Marine Insurance: Law and Practice
CHAPTER 23
TOTAL LOSS
I GENERAL CLASSIFICATIONS
Introduction
23.1 As stated above, total losses are classifiable as either actual or constructive total losses.1 It has also been observed that classification as a constructive total loss can be made for two reasons: first, to establish whether notice of abandonment should be given; and, secondly, to determine whether the assured is at the date of action entitled to recover for a total loss.2 It is the second method of classifying constructive total losses that is relevant in this chapter.Flexibility of classifications
23.2 Since the law was codified in the Marine Insurance Act 1906, it is fitting to begin this chapter by setting out its classifications of total loss before going on to consider a more broadly based categorisation. It should be noted that the statutory code has been judicially accepted as providing exhaustive definitions of actual3 and constructive4 total losses and that the apparently specific examples, in relation to ship and goods,5 of the general categories6 of constructive total loss in fact amplify and do not merely illustrate the general categories.7 If this is so, it means that, even if the specific examples reveal further general principles for classifying constructive total losses, those general principles should not be applied to subject matter other than ship or goods. 23.3 This part of the Marine Insurance Act 1906 further exemplifies its tendency to codify rules which had been identified at the time at which it was drafted, apparently without a complete awareness of a broader framework of principles within which the law could develop.8 In particular, the difficulty and uncertainty of the rules on freight led the draftsmen to omit specific rules on freight from the legislation and they have had to be developed judicially;9 hence their separate extended treatment below.10 Moreover, the Act fails to take account of the possibility of a total loss to goods arising from loss of the adventure, yet this has been held to survive the codification.11 Although there are good reasons, and strong dicta, for not stepping beyond the classifications of total loss within the Act, it may nonetheless be appropriate to do so when the occasion warrants, especially since hulls, goods and freight are not the only subjects of marine insurance.Right to claim for a total loss
23.4 Although the Marine Insurance Act 1906 lays down the basic cases in which total losses occur, it does not clearly specify or restrict the cases in which claims may be pursued for an indemnity for a total loss. The obvious cases in which such claims may be brought are those where there is a total loss at the date of action. However, in addition, the law empowers the assured to convert a claim for a partial loss into one for a total loss: where in an emergency a right sale is effected;12 or where there is a constructive total loss and the insured gives notice of abandonment and abandons the subject matter to the insurer.13 Moreover, even if there is no total loss within the statutory definition, an assured can recover a full indemnity if the insurer consents to liability for doing so, for example by accepting notice of abandonment.14Categories of actual total loss
23.5 The Marine Insurance Act 1906, section 57(1) provides: “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”. The Act therefore distinguishes, exhaustively,15 between three types of actual total loss: destruction; loss of character; and irretrievable deprivation. The scheme of the Marine Insurance Act 1906 is clearly that consideration of the cost of recovery of the subject matter, as compared with its value when recovered, is not relevant to actual total loss but to constructive total loss.16Categories of constructive total loss
23.6 The statutory categorisation of constructive total losses is also exhaustive and is also more complex in that it contains a general definition together with a number of specific instances of constructive total loss which not only illustrates but amplifies the basic definition.17 Thus, the Marine Insurance Act 1906, section 60 provides:- “(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 … ;18 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.”
