LW 620 MARINE INSURANCE: WORKSHOP EIGHT

CONSTRACTIVE TOTAL LOSS: 11.00 – 13.00

MIA 1906 s 60

Constructive total loss defined.

(1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.

(2) In particular, there is a constructive total loss—

(i) Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be, or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered; or

(ii) In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired.

In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired; or

(iii) In the case of damage to goods, where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival.

The lengthy provisionsconcerningconstructive totallossarefoundins 60ands 60 (1) statesthegeneralruleinrespectofconstructive totalloss 'Subject toanyexpressprovisioninthepolicy,there isaconstructive totallosswherethe subject matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or becauseitcould not bepreserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.' In essence a constructive total loss occurs when the goods are a commercial write-off. The cost of recovering or repairing the insured goods makes it uneconomical to carry out such an exercise and the goods are abandoned to the insurer

In particular, with regard to damaged goods, there isa constructive total loss whenthecostofrepairing thedamageandforwarding thegoodstotheirdestination wouldexceedthe valueofthegoodsontheirarrival(s 60 (2) (iii)).Furthermorethere willbeaconstructive totallosswherethe assured isdeprived of possessionof his goodsanditisunlikelythathewillrecoverthegoods(s 60 (2) (i) (a))orwherethecost of recovering the goods would exceed their value on arrival. This should be contrasted with the requirement that thegoodsbeirretrievably losttotheassured whenoneisconsideringwhether therehasbeenanactualtotalloss. These provisions are mirrored in clause 13 of the Institute cargo clauses, the 'Constructive Total LossClause', whichprovidesasfollows:

'No claimfor ConstructiveTotal Lossshall berecoverable hereunder unlessthesubject matter insured is reasonably abandoned either on account of its total loss becoming unavoidableor becausethe costofrecovering, reconditioning and forwarding thesubject matter tothedestination towhichitisinsured wouldexceeditsvalueonarrival.'

Indecidingwhether therehasbeenaconstructive total lossthevaluedeclaredin avaluedpolicyisnotconclusive(s 27 (4)).

In sum, s 60 provides a complete definition of the terms “constructive total loss”, but the two limbs of the section, appear on their face, to be contradictory. The House of Lords has, however, authoritatively stated that the two are in harmony and that they offer two different definitions, which might be employed in two different factual circumstances: Robertson v Petros M Nomikos Ltd [1939] AC 371; Rickard v Forestal Land, Timber and Railway Co Ltd [1941] 3 All ER 62; Irvine v Hine [1949] 1 KB 555

When therehasbeenaconstructive totallosstheassured hasachoice.He mayelecttoabandon thegoods totheinsurer andtreatthelossasaconstructive totallossorhemaydecidetomerelyto treatthelossasapartiallossandretainwhatisleft ofthegoodsandclaimunderthepolicy(s61).

Iftheassured decidestodeclareaconstructive totallosshemust givenoticeof abandonment to hisinsurer. This notice of abandonment need not be in any particularformbutmustbeclearandshouldindicate totheinsurer thattheassured unconditionally abandons the insured goods to the insurer and claimsatotal loss under the policy(s 62 (2)).The notice ofabandonment should begivenwithina reasonabletimeaftertheassured hasreceivedreliableinformation oftheloss. Ifthe information is, however, of adoubtful character the assured is then entitled to a reasonable time to make the necessary inquiries to either verify or discount the information he has received (s 62 (3)). If the assured fails togiveanoticeofabandonment thelosscanonlybetreated asapartialloss(s 62 (1)).

Noticeofabandonment maybewaivedbytheinsurer(s 62 (8)) andincertain circumstances itmaybeunnecessary (s 62 (7)).Where, however,theinsurer accepts the notice of abandonment this acceptance is irrevocable (s 62 (6))and the insurer mustpaytheinsured valueofthegoods.

