Salvage & General Average – Excessive Security

1. Recently, we came across a container casualty in which the security demanded was for 80% of the value of the property (50% Salvage and 30% GA)ⁱ. While the request for security may indeed be valid, our thoughts are that seeking such high amounts may be counterproductive given that some cargo and container interests may simply abandon their property due to the high security sought!
2. High/excessive security: For the purpose of this article, we would suggest that any security for more than 75% of its landed value may be considered as excessive security. The reason why we peg the figure to 75% is that it may be possible under some insurance policies to trigger a Constructive Total Loss (“CTL”) at 75%ⁱⁱ of the insured value of the ship or cargo. The risk of seeking such excessive security may result in the cargo interests, if insured, to abandon their property and seek a CTL claim from their Insurers (Insurers may however refuse to accept the CTL given that the request for security does not mean that the actual payouts would be the same). If uninsured (we believe that a significant portion of cargo interests would be uninsured), the cargo interests would consider whether they would wish to provide such excessive security considering the potential opportunity from the use of the security demanded (which would be by way of a cash deposit).
3. A container GA generally would take a few years to be adjusted and with the cash deposit being retained with the Average Adjuster during this period. While the YAR 1994/2016ⁱⁱⁱ do provide for these cash deposits to earn interests, our understanding is that this is not strictly followed, or if followed, the interests are invariably much lesser than the interests allowed under the YAR^iv for the parties with respect to sacrificial damages or expenditure. This would mean that the provider of cash deposits incur a greater loss than the party who incurred either a sacrificial damage or expenditure^v.
4. Given the time involved in the process (which would result in the award of interests to the parties who have incurred sacrificial damage or expenditure) and the potential for some parties refusing to provide security, Average Adjusters/Owners may have factored this in their calculation and sought a higher percentage of security. 
5. If valid security is not provided by cargo interests, the Salvors/ Owners will, on the basis of the prevailing law, proceed to conduct a salvage sale to realise the inherent value of the property. Unfortunately, any such sale will realise lower values than the landed/CNF values (which was the basis of the calculation for the contributions due).
6. Due to the reduction in values, there may a short fall such that it would have to be borne by the other parties (who have provided security for the full value of their interests). If the other parties have also capped their exposure, this shortfall would necessarily fall on the father of the voyage, the Owners. Fortunately, Owners under English Law^vi are entitled to recover any sacrificial damage from their Insurers without having first recovered this from other parties. While Owners and their subrogated Hull Insurers can certainly try and pursue the other parties for the shortfall, the costs involved may make this exercise unworkable. With respect to expenditure, English Hull Insurance policies^vii generally provide for Insurers liability to be restricted to the Owners pro-rata share together with any reduction for under insurance. Accordingly, with respect to GA expenditures, the shortfalls would have to be borne by the Owners.
7. Conclusion:
   1. Owners and their Insurers must be aware of the potential risks of abandonment should excessive security be demanded from the cargo interests, particularly, if they are uninsured.
   2. Owners may consider seeking additional/top up GA cover to cater to this eventuality. 

^i. Maersk Fankfurt
^ii. See What is Constructive Total Loss in Marine Insurance?
^iii. Rule XXII of both YAR 1994 and 2016.
^iv. Rule XXI of both YAR 1994 and 2016.
^v. See our earlier article, Interest and Cash Deposit – York Antwerp Rules and Salvage and General Average – Security Issues.
^vi. S 66 (4) of the English Marine Insurance Act 1906 states “Subject to any express provision in the policy, where the assured has incurred a general average expenditure, he may recover from the insurer in respect of the proportion of the loss which falls upon him; and, in the case of a general average sacrifice, he may recover from the insurer in respect of the whole loss without having enforced his right of contribution from the other parties liable to contribute” (words underlined by us for emphasis).
^vii. See 11.1 of ITCH 1/10/83, 10.1 of ITCH 1/11/95 and 8.1 of IHC 03. The critical difference is that in IHC 03, there is no reduction in case of under insurance.