- (i) Where the assured is deprived of the possession of his ship or goods by a peril insured against, and
Contractual qualification
23.7 In practice, the circumstances which constitute, and in which a claim can be brought for, a constructive total loss are qualified by express provision. 23.8 In this respect an agreed valuation is ambivalent. On the one hand, the Marine Insurance Act 1906, section 27(4) provides that, unless the policy otherwise provides, the value fixed by it is not conclusive for the purpose of determining whether there has been a constructive total loss. However, it may do so in practice, for insurers may be happy to agree both a high value and a clause that the insured value is to be taken as the repaired value, in order to make it more difficult for there to be a constructive total loss.19 23.9 For calculating what may constitute a constructive total loss, current clauses fix an “agreed CTL repaired value”.20 Thus, the Institute hulls clauses provide that, “In ascertaining whether the Vessel is a constructive total loss, the insured value shall be taken as the repaired value”.21 Similarly, the Institute Freight Clauses state that, “In ascertaining whether the Vessel is a constructive total loss, the insured value in the insurances on hull and machinery shall be taken as the repaired value”.22 The International Hull Clauses 2003 makes a different provision: that, “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”.23 All of these clauses add that “nothing in respect of the damaged or break-up value of the vessel or wreck shall be taken into account”. 23.10 Secondly, the hulls clauses use the agreed CTL repaired value in prescribing when certain claims for constructive total loss can be brought. They state that, “No claim for constructive total loss of the vessel based upon the cost of recovery and/or repair of the vessel shall be recoverable hereunder unless such cost would exceed [the agreed CTL repaired 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”.24 23.11 Thirdly, the Institute Cargo Clauses generally exclude CTL claims for one type of prima facie constructive total loss (namely, deprivation of possession) and deal in different terms from the statute with another type (namely, where the cost of repairing and forwarding damaged goods would exceed their value on arrival25). Thus they provide that: “No claim for Constructive Total Loss shall be recoverable hereunder unless the subject-matter insured is reasonably abandoned either on account of its actual total loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subject-matter insured to the destination to which it is insured would exceed its value on arrival”.26Superexpense
23.12 The Marine Insurance Act 1906, section 60 sanctions an economic catalyst for conversion of entitlement to claim for a partial loss into entitlement to claim for a total loss, namely that the cost of remedying the partial loss would exceed the value of the subject matter after that expense was incurred. As a convenient shorthand, this may be termed “superexpense”.27 As just noted, there is commonly a difference between the statutory and the contractual formula for calculating this figure.28 The Act lists a general situation and three particular instances where a claim for partial loss can be converted into a claim for a total loss by the necessity for superexpense to remedy the loss. 23.13 The first, general, case, in section 60(1), is that, “Subject to any express provision in the policy, there is a constructive total loss 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”. 23.14 The second case, in section 60(2)(i)(b), is where the assured is deprived of the possession of his ship or goods by an insured peril and the cost of recovering the ship or goods would exceed their value when recovered. 23.15 Thirdly, in section 60(2)(ii), is where a ship is so damaged by an insured peril that the cost of repairing the damage would exceed the value of the ship when repaired. 23.16 Fourthly, in section 60(2)(iii), is the case where goods are damaged and the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival.Summary
23.17 Accordingly, an assured can recover for a total loss in four main categories (A-D). The six numbers given to the left of these four categories indicate the principal factual circumstances in which cases for total loss arise. The six factual circumstances and the four main categories are:- (1) (A) there was a right sale of the subject matter;
- (2) (B) the insurer’s consent to pay for a total loss, most obviously by accepting notice of abandonment;
- (C) the assured suffered an actual total loss,29 eg:
- (3) destruction of the subject matter;
- (4) change of character of the subject matter (ie, it is so damaged as to cease to be a thing of the kind insured);
- (5) irretrievable deprivation of the subject matter;
- (D) the assured suffered a constructive total loss of the subject matter, ie,
- (i) at the time of the casualty its total loss appeared unavoidable or it could not be preserved from total loss without an expenditure exceeding its repaired value,
- (ii) the assured gave notice of abandonment and
- (iii) at the date of action there was reasonable abandonment of the subject-matter because of:30
- (3-5)
- (a) apparently unavoidable actual total loss (s. 60(1)); in particular, deprivation of possession of ship or goods where recovery is unlikely (section 60(2)(i)(a));
- (3-5)
- (b) inability to preserve from actual total loss without superexpense (s. 60(1)); in particular, deprivation of possession of ship or goods where the cost of recovery would require superexpense (section 60(2)(i)(b));
- (6)
- (c) damage to goods where superexpense is required: to effect repairs (section 60(2)(ii)) or to effect repairs and forward the goods to destination (section 60(2)(iii))
