Constructive Total Loss
A constructive total loss (CTL) is a concept peculiar to marine insurance.1 It is an intermediate form of loss between partial and actual total loss.2 The editors of Arnould describe ATL as a total loss in law and in fact and CTL is a total loss in law but not in fact.3 If the requirements for a CTL are met the assured may claim for a total loss of the vessel although the vessel say, was not destroyed. On the other hand, the assured is not obliged to claim for a CTL, he may choose to claim for a partial loss.4
Under section 60(1) of the MIA 1906 there is a constructive total loss where
a) the subject matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or
b) 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(2) supplements5 subsection (1) by providing:
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.
Section 60(2)(ii) further provides ‘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 subject matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable (s.60(1))
The word ‘abandonment’ within the meaning of s.60(1) of the MIA 1906 is not a notice of abandonment in the sense of Sections 61, 62 and 63 of the MIA 1906, but ‘the abandonment of any hope of recovery’.6 When the ship is spoken of as ‘abandoned on account of its actual total loss appearing to be unavoidable’, the word is used in nearly the same sense as when according to the law of salvage the ship is left by master and crew in such a way as to make it a ‘derelict’, which confers on salvors a certain but not complete exclusiveness of possession, and a higher measure of compensation for salvage services.7 But to render the ship a ‘derelict’, it must have been left (a) with that intention (b) with no intention of returning to her; and (c) with no hope of recovering her.8 The forecast of the probability of actual total loss would, at any rate a century ago, nearly always have to be made by the master on the spot; and even in these days of easy and quick wireless communication, the decision would very often devolve on the master.9
In Masefield AG v Amlin Corporate Member Ltd10 – the facts of which were given in the actual total loss chapter – the vessel and its cargo were not abandoned in the relevant sense.11 On the contrary, the shipowners and the cargo owners had every intention of recovering their property.12 There was no reasonable basis for regarding an ATL as unavoidable.13 The fact that the pirates were holding the ship to ransom to which the owners succumbed does not alter this analysis.14
Where the subject matter insured is reasonably abandoned because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred (s.60(1))
This is an economic test.15 Lord Abinger stated in Roux v Salvador16 that in the case of, for instance, perils of the sea rendering the ship unnavigable without any reasonable hope of repair or by which the goods are partly lost, or so damaged, that they are not worth the expense of bringing them, or what remains of them, to their destination, the test to determine CTL is ‘if a prudent man not insured, would decline any further expense in prosecuting an adventure, the termination of which will probably never be successfully accomplished’.17 The test was recently approved by Andrew Smith J in Venetico Marine SA v International General Insurance Co Ltd.18
Deprivation of possession of ship or goods (s.60(2)(i)(a)
Recovery is unlikely
Under this heading an assured does not have to prove an ATL if he is able to show that he is deprived of possession of ship or cargo by a peril insured against and recovery is ‘unlikely’.19 What is required to be established is the loss of ‘free use and disposal’ of the ship or goods.20 Although the Act is in general a codification of prior common law, the common law test in the case of CTL dispossession had been where recovery was ‘uncertain’, not ‘unlikely’. So in this respect, the Act changed the law.21
The test is objective. It depends on the judgment of the reasonable man, not of the assured himself.22 The judgment is to be exercised on the true facts existing at the relevant time, not merely on the facts as known or appearing to the assured.23
The words ‘within a reasonable time’ are implicit in subsection 2(i)(a).24 In Polurrian Steamship Company, Limited v Young,25 the Polurrian sailed from Newport on 9 October 1912, with a cargo of coals. On 25 October she was captured by the Greek navy and her cargo was removed and used for coaling the Greek fleet. On 26 October notice of abandonment in writing was given to the insurers. The ship was detained by the Greek Government until 8 December 1912, when they released her. Warrington J stated that the test of ‘unlikelihood of recovery’ has now been substituted for ‘uncertainty of recovery’. The assured was held to have to establish fully (1) that at the date of the commencement of this action they were deprived of the possession of the Polurrian; and (2) that it was not merely quite uncertain whether they would recover her within a reasonable time, but that the balance of probability was that they could not do so. In Panamanian Oriental Steamship Corp v Wright (The Anita)26 it was established that the recovery of the vessel within reasonable time was unlikely. In The Anita the vessel was seized at Saigon in March, 1966, after unmanifested goods had been discovered by customs officials. She was confiscated by order of a Special Court and had not been recovered until August 1968. The assured gave a notice of abandonment in May 1966 and this was held to be a constructive total loss of the vessel.
