Marine Insurance: Law and Practice

F D Rose

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CHAPTER 21 LOSSES

I INTRODUCTION

21.1 The fact that an insured peril has been found to operate does not per se determine whether there has been a loss for which the assured is entitled to recover and, if so, which type of loss.1 It is therefore necessary to consider what constitutes a recoverable loss. The purpose of this chapter is to outline the main divisions between different types of loss, especially between different types of total loss, and some general matters relating to insured losses. Subsequent chapters will then provide specific discussion of: partial losses;2 total losses;3 and abandonment and notice thereof.4

II GENERAL CLASSIFICATIONS

Basic statutory classification

21.2 The basic statutory classifications of loss are set out by the Marine Insurance Act 1906, section 56:

“(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.”

21.3 Whether or not a loss has occurred is a question of fact;5 but, for the purposes of marine insurance, it is a matter of law rather than of fact or language whether the loss which has occurred is classified as a partial loss, a constructive total loss (“CTL”) or an actual total loss (“ATL”).6 21.4 At one extreme, it is arguable that very few, if any, losses can be truly total in the physical sense, for matter does not cease to exist and it is increasingly possible to reconstitute it, even in cases of apparent destruction. In fact most losses are partial but some partial losses are treated as total losses for commercial and other practical reasons. Since businessmen are essentially engaged in profit-making adventures, and effect insurance in order to protect their interests in such adventures, marine insurance law affords them protection in cases of impossibility: both of physical impossibility and also of commercial impossibility, where commercial operations become prohibitively expensive and therefore impracticable.7 If, by reason of insured perils, the assured becomes unable to obtain the safe completion of the adventure and no longer has any realistic expectation of doing so, then, whatever his view or decision on the matter, there is an actual total loss.8 Similarly, if total loss appears to be unavoidable or the cost of preservation exceeds the repaired value, it makes sense pragmatically to treat the loss as total, so these losses are classified as ones of constructive total loss and the assured has an election to claim for a total loss. The practical considerations in such circumstances, of enabling the assured to claim a full indemnity and the insurer to take whatever steps he deems necessary to salvage what he can, are important elements of the treatment of such claims as ones for total loss. These considerations are present, but not so strong, in cases where the insured subject matter has lost its character or the assured has been irretrievably deprived of possession of it. Again, these are cases where the subject matter continues to exist, and so in that sense is not lost, but the possibility of restoration has ceased and for that reason it is treated as an actual total loss. 21.5 The classification of a loss as total therefore depends on whether it falls into one of the categories recognised by law as constituting a total loss, whether actual or constructive. It is then a separate question whether an assured is entitled to recover an indemnity for a total loss. This depends on whether there has been either (a) an actual total loss or (b) a right sale of the subject matter9 or (c) a constructive total loss of which the assured has given notice of abandonment.10 In the first case, the assured is automatically entitled to claim for a total loss. In the second and third cases, the assured is empowered to convert a claim for a partial loss into a claim for a total loss. 21.6 The basic statutory definitions of actual total loss and constructive total loss are amplified as follows:

“57(1) Where the subject-matter 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”.11
“60(1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter is reasonably abandoned on account of its 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(2) endeavours to provide particular instances of constructive total loss and is considered below.12

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