Maritime Insurance Law Part 28

Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series the basis and elements of Marine Insurance claims will be explored.

The measure of indemnity: constructive total loss (CTL)

1. Definition of a constructive total loss

   A constructive total loss (or a ‘CTL’) is a concept known only to marine insurance law.
   Section 60(1) MIA defines a CTL in the following terms: ‘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.’
   Section 60(1) therefore identifies two types of CTL:

   • Where the subject-matter insured is reasonably abandoned on account of its ATL appearing to be unavoidable.
   • The subject-matter insured could not be preserved from an ATL without an expense which exceeds the value of the subject-matter insured after the expense has been incurred. Section 60(2) MIA proceeds to identify two particular instances of a CTL where the subject-matter insured is either ship or cargo:
     1. Where the assured is deprived of possession of the ship or goods.
     2. Where the ship or goods have been damaged.
        The relationship between sections 60(1) and 60(2) has been the subject of debate. One view is that section 60(2) is merely illustrative of section 60(1).The other view is that section 60(2) gives an independent definition of a CTL so that an assured could try to rely on section 60(1) or section 60(2). Rickards v Forestal Land, Timber and Railways Co Ltd; Clothing Management Technology Ltd v Beazley Solutions Ltd.
        It seems clear that the concept of CTL is not limited to insurances on ship or cargo and may extend to other subject-matters of marine insurance (including possibly freight and the adventure as a whole).
        Section 60 MIA is treated as exhaustively defining the situations in which a CTL may arise, because section 56(1) MIA says that any loss other than a total loss ‘as hereinafter defined’ is a partial loss. The only definition of a total loss is contained in the provisions relating to ATLs and CTLs.

2. Damage

   Where the subject-matter insured is a ship, and the ship has been damaged, the ship will be a CTL if the cost of repair would exceed the value of the ship when repaired (section 60(2)(ii) MIA). However, the Institute Time Clauses – Hulls (1/11/1995), clause 19.2 requires that the cost of repair exceeds the insured value of the ship. (Institute Voyage Clauses – Hulls (1/11/1995), clause 17.2.) Under clause 21 of the International Hull Clauses 2003, there will be a CTL if the cost of recovery and/or repair exceeds 80 per cent of the insured value.
   The repairs must be such as to restore the ship to her pre-damage condition. In calculating the cost of repair, the residual value of the damaged vessel (i.e. the wreck) is not taken into account (Hall v Hayman; Institute Time Clauses – Hulls (1/11/1995), clause 19.1; Institute Voyage Clauses – Hulls (1/11/1995), clause 17.1; International Hull Clauses 2003, clause 21.1. Compare the common law position: Macbeth & Co v Maritime Insurance Co Ltd).
   Where the subject-matter insured is cargo, the cargo will be a CTL where the cost of repair and of forwarding the cargo to its destination would exceed its value on arrival (section 60(2)(iii) MIA; compare the common law position: Rosetto v Gurney). (See the Institute Cargo Clauses (A), (B) and (C), clause 13).
   The costs of repair which are taken into account in determining whether there has been a CTL may include items of repair which are excluded from cover for a partial loss or particular average under the policy. See Suez Fortune Investments Ltd v Talbot Underwriting Ltd; Venetico Marine SA v International General Insurance Company Ltd. It is permissible to take into account the costs of repair incurred prior to the tender of the notice of abandonment (NOA): Connect Shipping Inc v The Swedish Club (MV Renos).

   Where there is difficulty in formulating an estimate of the cost of repair: Suez Fortune Investments Ltd v Talbot Underwriting Ltd; Connect Shipping Inc v The Swedish Club (MV Renos).