The assured was successful in his claim under this heading in Bayview Motors Ltd v Mitsui Marine & Fire Insurance Co Ltd27 where the insurance claim was for the loss of motor vehicles that had been shipped from Japan to the Dominican Republic for onward carriage to the Turks and Caicos Islands. The vehicles arrived at Santo Domingo on 11 August 1997. Neither the bill of lading nor the cargo manifest mentioned the fact that they were intended for shipment on to the Turks and Caicos. Under the Dominican Customs Regulations onward transmission was permissible only where a statement to that effect had been made at the port of origin and consent had been given by the Dominican customs authorities. Although the claimants completed the necessary documents to comply with the local customs regulations the cars were not released. They were placed by the Dominican customs authorities in a fenced parking lot within the area of the port of Santa Domingo. At some point the vehicles were removed from the parking lot by the customs authorities, and the claimants were informed by the Port Authority in November 1997 that the vehicles had ‘gone’; they had been taken by ‘Customs’ about a month earlier. The assured’s claim for a CTL was approved by the Court, the vehicles had not disappeared but had fallen into the hands of those who, in the real world, would not be returning them.
Bayview was affirmed in a recent case of Clothing Management Technology Ltd v Beazley Solutions Ltd (t/a Beazley Marine UK).28 In this case a British clothing manufacturer, CMT, manufactured clothing at a factory in Morocco. After working for a few years without a problem, in 2008 the owners of the Moroccan manufacturing company disappeared, leaving its workers unpaid. The workers occupied the factory and refused to finish the garments. CMT made a claim on its insurance for £180,527.60, being the price which CMT would have charged its customers for the garments to be manufactured from the clothing fabrics and trimmings not recovered from the factory in Morocco. Before the workers occupied the factory CMT made payments to the workers but negotiations broke down in early November 2008, at which point CMT understood that the workers would be stripping the factory of all its machinery and fabric. HHJ Mackie QC held that the garments became a constructive total loss. It became unlikely in early November 2008 that CMT could recover possession of the goods within a reasonable time to meet its commitments to customers. This was the case due to the nature of the products in question: fashion garments, which have a relatively short commercial life. Similar to Bayview, the Court accepted that the garments were not going to come out of the factory within a reasonable time, and they had a limited life as finished goods capable of being sold at or approaching invoice value. This was not physical impossibility but it was mercantile impossibility.
One might consider whether the outcome in Masefield v Amlin would have been different if the arguments along the same lines as those successful in Beazley had been brought forward. It was clear in Masefield that the cargo would lose its market (similar to the fashion garments in Beazley) therefore recovery of the goods (which would sell and make profit) within reasonable time was unlikely. However Masefield still seems different to Beazley for the reason that in the former recovery of cargo was not unlikely, it was a wait and see situation. Whereas in Beazley it was clear that the local courts would likely be sympathetic to the workers and the legal battle to recover the garments could last for years.
The cost of repairing the damage would exceed the value of the ship when repaired (s.60(2)(i)(b)
Under this heading the determinative issue is not whether the subject matter insured was destroyed or annihilated, but the cost of repair. In other words, repairing the ship may be physically possible but in matters of business it may be impracticable due to the cost of repair, which exceeds the value of the ship once repaired.29
Section 60(2)(ii) of the MIA 1906 states ‘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’. However, as seen below, the relevant value, by virtue of the Institute Clauses, will be the insured value, not the actual value when repaired.
The relevant standard is what it would cost to make the vessel as good as she was before the casualty.30 The question is, how would the claimants reasonably have gone about repairing the damage, judging them by the standards of owners who were uninsured and behaving prudently?31 Under a valued policy, the test has been formulated in terms of repairing the vessel to the same condition, as nearly as possible, as at the time when the valuation was agreed.32 Although the common law held that in a valued policy whether the subject matter of insurance be ship or goods, the valuation is the amount fixed by agreement at which in case of loss the indemnity is to be calculated,33 the MIA 1906 s.27(4) provides ‘Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss’. On the other hand, cl.21 of the International Hull Clauses (01/11/03) provides:
21.1 In ascertaining whether the vessel is a constructive total loss, 80% of the insured value of the vessel 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.
