Maritime Insurance Law Part 27
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: Actual Total Loss (ATL)
Types of total loss
There are two kinds of total loss in marine insurance law (section 56(2) MIA):
- An actual total loss.
- A constructive total loss.
If either an actual or a constructive total loss is proved, assuming the policy covers the loss, the measure of indemnity is the sum fixed by the policy (in the case of a valued policy) or the insurable value of the subject-matter insured (in the case of an unvalued policy) (Section 68 MIA).If the insurance policy covers ‘total losses’, the insurance will respond to both actual and constructive total losses (assuming of course that the insurance contract does not provide otherwise) (Section 56(3) MIA).
Definition of an actual total loss
An actual total loss (sometimes referred to as an ‘ATL’ and formerly referred to as an ‘absolute total loss’) occurs in one of four situations (sections 57(1) and 58 MIA):
- Where the subject-matter insured is destroyed.
- Where the subject-matter insured is ‘so damaged as to cease to be a thing of the kind insured’.
- Where the assured is irretrievably deprived of the subject-matter of the insurance
(Forestal Land, Timber and Railways Co Ltd v Rickards, Berger and Light Diffusers Pty Ltd v Pollock, Kuwait Airways Corp v Kuwait Insurance Co SAK, Fraser Shipping Ltd v Colton (The Shakir III), Royal Boskalis Westminster NV v Mountain, Bayview Motors Ltd v Mitsui Marine and Fire Insurance Co Ltd, Scott v Copenhagen Reinsurance Co (UK) Ltd, Kastor Navigation Co Ltd v Axa Global Risks, Masefield AG v Amlin Corporate Member Ltd, Venetico Marine SA v International General Insurance Company Ltd).
- Institute Voyage Clauses – Freight (1/11/1995), clause 12.
- Where the ship concerned in the adventure is missing and after the lapse of a reasonable time no news has been received of the ship.
The first and second types of ATL are distinguished only by matters of degree. The fourth type of ATL is merely an instance of the third type of ATL in that if the ship concerned is a ‘missing ship’, there is presumed to be an actual total loss because the assured is irretrievably deprived of his or her ship.
Each of these cases is predicated on the notion that it would be impossible for the subject-matter of the insurance to conclude the contemplated period of the insurance (e.g. the vessel cannot complete the insured voyage). The concept of ‘possibility’ or ‘impossibility’ for these purposes is a question of physical possibility as opposed to economic possibility.
Whether or not there has been an actual total loss must be assessed as at the date of he casualty. Therefore, if the subject-matter of the insurance is subsequently restored or becomes salvageable, the subject-matter remains an actual total loss notwithstanding. (There is authority for the view that the doctrine of ademption which applies to constructive total losses (i.e. that the total loss must continue to exist as at the date of commencement of proceedings) also applies to actual total losses: Tunno v Edwards; Goldsmid v Gillies). Nevertheless, there may be occasions where one has to wait a reasonable time to determine whether there has been an actual total loss.It is likely that the date of the casualty must fall within the policy period of the insurance. If the subject-matter of the insurance received its ‘death blow’ before the insurance expired, but it was not an actual total loss at that date – rather, merely a partial loss or a constructive total loss – the fact that it develops into an actual total loss after the expiry of the insurance will not prevent the ATL being covered by the policy.
If the vessel or cargo is reduced to ashes, then the subject-matter of the insurance has been ‘totally destroyed or annihilated’ and will be an ATL.
Or, as in Sailing Ship ‘Blairmore’ Co v Macredie :‘ a mere congeries of wooden planks or of pieces of iron could not without reconstruction be restored to the form of a ship’.
Where the subject-matter insured is not destroyed, but merely severely damaged, it may be more difficult to determine whether or not there has been an ATL.
- The ship as an actual total loss
Where the insured vessel is reduced to a ‘wreck’ (i.e. scattered planks, etc.) the mere fact that the constituent elements of what had been a ship are recoverable does not detract from its status as an actual total loss. Similarly, where the ship is not totally destroyed, but is damaged to such a degree that it ceases to be that which it had been, there will be an ATL of the subject-matter insured.The question is whether it is physically possible to restore the vessel Into a serviceable condition. This question is not concerned with cost or economics, but with physical possibility. Therefore, when a ship was virtually split in two, it was held that the vessel was not an ATL, because there was undisputed evidence that it was feasible to salvage the vessel subject to accessibility and cost; the Court considered that the vessel retained its original appearance and character as a single ship (Fraser Shipping Ltd v Colton (The Shakir III)).Note that there was an exception to this position that if it was not practicable for the master to repair a ship – which was merely a constructive total loss – and the master sold the ship, the ship would become an ATL. However, with the growth of modern communications, it is difficult to conceive that this exception would have any realistic application today. This possibility exists with more likelihood in respect of cargo insurance.