3. Deprivation of possession

   Where the assured has been deprived of possession of the insured vessel or cargo by reason of an insured peril, there is a CTL (under section 60(2)(i) MIA) if:

   1. It is unlikely that he or she can recover the vessel or cargo.
   2. The cost of recovering the vessel or cargo would exceed its value when recovered.
      The deprivation of possession of the vessel or cargo means that the assured is deprived of the right to use the vessel or cargo as he or she chooses. Therefore, if the assured or the master remains in physical possession of the vessel or cargo but is not, for example, permitted to remove the vessel or cargo from a particular place or port, it may be that the assured has been deprived of possession, because he or she has been deprived of the free use and disposal of the vessel or cargo.
   1. Unlikelihood of recovery
      The requirement that it is ‘unlikely’ that the vessel or cargo will be recovered means that the assured has to prove that there is at least a 51 per cent chance that the vessel or cargo will not be recovered. The law before the MIA was that it merely had to be uncertain, not unlikely, that the vessel or cargo would be recovered.
      The unlikelihood of recovery must be assessed on the basis that it would be unlikely to recover the vessel or cargo ‘within a reasonable time’ (Polurrian Steamship Co v Young, Petros M Nomikos Ltd v Robertson, Royal Boskalis Westminster NV v Mountain).
      Further, the likelihood of recovery must be based on the true facts as opposed to the facts as they appeared to the assured (Marstrand Fishing Co Ltd v Beer, Royal Boskalis Westminster NV v Mountain).
      The policy may include a provision whereby it will be deemed that it is unlikely that the assured will recover possession of the vessel if he or she has been deprived of the free use and disposal of the vessel for a continuous period, say, of 12 months (see the Institute War and Strikes Clauses – Hull (1/11/1995), clause 3; The Bamburi.
   2. Cost of recovery
      When considering the cost of recovery, the MIA requires that it be compared with the ‘recovered value’ of the subject-matter insured. However:
   1. 1. With respect to an insurance of ship, the Institute Time Clauses – Hulls (1/11/1995), clause 19.2 requires the comparison to be made with the insured value of the vessel. (See also the Institute Voyage Clauses – Hulls (1/11/1995), clause 17.2; International Hull Clauses 2003, clause 21.2.)
      2. With respect to insurance of cargo, the Institute Cargo Clauses (A), (B) and (C) (1/1/82), clause 13 requires the comparison to be made between the cost of recovery, reconditioning and forwarding the cargo to its destination and the value of the cargo on arrival.

4. The assured’s election

   In the event that there has been a CTL, the assured has a choice (under section 61 MIA):

   1. He or she may treat the loss as a partial loss.
   2. He or she may offer to abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss. If the assured elects to treat the loss as a partial loss, he or she cannot thereafter claim for a CTL. However, if the assured elects to claim for a CTL, if as a matter of fact the loss is not a CTL, the assured may nevertheless thereafter claim for a partial loss (section 56(4) MIA).

5. The notice of abandonment (NOA)

   If the assured wishes to claim for a CTL, he or she must give notice of abandonment (‘NOA’) to the insurer thus signifying his or her election to claim for a CTL, rather than a partial loss (section 62(1) MIA). The mere fact that the assured chooses to claim for a CTL will not prevent him or her claiming alternatively for a partial loss if the evidence does not establish that there was in fact no CTL (see section 56(4) MIA).
   If the assured fails to tender an NOA where one is required, he or she will be treated as claiming only for a partial loss and will not be permitted to claim for a CTL. There is no particular form required for a valid NOA. The only requirement is that by the NOA the assured indicates his or her intention to abandon his or her interest in the subject-matter insured unconditionally to the insurer (section 62(2) MIA). Further, the NOA should provide sufficient information to enable the insurer to make proper enquiries concerning the status of the subject-matter insured.
   The NOA is not a ‘matter of the mind’ and must be manifest to the insurer (Kastor Navigation Co Ltd v AGF MAT).
   The NOA (if required) must be given ‘with reasonable diligence after the receipt of reliable information of the loss’. However, ‘where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry’ (section 62(3) MIA). As to what may constitute a reasonable time, see, Anderson v Royal Exchange Assurance Co, MR Currie & Co v Bombay Native Insurance Co; Kaltenbach v Mackenzie; Involnert Management Inc v Aprilgrange Ltd; Connect Shipping Inc v The Swedish Club (MV Renos).
   Even though the NOA remains unaccepted by the insurer, the assured may revoke the NOA (Royal Boskalis Westminster NV v Mountain; Suez Fortune Investments Ltd v Talbot Underwriting Ltd; Connect Shipping Inc v The Swedish Club (MV Renos). However, when the NOA is accepted by the insurer, the abandonment is irrevocable and the acceptance constitutes an admission of the insurer’s liability for the loss (see section 62(6) MIA). However, the insurer may still be able to reverse the position by arguing that the insurance contract is voidable for non-disclosure or misrepresentation (Fraser Shipping Ltd v Colton (The Shakir III)) or that the loss was caused by an excluded or non-covered peril if the NOA was accepted under a mistake of fact (Norwich Union Fire Insurance Society v Wm H Price Ltd). Under section 62(5) MIA, the acceptance of the abandonment may be either express or implied from the conduct of the insurer, but the mere silence of the insurer after notice has been tendered will not constitute an acceptance of the NOA.
   The NOA is not an essential element of the assured’s cause of action to be indemnified in respect of a CTL. Rather, it is merely a condition to be satisfied if the assured wishes to claim for a CTL. That is, it is a procedural condition, not a substantive condition. Therefore, the limitation period for a claim for a CTL starts running from the date of the loss, not from the date of the NOA.
   NOA need not be given by the assured where:

