TOTAL LOSSES. by Dr Nicholas G. Berketis. ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS, MSc in International Shipping, Finance and Management

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1 TOTAL LOSSES by Dr Nicholas G. Berketis

2 Two (2) classes of losses on a marine insurance policy: Ø Total Losses Ø Partial Losses l Any loss, which is not a total loss is a partial loss

3 Actual Total Loss (A.T.L.) and Constructive Total Loss (C.T.L.) Section 56 of Marine Insurance Act (1906) provides the following: (1) A loss may be either total or partial. Any loss other than a total loss, as hereinafter defined, is a partial loss. (2) A total loss may be either an actual total loss, or a constructive total loss. (3) Unless a different intention appears from the terms of the policy, an insurance against total loss includes a constructive, as well as an actual total loss. (4) Where the assured brings an action for a total loss and the evidence proves only a partial loss, he may, unless the policy otherwise provides, recover for a partial loss.

4 Measure of Indemnity The measure of indemnity (i.e. what you recover as a claim) for a total loss is the full amount insured on the policy. Section 68 of the Marine Insurance Act (1906) provides as follows: Subject to the provisions of this Act and to any express provision in the policy, where there is a total loss of the subject-matter insured,- (1) If the policy be a valued policy, the measure of indemnity is the sum fixed by the policy. (2) If the policy be an unvalued policy, the measure of indemnity is the insurable value of the subject-matter insured.

5 Actual Total Loss According to the Marine Insurance Act an actual total loss of a ship can occur in one of three ways: 1. The ship is destroyed; 2. The ship is damaged so badly that she is no longer recognizable as a ship; 3. The assured is irretrievably deprived of the ship. Section 57 of the Marine Insurance Act provides the following: Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss.

6 Actual Total Loss (cont d) Ø Irretrievably Deprived: The part of the definition which mentions "irretrievable deprivation" is to deal with the situation when a ship is captured or seized in war or by a hostile power. Ø Destroyed: A ship which is sunk in deep water, with no hope of salvage would be regarded as destroyed, and so in an actual total loss. The important factor is that it is physically impossible to recover the ship. A wooden ship which is burnt to a pile of ashes would clearly have been "destroyed".

7 Missing Ship This is a special case of actual total loss. The Marine Insurance Act provides under Section 58: Where the ship concerned in the adventure is missing, and after the lapse of a reasonable time no news of her has been received, an actual total loss may be presumed. At Lloyd s the "reasonable time" is considered to be 30 days.

8 Agreement of a Total Loss An actual total loss will be admitted by underwriters only in the clearest of cases, such as sinking in deep water, a missing ship, or capture. They will expect any other situation to be dealt with as a constructive total loss.

9 Constructive Total Loss Constructive Total Loss (C.T.L.) is defined by Section 60 of the Marine Insurance Act. The concept of C.T.L. is peculiar to marine insurance and has no meaning outside this context. The essence of C.T.L. is that the ship still exists as a ship at the time the claim is made, but it is unlikely that the ship can be saved at all, or if it can be saved then only at a cost which is out of proportion to the value of the ship. A C.T.L. claim allows the assured to transfer the commercial problems posed by this situation to the insurer.

10 Constructive Total Loss (cont d) Section 60 of the Marine Insurance Act provides the following: (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. Notes: a) The word "abandoned" in sub-section 60(1) simply means "given up for lost". It is NOT a reference to "Notice of Abandonment", which we shall deal with later. b) The above definition of C.T.L. is complete and exhaustive: if the situation does not fall within the definitions above, then there is no C.T.L.

11 The Repaired Value Most C.T.L. claims are made under sub-section 60(2)(ii) of the Marine Insurance Act (1906), i.e. the cost of repairs would exceed the value of the ship when repaired. The Act means the actual market value, but this is varied by all modern hull insurance policies. Special clauses in the policy provide that the insured value is to be taken as the repaired value to test whether the ship is a C.T.L. The 1/10/83 version of the Institute Time Clauses (Hulls) include the following: 19 Constructive Total Loss 19.1 In ascertaining whether the Vessel is a constructive total loss, the insured value 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 No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value. In making this determination, only the cost relating to a single accident or sequence of damages arising from the same accident shall be taken into account. Therefore, under Institute Time Clauses (Hulls) , when the cost of recovery and/or repairs to damage received in a single accident would exceed the insured value.

12 Example of C.T.L. Insured Value: US$ 10,000,000 Vessel in ballast, not under charter Surveyor s estimates of cost (i.e. no expenses yet incurred) Refloating expenses US$ 1,000,000 Repairs 9,500,000 US$ 10,500,000 The estimated cost of refloating and repairs exceeds the insured value and the ship is considered a C.T.L.

13 Notice of Abandonment (N.O.A.) - (1/3) Section 61 of the Marine Insurance Act (1906) provides the following: Where there is 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.

14 Notice of Abandonment (N.O.A.) (2/3) The rules about giving notice of abandonment are set out in Section 62 of the Marine Insurance Act (1906). The important points are: 1. Unless N.O.A. is given, there can be no claim for C.T.L. and the loss will be treated as a partial loss; 2. The Assured must give N.O.A. as soon as he has reliable information, on which to decide that the ship is a C.T.L; 3. If the Insurer refuses N.O.A., which he invariably does, the Assured is not prejudiced by this refusal; 4. If the Insurer accepts the N.O.A. the abandonment is irrevocable and the Insurer conclusively admits liability to pay a total loss.

