This article is written by Sakshi Srivastav, from RGNUL, Punjab along with co-author Prakhar Mishra, from NLUO, Odisha and this article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).
Marine insurances, which are agreements between an insurer and the assured for indemnification of the latter on account of marine losses (losses relating to the sea), are one of the notable domains of Insurance law. Marine insurances, the provisions for which are contained under the Marine Insurance Act, 1963, have a striking feature in the form of the doctrine of constructive total loss and abandonment, used in reference to total losses that are not of actual nature. The authors, through this article, have attempted to examine the concepts of constructive total loss and abandonment and to understand the purpose behind applying the said concepts in marine insurance cases.
Sections 55 to 66 of the Marine Insurance Act, 1963 (hereinafter referred to as MIA) enshrine the principles related to loss and abandonment as applicable to marine insurances.
Section 55 makes it clear at the offset that only those losses that have a reasonable proximate relation with the perils the insurer(s) has insured against could the assured person claim indemnification. Thus, Section 55, by making a demarcation between the losses that could be indemnified and those that cannot, effectively excludes certain losses from the ambit of insurance. Further, it also places, unless they are specifically included in any insurance policy, a general exclusion on the following losses-
- Any loss that takes place owing to negligence or any intentional mis-conduct on the part of the assured. However, as an exception, the aforementioned would not be excluded, except if the policy so mandates, from the ambit of insurance when such negligent loss has been caused owing to a peril the assured was insured against.
- Any loss, except if the policy so mandates, that is caused to the assured due to any delay even if the same has been caused by a maritime peril.
- The general rule is that the assured does not have the right to seek indemnification from the insured if any damage to the ship or the cargo that has taken place does not have a proximate relationship with the peril the assured was insured against. Similarly, damage caused due to gradual wear and tear of the ship or any other insured object, or its ordinary leaking and breaking, or owing to its innate flaw, or by rodents is not qualified for insurance, except if the policy so mandates.
The aforementioned raises questions about the scope of the term “proximate cause” as it is fundamental to the inclusion or exclusions of the losses from the purview of insurance. The High Court of Calcutta relied upon a series of judgments to elucidate its understanding of the said term in the 1972 case of A. Akooji Jadwat Pvt. Ltd. vs Oriental Fire & General Insurance Co Ltd.
Facts of the case
The ship of the assured that was insured against the peril of detention, capture, arrest, etc. during wartime was captured by Pakistan during the 1965 Indo-Pak skirmish. The insurer refused to indemnify the assured stating that Pakistan had not declared any war on India and, therefore, the said clash was an informal war and such wars were not covered under their insurance policy.
The ruling of the Court
The HC ruled that the insurers could not take the aforementioned excuse to free themselves of their liability. Any hostility on the part of an enemy state will be covered under the policy of the defendant insurers.
The HC reflected upon the extent of the term “proximate cause” and held that any loss which occurs to which the peril insured against was the direct cause or that the peril had a predominating and efficient effect on it could be said to be proximately caused by the said peril.
In the case of Canada Rice Mills Ltd. V/s Union Marine & General Insurance Co Ltd, a ship was transporting rice and owing to the severe weather, the assured shut down all the ventilators of the room where the cargo was stored to prevent water from coming inside and damaging the rice. However, this led to the overheating of the cargo and they were damaged. The judicial court held the said loss to be a loss owing to the peril of the sea. The Judges opined that the rough weather, being a peril of the sea, served as a proximate cause for the shutting down of the ventilators as the same would not have been done except for the former and therefore both the factors must be viewed together and not separately.
Now, all those losses, which have not been excluded from insurance indemnification under Section 55, have been divided into two categories-
- Partial loss
- Total loss
In cases of marine insurances, the total loss has been categorised into two divisions, namely, actual total loss, and constructive total loss.
Actual Total Loss
As per section 57 of the MIA, an actual total loss could occur in three situations-
- Destruction of the insured object.
- When extensive damage is caused to the insured object which changes its very inherent nature and quality.
- Irretrievable deprivation of the insured object to the assured.
While the first two cases make the ascertainment of a loss as actual or constructive relatively easier, it is the third scenario where determination becomes difficult or a little dubious to fathom. In the case of George Cohen Sons and Co v/s Standard Marine Insurance Co Ltd, an insured ship had been taken to the port but it somehow went shore. The British Court observed that the assured had not been irretrievably deprived of the ship. The process of retrieval, the Court opined, would be difficult and also expensive to a large extent but would not be impossible. Therefore, the Court held the aforementioned loss to not be in the nature of an actual total loss. Further, in the case of Loyal Marines v/s National Insurance Co Ltd, it was found that the insured ship had got submerged in the sand up to its deck and it was therefore not possible to retrieve it for the use of the assured. The Court declared the said loss to be an actual total loss and asked the insurers to indemnify the assured for the same.