II TYPES OF TOTAL LOSS
1 Right sale
23.20 If the subject matter is seriously damaged but nonetheless retains its identity, it is likely to be a constructive total loss rather than an actual total loss, so an assured who wishes to recover for a total loss will need to abandon it.31 However, a series of older cases has established that, subject to a number of conditions, the master may effect a “right sale” of such property, in which case the assured is entitled to recover for an actual total loss.32 23.21 The conditions for a right sale are in substance the general conditions which in law authorise action in an emergency.33 First, the subject matter must be a constructive total loss; in particular, it must be so damaged that the master is unable to bring it to its destination, or is unable to do so without expenditure which would exceed its value when repaired. Secondly, the person effecting the sale must be an appropriate person to act: in practice, this will be the master, though in appropriate circumstances it would be sensible if the assured himself could take such action in the interests of the insurer. Thirdly, it must be impracticable for the person acting to obtain instructions from the shipowner or assured. Fourthly, the action taken, ie, the sale and its terms, must be taken in good faith and reasonably on behalf of the interested parties, ie, the assured and the insurer as the assured’s successor entitled to salvage. 23.22 If a loss has been caused by an insured event in circumstances where these conditions are satisfied, the person acting is empowered by law to convert a constructive total loss into an actual total loss, so that the assured is entitled to claim for a total loss without having to give notice of abandonment.34 However, in practice, in particular with modern communications, these conditions are unlikely to be satisfied. Nonetheless, in suitable, if rare, circumstances, it may not only be appropriate but even laudable for a right sale at a good price to be effected if it maximises the salvage to be obtained from a constructive total loss of property with rapidly declining value.2 Insurer’s consent
23.23 An insurer who contracts to pay for a total loss obviously consents to do so but it is no less obvious that the assured must prove that his entitlement to be paid has arisen in fact. However, the insurer may be liable to make payment in full if he has consented to do so whether or not the assured can establish an entitlement on normal grounds. He may do this in advance of a casualty, by a term of the policy, for example by agreeing that a vessel is a constructive total loss if the repaired value exceeds 80 per cent of its insured value.35 He may also do so after the casualty has occurred, most notably by acceptance of notice of abandonment, the effect of which has been said to estop him from denying that a total loss has occurred, although it is more accurately considered as constituting a fresh contract to pay for a total loss.363 Destruction
23.24 The clearest type of actual total loss is “Where the subject-matter insured is destroyed”.37 It has been observed that matter can be altered but will not cease to exist, so that in one sense the subject matter can never be destroyed and there can never be an actual total loss by destruction, even where the subject matter is burnt to ashes or irretrievably sunk or “reduced to the condition of a mere congeries of wooden planks or of pieces of iron which could not without reconstruction be restored to the form of a ship”.38 Indeed, recent technological developments have demonstrated that many things once thought lost can eventually be retrieved and/or reconstituted. The point, for insurance purposes, is that an assured can recover if, as a result of the insured peril, it is impossible to restore the subject matter to the insured.4 Change of character
23.25 There is an actual total loss “Where the subject-matter is … so damaged as to cease to be a thing of the kind insured”,39 for example “if the ship ceases to retain that character and becomes a wreck”.40 This is a question of fact. In Cambridge v Anderton 41 a ship which had run aground was kept afloat by a cargo of timber. On the advice of surveyors, she was sold to shipwrights with her register. After the repairs, the original master, mate and ship’s carpenter still thought she was unfit to go to sea. However, the purchasers sent her on a voyage, on which she was lost. In Abbott CJ’s view the test was not what the parties did but whether on the whole evidence “she was utterly useless as a ship, after she struck, and never could be made useful, but at an expense equal to her value”.42 23.26 Whether the subject matter has lost its character depends upon its original character for the purpose of the insurance. Thus, a dead ship under tow and heading for break-up may retain its character as such even where it suffers a casualty as a consequence of which it is grounded and incapable of proceeding without salvage and a degree of repair.43 23.27 If, as a result of an insured peril, goods are in such a condition that they are no longer merchantable as goods of the contract description, for example if dates intended for human consumption are contaminated by sewage, then there is an actual total loss both of the cargo and of the freight being earned for its carriage.44 If, before it has reached this stage, the cargo is deteriorating and constitutes a constructive total loss, the assured may be entitled to recover for a total loss either by giving notice of abandonment or, if it is certain that their loss of character is inevitable, by selling the goods45 and claiming for an actual total loss.465 Deprivation