Once theinsured goods havebeen validlyabandoned the insurer isentitled to takeovertheinterest oftheassured inwhatever mayremainofthegoodsand may exerciseallproprietary rights thereto (s 63 (1)).That istosaytheinsurer isentitled towhateverisleft ofthe goods.This rightofthe insurershouldbedistinguished fromtheinsurer’s rightofsubrogation whichisexaminedbelow.

Categories of Constructive Total Loss

A close reading of s 60 suggests that there are six types of loss, viz:

  1. Where the subject-matter insured is reasonably abandoned
  1. Where the insured subject matter issued cannot be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
  1. Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be,
  1. (b) Where the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered;
  1. Where the ship is so damaged by a peril insured against and the cost of repairing the damage would exceed the value of the ship when repaired.
  1. Where the cost of repairing the damaged goods and forwarding them to their destination would exceed their value on arrival.

Reference will now be made to a number of cases in order to gain some appreciation of the workings of section 60 and how it has been interpreted and applied by courts to the manifold factual situations presented to them over the years:

Court Line Ltd v R “Lavington Court” [1945] 78 Ll Rep 390; Read v Bonham (1821) 3 Brod & B 147; Farnworth v Hyde (1866) LR 204; Vacuum Oil Co v Union Insurance Society of Canada [1926] 25 LlL Rep 546; Moore v Evans [1918] AC 185;Polurrian Steamship Co Ltd v Young [1915] 1 KB 922; The Bamburi [1982] 1 Lloyd’s Rep 312; Marstrand Fishing Co Ltd v Beer [1937] 1 KB 158; Rickards v Forestal [1941] 3 All ER 62; Kuwait Airways Corp v Kuwait Insurance Co SAK [1986] 1 Lloyd’s Rep 664Irwin v Hine [1950] 1 KB 555; Stringer v English and Scottish Marine Insurance Co (1869) LR 4 QB 699; Moss v Smith (1950) 9 CB 94; Irving v Manning (1847) 1 HL Cas 287; Sailing Ship Holt Hill v United Kingdom Marine Association [1919] 2 KB 789; MacBeth & Co v Marine Insurance Co Ltd [ 1908] AC 144; Kemp v Halliday (1866) 6 B & S 623; Hall v Hayman [1912] 2 KB 5; Read v Darby [1808] 10 East 143; North Atlantic Steamship Co Ltd v Burr (1940) 9 Com Cas 164; Western Assurance Co of Toronto v Poole [1903] 1 KB 376; Rankin v Potter (1873) LR 6 HL 83; Kaltenback v MacKenzie (1878) 3 CPD 467; Black King Shipping v Massie, “LITSION Pride” [1983] 1 Lloyd’s Rep 437; Pameter v Todhunter (1808) 1 Camp 540; Ruys v Royal Exchange Assurance Co [1897] 2 QB 135

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Case Study Six

FraserShippingLtd v Colton [1997] 1 Lloyd's Rep. 586

The Issues

Marine insurance; underwriters refusing to salvage vessel; whether vessel actual total loss

The Facts

Under a valued marine policy, the underwriters represented by C insured F only against actual total loss of a vessel. F's brokers did not inform the underwriters of a change of destination. The vessel was damaged and was towed. It became separated from its tow and the costs of its salvage were considered prohibitive. The issue arose whether the vessel was an actual total loss.

Held, that the issue was whether F were irretrievably deprived of the vessel. While the costs of recovery would outweigh the insured value of the vessel this went only to demonstrate constructive total loss. The vessel was not an actual total loss within the period of the policy. The underwriters had not waived their rights in respect of late notification of change of destination in that they had no knowledge of the change. The underwriters demonstrated that, on these facts, they had been induced to enter into the contract on the basis of material non-disclosures.