   1. It has been waived by the insurer (section 62(8) MIA).
   2. At the time the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him or her (section 62(7) MIA). (Clothing Management Technology Ltd v Beazley Solutions Ltd).
      If the assured is excused from tendering an NOA, the assured may still be deprived of the right to claim a CTL if by his or her words or conduct he or she has manifested an intention to claim only for a partial loss (Kastor Navigation Co Ltd v AGF MAT).
      The mere fact that a CTL subsequently becomes an ATL does not prevent the assured claiming for a CTL (Kastor Navigation Co Ltd v AGF MAT).
      Notices of abandonment (section 62 MIA) must be distinguished from the doctrine of abandonment (section 63 MIA) (Clothing Management Technology Ltd v Beazley Solutions Ltd.
   1. The notice of abandonment is the offer made by the assured to abandon the vessel to the insurer in the event that the assured elects to claim for a CTL. It is a pre-condition of the assured’s entitlement to claim for a CTL.
   2. An abandonment, on the other hand, is ‘a cession or transfer of the ship to the underwriter, and of all his property and interest in it, with all the claims that may arise from its ownership, and all the profits that may arise from it, including the freight then being earned’ ( see section 63 MIA). An abandonment concerns the divestment of the assured’s interest in the insurer, if the insurer accepts the interest, following a total loss, whether an ATL or CTL, in service of the principle of indemnity.

6. The doctrine of ademption

   The date on which there must be a CTL is the date on which the NOA was tendered and the date on which proceedings are commenced.
   However, a practice has developed that when a NOA is tendered and declined by the underwriter, it will be agreed between the parties that the parties will be in the same position as if proceedings were commenced on the date on which the NOA was declined.
   Where the insurer gratuitously intervenes to recover or restore the vessel before the date of commencement of proceedings, so as to reduce the cost of repair or recovery of the vessel, the assured may still claim for a CTL.
   If there is a CTL as at the relevant date(s), it does not matter that the assured subsequently recovers the insured vessel or cargo. The assured remains entitled to press his or her CTL claim. If the insurer pays the claim, the insurer will be entitled to take over the assured’s interest in the property (sections 63 and 79(1) MIAct).

7. Successive total losses

   It may be that there is a CTL which is followed by an ATL. In that event, the question arises whether or not the succession of such total losses means that the assured is prevented from recovering in respect of the CTL or the ATL.
   There appears to be no doctrine of merger in such cases (as there would be if there were an unrepaired damage partial loss followed by a total loss – see section 77(2) MIA). Therefore, the assured could claim for the subsequent ATL.
   Equally, the assured would be entitled to recover in respect of the earlier CTL and not claim in respect of the later ATL.
   Of course, if the assured does not tender an NOA (and should have done so) and so elects to claim for a partial loss in respect of the prior CTL, the occurrence of the later ATL will result in the merger of the earlier partial loss assuming it concerned unrepaired damage Kastor Navigation Co Ltd v AGF MAT.

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This article is written by our Principal Associate, Chakaravarthi