea that shipowners many jurisdictions. The most commonly-used contract is the and their insurers think the contract is costly to use and Lloyd’s Open Form (LOF) salvage contract, which has been it is too generous to salvors. There may also be a lack of in existence for more than 100 years. It was developed by the understanding in the insurance community about the con-London insurance market, Lloyd’s, and continues to be ad- tract and its bene? ts. Additionally, it is possible that excess ministered by the Lloyd’s Salvage Arbitration Branch re? ect- capacity among salvage contractors means they are more ing the important role Lloyd’s retains in the insurance of ships prepared to work on daily hire rates and on other commer-and cargo. The contract has evolved to keep pace with changes cial terms. ISU believes it is important to improve levels of in shipping and the current edition was published in 2011. understanding of this important contract especially among The key feature of LOF is that it enables salvage services the younger element of the underwriting community. to be provided quickly without the need to negotiate terms. LOF is not perfect; not least because it is chie? y struc-The salvor undertakes to use his “best endeavors” to save tured to reward the saving of property. That may well have the ship and cargo and prevent pollution and parties agree been right when the order of priority was saving life; then to settle the award after conclusion of the services, based saving property then protecting the environment, whereas on the value of the property saved and taking account of today the order is saving life; protecting the environment several factors including the degree of risk to property, the then saving property. Many salvors therefore believe that time taken and the skill of the salvor. LOF does not adequately reward them for the bene? t their Most awards are agreed to amicably but if there is a dis- work confers on the environment.pute a de? ned process of arbitration, managed by Lloyd’s, ISU recognises there are a variety of other salvage contacts allows for an independent arbitrator to decide what is a which have their place in global salvage and it supports com-fair award for the services provided and there is an appeal petitive global provision of salvage with its members free to procedure. There is a trusted process for the deposit of ? - agree whatever terms they wish when providing salvage ser-nancial guarantees. vices. But the time has come for LOF users and supporters ISU, as the uni? ed, global voice of marine salvors sup- to once again become active in promoting its bene? ts.December 2014MN18 MN Dec14 Layout 18-31.indd 18 MN Dec14 Layout 18-31.indd 18 11/25/2014 10:05:44 AM11/25/2014 10:05:44 AM