Case Study Seven

Asfar & Co. v Blundell [1896] 1 Q.B. 123

The Facts

A vessel, on board which dates had been shipped under bills of lading making the freight payable on right delivery, was sunk during the course of the voyage, and subsequently raised. On arrival at the port of discharge it was found that although the dates still retained the appearance of dates, and although they were of considerable value for the purpose of distillation into spirit, they were so impregnated with sewage and in such a condition of fermentation as to be no longer merchantable as dates. The plaintiff paid the chartered freight and then claimed from the insurer for the loss of profits resulting from the non-delivery of the dates

Held, that there had been a total loss of the subject-matter of the insurance within the meaning of the warranty; that the plaintiff was entitled to recover the difference between the chartered freight and the total amount of the bill of lading freight that would have been received if the entire cargo had been duly delivered.

LORD ESHER M.R.

There is a perfectly well known test which has for many years been applied to such cases as the present—that test is whether, as a matter of business, the nature of the thing has been altered. The nature of a thing is not necessarily altered because the thing itself has been damaged; wheat or rice may be damaged, but may still remain the things dealt with as wheat or rice in business. But if the nature of the thing is altered, and it becomes for business purposes something else, so that it is not dealt with by business people as the thing which it originally was, the question for determination is whether the thing insured, the original article of commerce, has become a total loss. If it is so changed in its nature by the perils of the sea as to become an unmerchantable thing, which no buyer would buy and no honest seller would sell, then there is a total loss. That test was applied in the present case by the learned judge in the Court below, who decided as a fact that the dates had been so deteriorated that they had become something which was not merchantable as dates. If that was so, there was a total loss of the dates. What was the effect of this upon the insurance? If they were totally lost as dates, no freight in respect of them became due from the consignee to the person to whom the bill of lading freight was payable—that is, to the charterers—and there was a total loss of the bill of lading freight on these dates.

Appeal dismissed

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Likewise in Roux v Salvador (1836) above, where a cargo of hides was badly damaged and had to be sold at a loss, Lord Abinger had this to say

But if the goods once damaged by the perils of the sea, and necessarily landed before the termination of the voyage, are, by reason of that damage, in such a state, though the species be not utterly destroyed, that they cannot with safety be re-shipped into the same or any other vessel; if it be certain that, before the termination of the original voyage, the species itself would disappear, and the goods assume a new form, losing all their original character; if, though imperishable, they are in the hands of strangers not under the control of the assured; if by any circumstance over which he has no control they can never, or within no assignable period, be brought to their original destination; in any of these cases, the circumstance of their existing in specie at that forced termination of the risk, is of no importance. The loss is, in its nature, total to him who has no means of recovering his goods, whether his inability arises from their annihilation or from any other insuperable obstacle.

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Case Study Ten

Robertson v Petros M. Nomikos Ltd [1939] A.C. 371

The Facts

The respondents were insured in respect of the hull and machinery of their tanker valued at £28,000 for twelve months from July 30, 1936, and by a Lloyd's policy they were insured in respect of the tanker in the sum of £4110 on freight chartered or otherwise for twelve months from July 20, 1936, this policy being subject to the Institute Time Clauses - Freight, the material clauses of which were as follows:

"5. In the event of the total loss, whether absolute or constructive, of the steamer, the amount underwritten by this policy shall be paid in full, whether the steamer be fully or only partly loaded or in ballast, chartered or unchartered."

"6. In ascertaining whether the vessel is a constructive total loss the insured value in the policies on ship shall be taken as the repaired value, and nothing in respect of the damaged or break-up value of the vessel or wreck shall be taken into account."

"8. Warranted free from any claim consequent on loss of time whether arising from a peril of the sea or otherwise."

The respondents chartered the tanker to carry a cargo of crude oil from Venezuela to the United Kingdom at a certain freight. The steamer went to a port for repairs, and while there was, on October 31, 1936, damaged by an explosion followed by fire. The repairs were estimated to cost £37,000, but as when repaired she would be worth £45,000l, the respondents did not abandon her to the hull underwriters but had her repaired at the estimated cost, and claimed as for a partial loss from the hull underwriters and were paid by them £27,000. The charterparty was not performed, and the respondents consequently did not receive the freight payable thereunder. They then claimed £4110 from the underwriters of the freight policy, but as the latter refused to pay, the respondents brought an action to recover the amount:-

Held, that the respondents were entitled to recover the amount insured by the freight policy as there had been a constructive total loss of the tanker, and that it was not necessary that the respondents should have actually given notice of abandonment to the hull underwriters.