- The cargo as an actual total loss
Where the goods have deteriorated during the insured voyage to such an extent that they could never have reached their destination in their original character, but are sold at an intermediate port before they reach that degree of deterioration, the cargo will be an ATL.In the case of perishable or non-perishable goods, the insured cargo will be an ATL if they ‘cease to be a thing of the kind insured’. Therefore, if the goods remain in specie at the destination, notwithstanding that they are extremely damaged, the cargo will not be an ATL.If the goods lose their commercial identity or value and are incapable of being used for the purpose for which they are intended, there will have been an ATL of the cargo (Berger and Light Diffusers Pty Ltd v Pollock). The mere fact that the cargo insured could be used for a purpose for which they were not primarily intended does not mean that there has not been an ATL (Asfar v Blundell). In Asfar v Blundell, a cargo of dates was shipped on a vessel which sunk; when the dates were recovered they had lost their texture and had been contaminated by sewage; although they could no longer be used for human consumption, they retained some value as they could be used for distillation into a spirit; the Court of Appeal held that there was an ATL of the dates.If a part of the insured cargo is totally lost, it is possible for the assured to recover an indemnity for an actual total loss of that part, unless the insured cargo is ‘warranted free from particular average’ (section 76(1) MIA).Where the cargo consists of perishable goods, there will be an issue of causation as to whether the goods deteriorated by reason of its intrinsic characteristics or by reason of an insured peril.
- The ship as an actual total loss
If the subject-matter of the insurance is not ‘destroyed’ or severely damaged, it may be that the assured is irretrievably deprived of the subject-matter.In that case, there will be an ATL. The assured will be irretrievably deprived of the insured subject-matter only if it is physically or legally impossible for the assured to recover the insured subject-matter. In Masefield AG v Amlin Corporate Member Ltd, the owner of an insured cargo claimed that the cargo was an actual total loss after it had been seized by Somali pirates, even though the cargo was subsequently returned upon payment of a ransom to the pirates. The cargo-owner argued that the cargo was an actual total loss immediately on seizure and that the fact that the cargo was recoverable by payment of a ransom was irrelevant, as the payment of a ransom to pirates was contrary to English public policy. The Court of Appeal held that the payment of a ransom to pirates was neither illegal (as a matter of English law) nor contrary to English public policy and that, as the cargo was recoverable by payment of a ransom, the cargo-owner was not irretrievably deprived of the cargo so as to amount to an actual total loss.
The assured will be irretrievably deprived of the subject-matter if, for example:
- The vessel or goods lie at the bottom of the sea and it is not possible to retrieve them (Anderson v Royal Exchange Co).
- The vessel or cargo is legally sold by a competent authority to a third party (Cossman v West).
- The subject-matter insured is confiscated by a governmental authority, although one may have to allow a reasonable time to elapse in order to determine whether or not there has been an irretrievable deprivation (Marstrand Fishing Co Ltd v Beer, Scott v Copenhagen Reinsurance Co (UK) Ltd – a non-marine insurance case).
There will be a presumed actual total loss in the case of ‘missing ships’ (section 58 MIA). This presumption may be rebutted (La Compania Martiartu v Corp of the Royal Exchange Assurance).
Total loss of freight
If there is a loss affecting the vessel or cargo such that the assured is prevented from earning all of the freight due on the adventure, there will be a total loss of freight. Cover for total loss of freight may depend on the occurrence of a total loss of the vessel or the cargo (Institute Voyage Clauses – Freight (1/11/1995), clause 12).
Abandonment involves the divesting of the assured’s interest in the remains of the subject-matter insured in favour of the insurer from the time of the loss in the event of the insurer’s liability for a total loss (section 63 MIA); compare section 79(1) MIA). Such abandonment will take place if the insurer is willing to accept the assured’s interest in the subject-matter insured.It might be thought that if there has been an actual total loss of the subject-matter insured, there can be no abandonment because there is nothing left to abandon to the insurer. Accordingly, in cases of ATL (as opposed to CTL), there is no requirement that a ‘notice of abandonment’ must be given (section 57(2) MIA).
However, even in cases of ATL, the concept of abandonment (as opposed to notice of abandonment) is applicable. There may be some value in the remaining property which may be abandoned to the insurer.
If you have any questions or require any additional information, please contact our lawyer that you usually deal with.
This article is written by our Principal Associate, Chakaravarthi
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