21.2 No claim for constructive total loss of the vessel based upon the cost of recovery and/or repair to the vessel shall be recoverable hereunder unless such cost would exceed 80% of the insured value of the vessel.
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.’
Some of the cost of repairs may be ultimately recoverable by the owners of the interest insured from the owners of other interests in general average. Section 60(2)(ii) states that such a recovery is irrelevant to any question of constructive total loss. If, for instance, the cost of repairing a ship will be £4m and her repaired value will be £3.5m, this is a case of constructive total loss, notwithstanding the fact that half the cost of the repairs may be eventually recoverable from the owners of the cargo.
On the other hand, contributions by third parties to the cost of salvage must be deducted when deciding whether the vessel is a constructive total loss.34 In Kemp v Halliday35 a ship sank with heavy cargo on board. The most convenient mode of saving ship or cargo or both was by raising the ship together with the cargo. It was held that in considering whether the ship became a CTL the contribution by the cargo owner to the cost of raising the ship and cargo would be taken into account.
Constructive total loss of goods
The MIA 1906 s.60(2)(i) states that there is a CTL of goods 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.
In the case of damage to goods, there is a CTL where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival (s.60(2)(iii)).
Clause 13 of the Institute Cargo Clauses provides that: ‘No claim for constructive total loss shall be recoverable hereunder unless the goods are reasonably abandoned either on account of their actual total loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the goods to the destination to which they are insured would exceed their value on arrival.’
Loss of voyage may be relevant for CTL of cargo. In British and Foreign Marine Insurance v Sanday36 it was held that where goods are insured at or from one port to another port the insurance is not confined to an indemnity to be paid in case the goods are damaged or destroyed, but extends to an indemnity to be paid in case the goods do not reach their destination. This may be variously described as an insurance of the venture, or an insurance of the voyage, or an insurance of the market, as distinguished from an insurance of the goods simply and solely. The MIA 1906 does not list this case as CTL, however s.91(2) enacts that the rules of the common law, including the law merchant, save insofar as they are inconsistent with the express provisions of the Act, shall continue to apply to contracts of marine insurance.
In Sanday, two British vessels laden with merchandise belonging to British merchants for sale in Germany were on a voyage from Argentina to Hamburg when war broke out between the United Kingdom and Germany and the further prosecution of the voyage became illegal. The cargo owners had insured the goods on both vessels, the perils insured against included restraints of princes. Shortly after the outbreak of the war the vessels were directed to proceed to British ports, which they did. The cargo owners warehoused their goods and gave notice of abandonment to their underwriters, claiming on a constructive total loss. The House of Lords accepted the claim. Their Lordships found it well settled that when goods are insured at and from the port of loading to the port of destination, there is a loss if the adventure is frustrated by a peril insured. Insurance was not merely against the actual merchandise being injured, but also an insurance of its safe arrival. The goods were insured for their safe arrival at Hamburg, and the destruction of that adventure was directly caused by His Majesty’s declaration. Lord Atkinson said ‘… if the loss of the voyage, the loss of the chance of arriving at the port of destination, and the consequent loss of the market appear to be unavoidable, there would be a constructive total loss of the subject-matter.’
For a CTL of a vessel Lord Wright expressed a contrary view in Rickards v Forestal Land Timber & Railways Co Ltd (The Minden).37 His Lordships said ‘The primary subject of the insurance is the goods as physical things, but there is superimposed an interest in the safe arrival of the goods. This is very old law. Lord Mansfield insisted on applying the same rule to an insurance on the ship, but his view was rejected and it was said that the loss of the voyage has nothing to do with the loss of the ship. The ship is a vehicle employed in general trading, not wedded to any particular adventure.’
Thus, there appears to be a difference between loss of adventure in insurance of cargo and insurance of goods. In Rickards, Lord Wright accepted that a policy on goods is covering a composite interest, the physical things or chattels, and also the expected benefit from their arrival.38
Date at which CTL to be assessed
The Marine Insurance Act is silent on the question of what is the point of time to be taken in ascertaining whether there was a constructive total loss. By the English common law the relevant time is at the date of the notice of abandonment and the date of issue of the writ.39 In practice if a notice of abandonment is not accepted by underwriters, they agree that a writ be deemed to be issued.40