Apart from the foretasted three scenarios, a missing ship that is insured, of which nothing has been heard about even after the passage of a significant time period, would also be deemed to have been actually totally lost and the assured would be eligible for claiming indemnity.
Constructive total loss
The term constructive stands for something which is not explicit but derived from conjecture. Applying the said definition to understand a constructive total loss, it can be said that when an actual total loss defined under Sections 57 and 58 have not explicitly taken place but the loss caused is such that the insured object is as useless as it would have had been in case of an actual total loss.
Section 60(1) of the MIA, giving out a general definition of a constructive total loss, states that in case an actual total loss of the insured object becomes inevitable, or that prevention from the same demands the incurring of an expense higher than the value of the insured object, it is said that a constructive total loss has taken place. In the case of Marstrand Fishing Co Ltd V/s Bear, it was stated that the inevitability or unavoidability of the actual total loss must be determined on the basis of the facts and not on the basis of what the assured believed to be true. If what the assured believed to be true but was not true in fact, it is out of the question to consider such loss as a constructive total loss.
Further, Section 60 states the following to further explain what particular instances could lead to a constructive total loss-
- Where the assured loses the possession of the insured object owing to a peril of the sea they were insured against and recovery of possession is either a) not possible, or b) can be made possible but only by incurring such cost that would go beyond the value of the object.
- The damage caused to the insured object, owing to a peril of the sea the assured was insured against, is so severe that it could only be repaired by incurring such cost that would exceed the value of the object.
Effect of a constructive total loss
In case the loss in the nature of the aforementioned takes place, the assured could either abandon the object or continue possessing it. In the case of the former, the loss is to be treated as an actual total loss, whereas if the assured does the latter, they are said to be treating the loss as a partial loss. Abandonment is thus a necessary prerequisite for a loss to be deemed as an actual total loss. The concept of abandonment has been discussed in greater detail in the subsequent chapter.
Defining the said term, Lord Atkin in the case of Moore & Gallop v Evans, (1918) AC 185, remarked that it is a form of amalgamation of a total loss and a partial loss. It lies somewhere in between of the both with its determination dependent upon the doctrine of abandonment (discussed in the subsequent chapter).
However, the application and exhaustibility of a constructive total loss as defined under Section 60 depend upon the terms and conditions as stipulated in the marine insurance policy on a case to case basis. The Supreme Court of India, in the case of Peacock Plywood (P) Ltd v/s Oriental Insurance Co Ltd, ruled that if any provision of a marine insurance policy does not correspond to what is mentioned in Section 60 of the MIA, the former will prevail over the latter.
Difference between an actual total loss and constructive total loss
In simple words, the difference between the two aforementioned types of total losses is that while the former is a factual total loss, the latter is but a legal fiction, created to give those losses that are akin to an actual total loss equitable protection. Thus constructive total loss is a total loss in law and spirit.
Section 56 of the MIA defines partial loss as any loss other than a total loss. While the exact definition of Partial loss cannot be found in the MIA, Sections 64-66 deal with various components of a partial loss, namely, average general loss, particular average loss, and salvage charges.
General average loss
Section 66 of the MIA defines general average loss as any loss caused by a general average act, which is any wilful momentous expense or sacrifice carried out by the assured to prevent the insured object from being damaged by a peril insured against. The person carrying out such a general average act has the right to ask for contributions from other persons who have any interest in the insured object. Then, the assured can claim for indemnification from the insurer for such part of the money or sacrifice which is attributable to him after contribution. However, the insurer cannot be compelled to indemnify the assured for a general average loss if the general average act was not incurred for the purpose of preventing any damage or prospective damage to the insured object. All the aforementioned provisions, however, are dependent upon the terms of the marine insurance policy.
Particular average loss
Any loss which is not a general average loss falls under the category of particular average loss.
Salvage charges are charges that are incurred to avert any loss flowing from the peril insured against and can be indemnified to the salvor independently of a contract. The salvor can recover such charge either as a general average loss or a particular average loss, depending upon the circumstances in which the salvage charge was sustained.
The doctrine of abandonment under mia
As mentioned before, a constructive total loss cannot be treated as if it were a total loss unless the subject matter of the same has been abandoned by the assured. If the insured object that has suffered a constructive total loss is not abandoned, it is presumed that the assured is going to treat the same as a partial loss.
Notice of Abandonment
Now, after having abandoned the insured object, or after the intention of doing the same has been formed, owing to the occurrence of a constructive total loss, the assured needs to give a notice of abandonment to the insurer to express the bequeathing of his interest in the insured object in the favour of the insurer. Upon the acceptance of such notice by the insurer, the abandonment cannot be revoked. If, however, the assured fails to give such notice, the constructive total loss gets converted to a partial loss.