23.28 If the insured subject matter is not destroyed or its character changed, it may well be uncertain whether the operation of an insured peril has caused a temporary, partial loss or a total loss. Certainly, the mere fact that an assured is deprived of the possession or control of his property does not mean either that he has necessarily been subject to an insured peril or that he has suffered from or is likely to suffer a total loss.47 Thus, there is no total loss by deprivation simply because a shipowner has temporarily been deprived of the free use of his vessel, for example by its detention for 11 days to prevent it from proceeding to a port where British vessels were embargoed.48 Similarly, mere sinking does not per se constitute an actual or constructive total loss.49 And there may be a constructive total loss but, without abandonment, no eventual claim for a total loss where corn is sunk but later raised and dried.50 Whether an assured is “irretrievably deprived” of a vessel prima facie depends on whether, by reason of its situation, it is wholly outside the power of the assured or the insurer to procure its arrival; and this is unlikely to be the case if it can be physically salved.51 23.29 In its detailed illustrations of constructive total loss, the Marine Insurance Act 1906 states that “there is a constructive total loss … 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”.52 However, “where the assured is irretrievably deprived thereof [ie, of the subject matter insured], there is an actual total loss”.53 Thus, in most cases where the assured is deprived of possession of his property, the eventual outcome of the insured peril will be unclear, and there will be at most a constructive total loss. It will only be an actual total loss at the moment at which the deprivation was or became irretrievable. “[E]very case in which there has been a dispossession must depend on its own facts as to whether and at what stage a total loss has occurred. One must consider the facts concerning the dispossession, the apparent intention of the person or persons concerned, whether or not or to what extent the whereabouts of the subject-matter are known, and allow for a lapse of a period of time to form a view about the prospects of recovery; ie, whether the loss is total or partial”.54 23.30 There may be a total loss by deprivation of property either because the assured has lost physical possession of his property sine spe recuperandi 55 or because he has lost his legal right of possession.56 23.31 The word “possession” in the Marine Insurance Act 1906, section 60(2)(i)(a) has a wide meaning. Thus, whether or not a shipowner’s crew remains on board his vessel is not conclusive evidence of whether or not he has suffered a total loss.57 And it is sufficient for there to be a constructive total loss by deprivation that the assured has lost the “free use and disposal” of his vessel, for example where its movements are restricted by a foreign government even though a crew remains on board.58 23.32 An actual total loss by deprivation has occurred where: goods saved from a wrecked ship fell into the hands of natives who destroyed part and plundered the rest;59 goods were seized by a foreign government;60 a vessel was sold by order of a court of competent jurisdiction;61 a ship was subjected to an embargo in its foreign port of loading;62 and the carrying vessel was scuttled.63 23.33 If the assured has been deprived of possession, “Whether the detainer was rightful or wrongful is immaterial”.64 Thus, it is irrelevant to an assured shipowner that his vessel was taken by pirates but then captured by a British warship and brought before the Admiralty Court as prize for adjudication if the vessel remains continuously outside the possession of the assured.65 23.34 The classic example of deprivation is forcible dispossession, in particular, in a number of old cases, by capture. However, “capture is an event which may or may not terminate in a total loss”.66 “In cases of capture, a spes recuperandi exists”.67 However, according to Lord Atkinson, “The doctrine [of constructive total loss] had its origin in cases of capture”, for early cases “were apparently based upon the principle that the assured should not be obliged to wait till he had definitely ascertained whether his ship had been recaptured or not, but might upon capture proceed at once and, after notice of abandonment, recover his capital, the value of his ship, from the underwriters, provided he was not aware of her recapture when he commenced his action”.68 According to Lord Campbell CJ, “The cases … establish this principle: that, if once there has been a total loss by capture, that is construed to be a permanent loss unless something afterwards occurs by which the assured either has the possession restored, or has the means of obtaining such restoration”.69 As Porter J has said, “it was always a question of fact whether capture was an actual total loss or merely a possible constructive total loss. Capture followed by condemnation no doubt was actual total loss, but that was because the vessel had in fact been condemned; the war was supposed to last indefinitely, and, therefore, there was no chance within any reasonable time of the ship being restored. The capture alone I do not think was ever necessarily an actual total loss”.70 23.35 Where an assured is dispossessed of his property and is powerless to retrieve it, there may seem to be a good argument for concluding that, at the time of dispossession, there is an actual total loss. However, there will only be held to be an actual total loss if subsequent facts demonstrate that the loss was in fact irretrievable. Thus, “an assured is not irretrievably deprived of property unless it is physically and legally impossible to recover