Press Article: Wreck removal and the challenges of CTLs
14 August 2019
Rebecca Hamra, Claims Director, reports on the troubles encountered with recycling a ship that is a constructive total loss to Maritime Risk International.
The wreck of a ship poses several serious difficulties for a shipowner aside from the loss of the ship itself. This is especially true when a shipowner is faced with removing the ship for ultimate disposal and recycling. Modern wreck removal methods are often elaborate and costly endeavours. Much attention has been paid to the elaborate removal operation of the cruise ship Costa Concordia from its wreck site. However, an often-overlooked issue of the wreck removal process is that of obtaining an export licence to dispose of the ship for recycling and finding an acceptable recycling yard.
In common terms, a 'wreck' is a ship that has been destroyed at sea. However, for purposes of insurance, a ship can be an 'actual total loss' or a 'constructive total loss'. Under the Marine Insurance Act, a constructive total loss (CTL) occurs when it is unlikely that the ship can be recovered or when the costs of recovery and repairs will exceed the ship’s value. Under a Norwegian marine insurance policy, a ship is considered a CTL when the cost of repair exceeds 80 per cent of the insurable value, or 80 per cent of the value of the ship after repairs if the latter is higher than the insurable value.
Once considered a CTL, the shipowner must deal with removing the wreck. The Nairobi Convention on Wreck Removal 2007 (WRC) provides the legal basis for member states to have dangerous wrecks removed from their exclusive economic zone (EEZ), the body of water extending 200 nm from their shoreline. The Convention entered into force on 14 April 2015. There were 15 states party to the Convention when it entered into force and other states are continuing to ratify. Under the WRC, shipowners are financially and practically responsible for locating, marking and removing wrecks in an affected state’s EEZ, with only a few exceptions.
If the shipowner does not carry out these actions by a certain deadline, or if a wreck proves an imminent threat, the affected state can intervene directly at the shipowner’s expense. The country in which the wreck occurs also has the power to lay down the conditions for its removal. If that removal involves sending the ship to another country for recycling, the shipowner must obtain an export license before doing so as, once declared
a CTL, the ship is no longer considered a vessel but waste.
The export of waste is regulated under The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal. This global convention was adopted in 1989 and came into force in 1992. The original purpose of the Convention was to protect human health and the environment against harm caused by the disposal of waste. It was hoped that it would undermine the practice of illegally sending hazardous waste to developing countries like India, Pakistan and Bangladesh. The Convention also requires the prior informed consent of the authorities in the country receiving the ship to agree to the shipment of the waste in question on the basis that the waste (here the ship) will be treated in an environmentally sound manner.
To strengthen protection to developing countries, the Basel Convention adopted the 'Ban Amendment' in 1995. This Ban Amendment bans the export of all hazardous waste from an OECD country to a non-OECD country (OECD is the Organisation for Economic Cooperation and Development and includes 36 countries with a high-income economy). At the end of the
1990s the United Nations decided that the Basel Convention should also regulate the recycling of ships, notwithstanding that the Convention does not make any provision for ships or recycling yards. The Ban Amendment has not yet entered into force internationally. However, the European Waste
Shipment Regulation (EWSR) 2006 implements the Basel Ban Amendment’s requirements at the EU level. This regulation means that no ship leaving an EU port destined for recycling (regardless of the ship’s flag state) may be exported to a non-OECD country for that purpose.
It has been difficult for shipowners to find a certified recycling
yard that complies with the EU Ship Recycling Regulation of 2013. This regulation (which came into effect in 2019) requires all sea-going ships sailing under an EU member state flag to use an approved ship recycling facility included in the European List. The Ship Recycling Regulation implements the requirements of the 2009 Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships. It represents the EU’s attempt to implement even higher standards than the IMO’s Hong Kong Convention, which requires ships to maintain an inventory of hazardous materials and requires ship recycling yards to implement a ship recycling plan. The Hong Kong Convention has not yet entered into force.
The EU regulations are powerful considering Europe is the world’s second largest ship-owning region after China. Currently there are 34 yards in the world which are considered acceptable for ship recycling by the EU. However, shipowners have pointed out that the European yards are geared towards small ships trading domestically. Pricing is also a factor, with many of the EU-approved yards offering less money for the recycled materials than those not on the list. The one US yard that is approved is typically not favoured due to the even more stringent environmental regulations in effect. This leaves three Turkish yards as the remaining options which can price accordingly.
China had previously been a top choice for 'green' ship recycling, as the ships were dismantled in dock rather than beached. According to data by the NGO Shipbreaking Platform, China was fourth in the world in 2017 in terms of shipbreaking volumes, following Bangladesh, India and Pakistan. However, the country is no longer an option for non-Chinese ships needing to be recycled. The country issued an edict in early 2018 that banned the import of ships and offshore units for recycling as part of a wider ban on importing a total of 16 different types of waste material. The regulation was effective from 31 December 2018.
The cumulative effect of these regulations has caused difficulty for shipowners when trying to obtain an export licence for their ship which has been declared a CTL. Governmental authorities are often unversed in the world of shipping and unsure how to classify the ship and all its appurtenances under the export license requirements. Also, it can be a time-consuming process getting the receiving country’s authorities to confirm to the exporting country’s authorities that the ship will be disposed
of in an environmentally sound matter. The longer the delay in getting the licence, the greater the costs for the shipowner and ultimately the insurer.
2019 Informa plc. This article first appeared in Maritime Risk International, July 2019, pp10-11.