15 Notice of Abandonment (N.O.A) (3/3) The provisions of Section 62 of the Marine Insurance Act (1906) are as under: (1) Subject to the provisions of this section, where the assured elects to abandon the subjectmatter insured to the insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss. (2) Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word of mouth, and may be given in any terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer. (3) Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry. (4) Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment. (5) The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer after notice is not an acceptance. (6) Where notice of abandonment is accepted the abandonment is irrevocable. The acceptance of the notice conclusively admits liability for the loss and the sufficiency of the notice. (7) Notice of abandonment is unnecessary where, at the time when the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him. (8) Notice of abandonment may be waived by the insurer. (9) Where an insurer has re-insured his risk, no notice of abandonment may be given by him.

16 Claiming for a C.T.L. We have just considered how to decide whether a ship is, in terms of the Policy, a C.T.L. But, if she is, the Assured may choose whether he claims for a C.T.L. or repairs the ship and claims for particular average up to the sum insured (less of course the Policy Deductible, which applies to all claims except Total Losses). If he chooses to claim for a C.T.L. he is obliged to abandon the ship to Hull Underwriters by giving Notice of Abandonment.

17 Claiming for a C.T.L. (cont d) N.O.A. is usually given to Underwriters in a letter along the following lines: M/V "MARY" Whilst on a voyage from Gibraltar to Piraeus, the vessel stranded on rocks off Cape Matapan. It is likely that the cost of refloating and repairs will exceed the insured value and we hereby give Notice of Abandonment and claim payment of the sum insured. If you decline to accept this Abandonment, please agree to place us in the same position as if we had issued a writ against you today. The second half of the N.O.A. is known as the "writ clause". If the Assured sued the Underwriter, the court would look at the facts on the date when the writ was issued to test whether the ship was a C.T.L. Underwriters usually reply in the following terms: We decline to accept your Abandonment, but agree to place the Assured in the same position as if a writ had been issued today.

18 Effect of Abandonment Section 63 of Marine Insurance Act (1906) states the following: Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever may remain of the subject-matter insured, and all proprietary rights incidental thereto. In order to take over the interest the insurer must accept the N.O.A., but in accepting the benefit and rights of ownership he is also given the burden and liabilities, which might include for example, the obligation to remove the wreck. This is why Underwriters refuse to accept N.O.A. What they do in practice is to wait and see how events develop. If the ship is eventually recovered, and sold for scrap, and the proceeds of sale exceed the charges against those proceeds, then the Underwriters come forward at that point and claim the balance that is left. Note that Underwriters will usually accept that the ship is a C.T.L., and pay the sum insured, without accepting N.O.A. But this payment does not constitute acceptance of N.O.A.

19 Sue and Labour and the Waiver Clause of I.T.C. Hulls DUTY OF ASSURED (SUE AND LABOUR) 13.1 In case of any loss or misfortune it is the duty of the assured and their servants and agents to take such measures as may be reasonable for the purpose of averting or minimising a loss which would be recoverable under this insurance Subject to the provisions below and to clause 12 the underwriters will contribute to charges properly and reasonably incurred by the assured their servants or agents for such measures. General average, salvage charges (except as provided for in clause 13.5) and collision defence or attack costs are not recoverable under this clause When a claim for total loss of the vessel is admitted under this insurance and expenses have been reasonably incurred in saving or attempting to save the vessel and other property and there are no proceeds, or the expenses exceed the proceeds, then this insurance shall bear its pro rata share of such proportion of the expenses, or of the expenses in excess of the proceeds, as the case may be, as may reasonably be regarded as having been incurred in respect of the vessel; but if the vessel be insured for less than its sound value at the time of the occurrence giving rise to the expenditure, the amount recoverable under this clause shall be reduced in proportion to the under-insurance. After the Assured has given N.O.A. and the Insurer has refused it, the Assured remains the Owner of the damaged ship, and retains all the responsibilities that this entails. He also retains the responsibility, subject to the suing and labouring clause in the policy, to try to recover the ship. If the ship is sunk on a berth or in a harbour he may be served with a legal notice by the authorities requiring him to remove the wreck.

20 Example of a claim Vessel with cargo on board strands Ship value sound US$ 10,000,000 Insured for US$ 12,000,000 Cargo value sound US$ 3,000,000 Tugs hired for US$ 100,000 per day. After 40 days vessel saved. Vessel badly damaged and accepted as C.T.L. and sold for scrap realising US$ 1,750,000 Charges against proceeds of sale, including towage to scrap yard US$ 250,000 Cargo salved value US$ 2,000,000 Claim under Clause 13.5 Salvage (40 US$ 100,000) = US$ 4,000,000 Less proceeds: Ship US$ 1,750,000 Less charges 250,000 US$ 1,500,000 Cargo 2,000,000 US$ 3,500,000 Expenses in excess of proceeds in terms of Clause 13.5 US$ 500,000 Divided (to decide proportion which may reasonably be regarded as having been incurred in respect of the vessel) Ship (net salved value) US$ 1,500,000 US$ 214, Cargo (salved) - US$ 2,000,000 US$ 285, US$ 3,500,000 US$ 500, Shipowner receives: Claim for C.T.L. US$ 12,000, Charges against proceeds 250, Claim under Clause , TOTAL US$ 12,464,285.71