it (and even if such recovery can only be achieved by disproportionate effort [or] expense)”.71 23.36 This statement was uttered in a case involving arguably less extreme circumstances. The Bunga Melati Dua and its cargo were seized in the Gulf of Aden by Somali pirates and taken with her crew into Somali coastal waters. The seizure and return were part of an established practice whereby Somali pirates seized vessels and their cargoes with a view, not to retaining them, but to negotiating with the shipowners via professional negotiators for a payment representing an economic proportion of the value of the property at stake. The practice was for the payment to be made within a relatively short period of time, whereupon the ship, her cargo and her crew were released. A month after the seizure, the cargo-owners gave notice of abandonment to their insurers. Eleven days later, the seized property was released on payment of a ransom by the shipowners. However, the cargo missed its market and so its owners claimed against their insurers for the loss in value. The claim failed. 23.37 The Court of Appeal held generally that: capture or seizure per se does not as a matter of law automatically constitute an actual total loss; nor is it sufficient that the person taking the property intends to deprive its owner of it irretrievably if he has not in fact been able to consummate his intention or has otherwise not done so; it is a question of fact whether this has occurred or it will subsequently occur; and it is generally necessary to “wait and see”.72 More specifically, piratical seizure where there was not only a chance, but a strong likelihood, that payment of a ransom of a comparatively small sum, relative to the value of the vessel and her cargo, would secure recovery of both, was not an actual total loss.73 However, if pirates escape with their prize for their own use and there is no prospect whatever of finding or recovering vessel or cargo, there may well be an actual total loss. Likewise, capture, by a nation’s warship, subject to condemnation as a prize, is not inevitably an actual total loss, although it may mature into one.74 23.38 In G Cohen, Sons & Co v Standard Mar Ins Co Ltd 75 the obsolete battleship Prince George was being towed to a shipbreaking yard but came adrift and ran aground on the Dutch coast. Although it would have been extremely difficult and highly expensive to get her off, Roche J was not satisfied that it was physically impossible; and, although there was evidence that the authorities charged with the local sea defences would not allow the necessary removal work to be done, their decision was subject to review, albeit it might still be commercially impossible to comply with the terms of permission which might be granted. Accordingly, he held that there was not “such a certainty of deprivation as to amount to the deprivation being irretrievable”.76 23.39 Since most events under human control are reversible, taken to its logical conclusion, Roche J’s general principle potentially weakens the force of all examples of actual total loss, since even a judicial decision is generally subject to appeal or review.77 However, a distinction can be made between an administrative decision subject to judicial review, in a case like Cohen, and a judicial decision, which must normally be respected as final until reversed. The real message of cases such as Cohen is that cases of deprivation of property are more likely to be treated as ones of constructive, rather than actual, total loss. 23.40 As the Marine Insurance Act 1906, section 60(2)(i)(b) states, a deprivation of ship or goods may be a constructive total loss because the cost of recovery would exceed its value when recovered. The basic test is whether the assured is reasonably capable of retaking possession of the subject matter and may reasonably be expected to do so.78 “The case is quite different if the re-capture puts the ship in such a position that the owner cannot get her without paying more than she is worth.”79 23.41 A strong example of the application of the general test is M’Iver v Henderson,80 where the assured actually recovered possession of his ship but was nevertheless entitled to recover for a total loss. The insured vessel was captured and plundered and the voyage was lost. She was taken to Fayal and the master wrote to inform the assured. A Portuguese Admiralty court at Fayal ordered the ship to be returned to the master. The assured was unaware of this when he received the letter and abandoned the vessel. Meanwhile, the remaining cargo was sold and the captors appealed against the Portuguese court’s order. Consequently, the master was bound to leave the remaining proceeds of the sale of the cargo (£427 18s 9d) on deposit pending the outcome of the appeal, “subject to the risk not only of the plaintiff’s losing that deposit, but of being condemned in damages to a much larger and indefinite amount”.81 The vessel could have been sold for £600 at Fayal. An expense of £221 was incurred in navigating the vessel back to Liverpool, where she was worth £1,300.82 The insurer paid into court sufficient for a partial loss83 but it was held in the Court of King’s Bench (while the outcome of the Portuguese appeal was still to be determined) that the assured was entitled to recover for a total loss. Lord Ellenborough CJ held that “The mere restitution of the hull, if the plaintiff may eventually pay more for it than it is worth, is not a circumstance by which the totality of the loss is reducible to an average one … and the ultimate recovery of any thing is uncertain, and attended with the trouble, expence, and hazard of litigation”.84 23.42 Property that has been recovered cannot be considered to be an actual total loss on the ground