Scuttling, Sunk cargo & SCOPIC

Social media in June is abuzz with videos showing a large vessel being scuttled or deliberately sunk…….  the oohs and aahs, the likes and comments  followed as the giant ship  went down under, her cargo of iron ore fines forming a thick curtain in the sky and her funnel breaking off. This was something for the common man – an uncommon event. Even to an Insurance professional, scuttling is not a common occurrence but his reaction to these videos and news clippings would be certainly different. Forget the ‘oohs & aahs’, the first thing which would come to an insurance professional’s mind would be the financial impact — how much and who would pay?

It was on February 24th, 2020 that the VLOC ( Very Large Ore Carrier), STELLAR BANNER grounded off the coast of Sao Luis in Brazil. It is said that the grounding was done as a precautionary measure as the vessel had suffered damages to her bow, even as she left the Vale-operated terminal in Brazil. Vale, the mining giant was exporting around 300,000 MT of iron ore to China. After the grounding, all crew members were rescued and the vessel had listed badly but had not capsized. The Brazilian Navy swung into action and in a bid to avoid/reduce any pollution, it was decided to drain out the fuel oil from the vessel. Meanwhile international salvors were also appointed to salvage the vessel and cargo. After removal of fuel oil from the vessel tanks and salvaging around 145,000 MT of the cargo, the vessel straightened up a little or rather, the list reduced. This operation which started in March got over in mid-April. By 3rd June, the salvors managed to re-float the vessel and towed her to deeper waters. A structural examination of the vessel was carried out and the vessel was declared a Total Loss. On June 12th, The Brazilian Navy ordered the scuttling of the vessel with the remaining cargo on board ( close to 150,000 MT of iron ore). They also declared that the cargo on board would not cause any pollution even if the vessel was scuttled.

Now, the insurance minds get to work. The Hull & machinery insurer’s liability is absolute, as the vessel had been declared a Total Loss. Two issues hang in the balance– 1) Will the cargo insurer pay for the loss of around 150,000 MT of iron ore which went down with the scuttled vessel?  2) Will the salvors get any payment as they normally work on ‘No cure, no pay’ basis as stated in the Lloyds Open Form(LOF) and this salvaging operation was not successful?

We do not have access to the marine cargo policy of Vale but presume that it will have the Deliberate Damage (Pollution Hazard) clause. The clause reads as under:

‘ This policy is extended to cover but only while the property insured is on board a waterborne conveyance, loss of or damage to said property directly caused by governmental authorities acting for the public welfare to prevent or mitigate a pollution hazard or threat thereof, provided that the accident or occurrence creating the situation which required such governmental action would have resulted in a recoverable claim under this insurance (subject to all of its terms, conditions and warranties if the property insured would have sustained physical loss or damage as a direct result of such accident or insurance).’

Even with this clause, the claim for the cargo of iron-ore gone down with the vessel would not be payable, in my opinion since the authorities had ordered sinking of the vessel only and incidentally the cargo happened to be there in its holds. The order was not to destroy the cargo as it would pose a threat of pollution. On the other hand, the Navy had categorically declared that the iron-ore on board would not cause any pollution. An alternate point of view is that the claim will be payable as the initial incident of ‘grounding’ is anyway covered. Was grounding the proximate cause of loss of cargo on board Stellar banner which was ordered to be scuttled? When debated, the simple answer is that’ Law will take its own course’.

Now the question if the poor salvors would get paid for their efforts and expenses? It is said that if the LOF was subject to the SCOPIC ( Special Compensation from P & I CLUBS) clause and if the salvors had chosen anytime to invoke its provisions. then they may get compensated for some of the expenses they would have incurred on tugs, personnel, equipment, etc. A simple elaboration will be in order here. Salvors work on ‘No Cure, no pay basis’ as per LOF. If they are able to successfully salvage the vessel/cargo, they are entitled to an award under Article 13 which is worked out on the basis of time & effort invested, the value salvaged, the skill and the dangers involved, etc. However, if the operation is not successful, they may getting nothing for their efforts, time and costs. This was a yawning gap and was sought to be filled-in by the SCOPIC clause which would defray a portion of the expenses of the salvors where the operation was not successful or the reward insufficient and there was imminent danger of environmental pollution. This is a sper Article 14 and salvor has to specifically invoke this clause  and once done the ship-owner/P &I club would deposit a fixed amount to defray expenses. One may ask, why will the salvor not invoke SCOPIC clause always? The catch is, if he invokes SCOPIC and subsequently the salvaging is successful, the award calculated as per Article 13 gets reduced by 25% of the difference between the Article 13 amount and the Article 14 amount. Still…. with expense rising, casualties being more severe, the SCOPIC clause itself may not give the desired comfort to salvors. A re-look will certainly be in order.