Opinion reserved by Lord Atkin and Lord Thankerton whether the claim was in any view consequent on loss of time.

Per Lord Wright: The loss under clause 5 occurred Eo instanti [immediately], and did so none the less because the respondents retained and repaired the vessel. The sole condition under that clause was that the vessel should be an actual or constructive total loss. Clauses 5 and 8 had to be read together, but clause 8 could not control clause 5.

The underwriter appealed to this House.

LORD WRIGHT.

In my opinion, the appellant fails on both points. What is meant by a constructive total loss is now determined by ss. 60 and 61 of the Marine Insurance Act, 1906, which will apply to any particular contract of marine insurance unless some different meaning is imported either expressly or by implication. The question here is whether there was a constructive total loss of the vessel by insurance law. If clauses 5 and 6 are read together they cannot apply unless there are policies on ship, so as to determine what the insured value is. The appellant contends that the clauses only apply if the shipowner has elected to treat the loss under his hull policies as a constructive total loss by giving notice of abandonment of the ship. But the hull policies and the freight policy are distinct contracts and are only to be read together in so far as one incorporates the other. In the policy on freight it is only clause 6 which incorporates the hull policy so far as is relevant to this case, and then only for the purpose of introducing the insured value which is to be found in the hull policies. Clause 5 cannot be construed by considering what action the shipowner took on his hull policies. The words "constructive total loss" must have (apart from clause 6, which merely invokes the hull policy in order to get a figure of value) the same meaning as if there were no hull policy in existence at all. The test is not the shipowner's intention, or what he did under the hull insurances.

In my opinion, notice of abandonment is not an essential ingredient of a constructive total loss. The appellant's argument confuses two different concepts, because it confuses constructive total loss with the right to claim for a constructive total loss. The right to claim except in certain cases depends on due notice of abandonment under s. 62 of the Act. The distinction is *382 explicitly stated in s. 61 of the Marine Insurance Act, which is as follows:

"Where there is a constructive total loss, the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer, and treat the loss as if it were an actual total loss."

The section makes it clear that the right to abandon only arises when there is a constructive total loss in fact. That is the necessary precondition to a right to abandon. The frame of the section makes it impossible to treat the right to abandon as identical with the constructive total loss. It is a superimposed right of election where there is a constructive total loss. Nor is it even a necessary ingredient of a constructive total loss, because though there is a constructive total loss, the assured may still treat it as a partial loss.

The objective definition of a constructive total loss is found in the preceding section of the Act. Some difficulty has been found in interpreting that section because it consists of two parts. Sub-s. 2 is purely objective; it gives the two cases of constructive total loss of ship, the first being deprivation of possession, the second the cost of repairs. This is completely consistent with s. 61. But s. 60, sub-s. 1, is said to be inconsistent, because it makes the constructive total loss depend on the condition that the subject-matter is reasonably abandoned for either of the reasons stated. This, I think, does not qualify the definition in sub-s. 2. The two sub-sections contain two separate definitions, applicable to different conditions of circumstances. But I do not find any inconsistency between s. 60, sub-s. 1, and s. 61. Sect. 60, sub-s. 1, deals with actual abandonment, which is also an objective fact, not notice of abandonment, which may be necessary for a claim for a constructive total loss even after actual abandonment of the subject-matter insured. But if there is any inconsistency between s. 61 and s. 60, sub-s. 1, there is, in my opinion, no inconsistency at all between s. 61 and s. 60, sub-s. 2, which latter is the definition material in the present case.