that recovery was only effected by payment of a ransom. In one sense it is irrelevant how property is recovered, since the fact of its recovery is sufficient to demonstrate that the assured has not been irretrievably deprived of it. Nonetheless, The Bunga Melati Dua 85 confirms that the method by which recovery was obtained does not justify the claim. The Court of Appeal noted that: payment of ransoms is not illegal; the practice of paying them is morally ambiguous rather than immoral;86 there is no duty not to make payment; and in any case payment to recover the ship, cargo and crew was made by the shipowners rather than the claimant assured cargo-owner. The court was not required to rule on whether it would make a difference that the ransom had not in fact been paid, whether by the assured or a third party; but it would seem to be consistent with its judgment that, if the property were recoverable on payment of a not unreasonable amount, the result would have been the same. 23.43 The court left open two further points. One was whether the position with regard to terrorists is different.87 Probably wisely, the court did not attempt to deal with an issue that was not before it. However, raising the possibility that different treatment may be necessary according to the class of person who withholds an assured’s property subject to satisfaction of demands also raises a question-mark over the decision in The Bunga Melati Dua itself, unless there is a real distinction between different classes of persons of unlawful withholders or different rules of illegality or public policy apply. 23.44 This raises the court’s remaining question: whether it would have made a difference if the property had been recovered, or was recoverable, by illegal means. Here distinctions may be justifiable: between a situation of dubious morality, such as payment of a ransom, and a positive rule of illegality or public policy, for example that a bribe should not be paid; and between situations of actual and potential recovery. Again, it is arguable that, if property has actually been recovered after performance of an illegal act, it is in fact not an actual total loss. However, if the property has not been recovered but is recoverable on performance of an illegal act, the position is not straightforward. In one respect the situation may be simpler for, if property has been seized and can be recovered only by illegal means, this may well constitute a crystallised actual loss by seizure by a lawful authority, so that it is unnecessary to investigate further whether the property is recoverable by illegal means. Leaving that matter aside, a court of law should not support an illegal act and therefore, it is submitted, should accept that the assured is at least entitled, if not obliged, to refrain from performing one. If so, he should be considered in law to have suffered a loss if his property is recoverable only by performing an illegal act. However, such a loss does not clearly fall within the categories of the Marine Insurance Act 1906, except in the sense that “Any loss other than a total loss, as hereinafter defined, is a partial loss”,88 even though in fact the loss is patently more than partial. It is arguable that, because the assured is legally inhibited from taking the necessary action to recover the property, such a loss constitutes in law an actual total loss through irretrievable deprivation of the subject matter of the insurance.89 However, it may be countered that it does not do so, since it is in fact retrievable, albeit by illegal means. It may therefore appropriately fall within the intermediate class of constructive total losses, most obviously “on account of its actual total loss appearing to be unavoidable”,90 though again this depends on whether it does in fact appear to be unavoidable and requires the same interpretive approach as would be necessary to deem it an actual total loss. 23.45 It was held in Polurrian SS Co Ltd v Young 91 that, though it was ostensibly intended to codify the law, the Marine Insurance Act 1906 had narrowed the circumstances in which the assured could recover for a constructive total loss by deprivation from one where there was “uncertainty of recovery” (“for that which was avowedly a temporary purpose, which will end within a period not, from the commercial standpoint, unreasonably long”)92 to those where there was “unlikelihood of recovery”. Thus, the Court of Appeal held that, to recover for a constructive loss by deprivation of possession, the assured had to show: “(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”.93 The second question must be answered on the basis of the true facts, rather than on the facts as known at the time to the person exercising the judgement.94 23.46 It is an implied rider to the Marine Insurance Act 1906, section 60(2)(i)(a) that recovery must be unlikely within a reasonable time.95 It has been said that the moment from which the reasonable period is calculated is, not from the moment of the casualty but, no earlier than the moment at which notice of abandonment should be given, which is the moment at which the subject matter should have become a constructive total loss.96 Thereafter, what is a reasonable time is a question fact;97 and it is possible that it can include any period during which a vessel has been detained as a consequence of the casualty before notice of abandonment is given.98 In practice the question may be resolved by a clause such as the Detainment Clause, which deems there to be a constructive total loss after a continuous 12 months’ loss of free use and disposal.99 23.47 The tension which the Court of Appeal in Polurrian 100 had identified between the general test for a constructive total loss (“reasonably abandoned on