Following are certain rules that the assured needs to abide by with reference to notice of abandonment-
- The insured needs to give such notice in writing or in oral or in such other form which clearly expresses his intention of bequeathing his interest in the insured object to the insurer.
- The assured must exercise reasonable care before giving the notice of abandonment. In case an enquiry regarding the nature of the loss or the threat of loss is to be carried out, the assured must give the notice only after such notice when the truth has surfaced.
- If the assured has given proper notice of abandonment, the refusal of the same on the part of the insurer would not affect the rights of the assured flowing from abandonment. The acceptance of the insurer does not have to express, it could be implied too. However, his silence would not imply acceptance.
- The acceptance of the notice by the insurer makes the abandonment of the insured object/property irrevocable. Before acceptance, the assured is free to revoke his notice of abandonment which once final would lead him to bequeath all his interests in the insured subject matter.
While it is true that without giving the notice of abandonment, the constructive total loss cannot be treated as an actual total loss but only partial, there are certain circumstances that do not require sending the notice. These are as follows-
- When the insurer has waived the notice of abandonment
- When by the time the assured received the information about the constructive total loss, it is too late for any possibility of accrual of any profit to the insurer; the assurer is not bound to send the latter a notice of abandonment.
- The insurer does not need to give any notice of abandonment to the insurer if the latter has re-insured his risk.
Effect of Abandonment
The effect of abandonment is that whatever little remains of the insured object/property becomes the insurer’s. By abandoning and serving notice about the same to the insurer, the assured gives away his interest in the insured object to the insurer. And if he follows the procedure properly, the constructive total loss he suffered is indemnified by the insurer as if it were an actual total loss. This is the benefit of abandonment to the assured, which if he had not practised would have led to the treatment of the loss as a partial one, leading to indemnification of a lesser value.
Now, after the insurer indemnifies the assured for the loss being treated as an actual total loss, the assured the benefits the insured derives from abandonment on the part of the assured as mentioned under Section 63 of MIA are as follows-
- The insurer gets hold of all the freight that was in the course of being earned or that is earned after the loss. (for the latter, however, such amount that was spent in earning the fright after the loss would be subtracted)
- If the ship is carrying the cargo of the owner, the insurer would be free to charge him for their transportation on the ship post abandonment.
Scope and limitatons
The application of the concept of constructive total loss is limited to the cases of marine insurances and one may wonder the reason behind the limitation of concept to cases related to marine insurances as well as its application to the same in the first place. To answer the aforementioned concerns, we need to understand the pith and gravity the marine cases entail.
One of the prominent examples of a constructive loss is when the insured ship gets captured by the enemy nation or any other entity, making the recovery of the good very unlikely. In this case, while the loss incurred is not an actual total loss because the ship has not been destroyed, or extensively damaged, or become irretrievable as the ship can definitely be recaptured; the assured has, however, lost its possession and is incurring losses equivalent to totally losing the object. To provide relief in such cases the concept of a constructive total loss, which came into being in the early nineteenth-century was conceptualised to protect, as remarked by Lord Alkin in the Moore case, the interests of the mariners who were engaged in this rather risky business of maritime trade, which required very heavy investment and where the probability of the occurrence of casualties was very high as navigation in the seas is a very dangerous activity. In the case of Goss v/s Withers, which was a case involving the capture of the ship, the Court held that the assured cannot be expected to wait for too long to know about the recapture of the ship, rather given the gravity of the financial strain the said incident has caused, he could be made to go ahead with getting his loss indemnified once he has served the insurers with the notice. The inherent risk involved in the business, coupled with the existence of a host of circumstances in maritime commerce and trade where a loss could not be absolutely said or proved to be an actual total loss but is equitable to the same in terms of its implication and nature, is what engendered the concept of constructive total loss and abandonment in the arena of marine insurances with the purpose of providing an impetus and protection to adventurers to enter the rather risky and expensive sector of maritime and navigation.
Explaining why the said concept could not be applied to any other insurance policies besides marine, Lord Atkin further observed that the underlying nature, circumstances and necessities giving birth to the concept of constructive total loss in marine insurances cannot be reasonably applied to other insurance policies.
The doctrine of a constructive total loss, owing to its hybridity wherein the notice of abandonment is the key to determining wherein such loss would be considered a total loss or a partial loss is, therefore, somewhat esoteric and peculiar. However, the nature and modalities of the maritime sector make the doctrine as relevant as it was more than a century ago. The doctrine has been given a fresh outlook to meet the needs of modern times. While earlier cases involving capture by enemy nations or pirates led to the application of the concept of constructive total loss the most, cases wherein the cost of repairing a damaged or injury would exceed the value of the ship altogether dominates the said concept’s area of application in the present times.
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