account of its actual total loss appearing to be unavoidable”)101 and the specific test (“where the assured is deprived of the possession of his ship … and it is unlikely that he can recover the ship”)102 arguably was false. The Act states the latter test simply as a specific example of the general test and does not preclude there being a constructive total loss where recovery of ship or goods is uncertain but short of unlikely.103 Nonetheless, since the court held that the assured would have recovered under the common law test but failed under the statutory formulation, its ruling is decisive and it has been adopted in the House of Lords, where Lord Wright has said that section 60(2), as compared with section 60(1), is “cumulative, not merely illustrative”.104 23.48 Examples of constructive total loss by deprivation include: necessary desertion by the crew;105 and change of destination by the German master in obedience to orders of his Government at the outbreak of the Second World War, so that he thereafter held the insured British goods being carried “as the subject and servant of that government instead of holding them as the bailee of the assured”.106 23.49 A constructive total loss has been held not to arise from a mere barratrous taking or removal of a vessel.107 Nor does it depend on whether a vessel is under charter and, if so, whether hire continued to be paid under the charter or the charterparty was frustrated.108 23.50 Ex hypothesi, an assured cannot recover for a loss arising from deprivation of his property if he has not been effectively deprived of possession, or he has acquiesced in it, or if it has not caused him a loss. In Thornely v Hebson 109 a ship damaged by a tempest was deserted by its crew, who were taken on board a brig from which persons on board went out to salve the casualty. There was no evidence that the assured shipowners unsuccessfully tried to raise money to discharge their liability for a salvage reward. At the instigation of the salvors, and without opposition by its owners, the vessel was subsequently sold by the Admiralty Court at Rhode Island to realise the salvage reward, after which a surplus remained. The assured failed to recover for a total loss: first, because this was not an inevitable consequence of mere desertion by the crew, and, though the salvors had custody of the vessel, the owners retained legal possession;110 and, secondly, because the assured had not proved that the judicial sale was opposed by them and was contrary to their interests. 23.51 The parties may avoid uncertainty as to the eventual result of an insured peril by prior agreement, for example by providing that the assured can recover for a total loss 30 days after notice of the operation of the insured peril111 or by a deemed deprivation without likelihood of recovery in the event of detention for a continuous period of 12 months under the Institute War Clauses.112 Obviously, an agreed loss can also be achieved in the case of a constructive total loss by the giving and acceptance of notice of abandonment.1136 Damage
23.52 Where the insured subject matter suffers damage, prima facie the assured is entitled to claim for a partial loss. However, as has been seen, his claim can be converted into a claim for a total loss by a right sale.114 More importantly, he may do so if the loss constitutes a constructive total loss, he gives notice of abandonment and he reasonably abandons the subject matter because superexpense is required,115 in particular: to effect repairs;116 or to effect repairs and forward the goods to destination.117 23.53 This last situation is specifically dealt with in the second of the two grounds for recovery for a constructive total loss in the Institute Cargo Clauses, which provide that namely: “No claim for Constructive Total Loss shall be recoverable hereunder unless the subject-matter insured is reasonably abandoned either on account of its actual total loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subject-matter insured to the destination to which it is insured would exceed its value on arrival”.118 The precise effect of this is unclear. First, the clause begins by assuming that it is dealing with a claim for constructive total loss as generally understood (ie, under the Marine Insurance Act 1906, section 60(2)(iii), “where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival”119). It then appears to enlarge the factors that can be taken into account in assessing the superexpense of remedying the loss (ie, by substituting the cost of recovering and reconditioning for the cost of repairing), so that the overall expense may be more likely to exceed the arrival value. But, on a literal interpretation, unless the loss initially qualifies as a constructive total loss under the statutory test, it is irrelevant that the Institute Clauses may allow additional factors to be taken into account in assessing the superexpense for contractual purposes. However, since the provisions of the Act may generally be varied by contractual agreement,120 the more likely interpretation is that the terms of the contract are to be construed as an agreed redefinition of the circumstances of a constructive total loss in this case.III FREIGHT
The underlying law
23.54 The law on total loss of freight appears less clear than that on ship and goods for a mixture of reasons. First, there are fewer cases on loss of freight than of ship and goods. This presumably helps to explain: why the Marine Insurance Act 1906 makes no specific provision for total loss of freight; and why, in particular, though there was originally provision in the Bill for constructive total loss of freight, those involved in preparing the legislation were unable to agree on the appropriate rules for it.121 Thus, total loss of freight is governed by the general statutory rules on total loss as adumbrated by prior and, especially, subsequent case law, although the guidance from subsequent cases is reduced by their concern with the interpretation of standard form clauses rather than with the underlying law. Indeed, secondly, the under-clarification of the underlying law has both prompted and been reinforced by provision for freight in standard form clauses. 23.55 Thirdly, freight is an intangible interest, a chose in action,122 so less obviously dealt with than the tangible interests of ship and cargo. Fourthly, freight is normally dependent on, and therefore decided by, the fate of ship and/or cargo, so that, for example, if one of those suffers a total loss, there may inevitably follow an actual, and not merely a constructive, total loss of freight; so there is less opportunity for a constructive total loss of freight than of ship or goods. 23.56 Fifthly, the roles of abandonment, and the distinctive requirement in cases of constructive total loss of notice of abandonment, are less straightforward in the case of freight than in cases of ship and goods. In particular, there is a peculiar rule of English law that, even when there is separate insurance of ship and freight, the abandoner of ship rather than the insurer of freight is entitled to salvage of freight;123 so, if the ship is abandoned, it is generally unnecessary to give a specific notice of abandonment of freight to either the insurer of ship or the insurer of freight. The lack of clarification from situations in which notice of abandonment has or has not been given is exacerbated by the facts that: giving notice of abandonment is possible, even in practice advisable, even if it is not necessary (where there is an actual total loss), so the fact that notice is given in such cases does not mean that it needs to be;124 and it may be excused, especially in the case of freight (because there is less likelihood of salvage if ship or cargo is totally lost), so the fact that notice is not needed or given in most cases does not mean that freight is not subject to the general requirement of notice of abandonment in cases of constructive total loss.125 The scarcity of clear authority has allowed doubt as to whether notice of abandonment is necessary in the case of a constructive total loss of freight and, in turn, even of whether it is possible for there ever to be a constructive total loss of freight.126 23.57 Nonetheless, the possibility of a constructive total loss and the obligation to give notice thereof are expressed generally by statute, and not disapplied in the case of freight, so to that extent the default position is clear. Moreover, albeit in a poorly reported judgment, Walton J has held, in a case where steamers were prevented by ice from reaching destination and the cargo was forwarded by rail, that, if there had been a total loss, it was a constructive total loss, and the plaintiffs were disentitled from claiming for a total loss by not having given notice of abandonment.127 Moreover, Brett J has opined that, if it is clear that the cargo cannot be carried to destination by the original vessel but unclear whether this can be done by a substitute ship, or it is clear that the ship cannot earn freight by carrying the original cargo to destination but unclear whether it may do so by carrying a substitute cargo, to be entitled to claim for a total loss the assured should give notice of abandonment of the chance of earning substitute freight.128 23.58 It is submitted therefore that: there may be either an actual or a constructive total loss of freight; and, if there is a constructive total loss of freight, the assured’s entitlement to claim for a total loss is subject to both the usual requirement to give notice of abandonment and especially the excuses for not doing so; but in the great majority of cases in practice notice of abandonment is in fact unnecessary.General principles
23.59 Freight is an intangible interest, dependent upon a contract. However, it does not come about independently of tangible interests, whether ships, goods or people. So far as it is independent of tangible interests, it is not lost. Thus, if a carrier has a contract with a forwarder whereby he is to earn freight for carrying whatever goods are delivered into his custody, but the contract is not subject to carriage of any particular goods or on any particular ships, the unavailability of particular goods or vessels will not prevent performance of the contract or cause the loss of freight thereunder. In practice, the earning of freight—whether chartered freight for the use of a vessel, bill of lading freight for the carriage of goods, or otherwise—is dependent on some factor—whether the availability of a vessel, the condition of the goods, human agency, or otherwise. The operation of an insured peril on one of these factors may cause a loss of freight, whether partial or total; but it will not necessarily do so. Given the relationship between the earning of freight and other factors, determining whether there has been a total loss is generally more complex in the case of freight than in the case of ship or goods. It generally involves a multi-layered enquiry as to: the variety of freight in issue; the effects of insured perils on ship and/or goods, in particular what action is taken in the event of a constructive total loss of ship or goods; and then the consequences for freight itself. 23.60 Nonetheless, this process is ultimately concerned with the same general issues as in the case of ship and goods: if the subject matter ceases to exist, there is an actual total loss; and there is a constructive total loss if avoidance of total loss appears impossible or only achievable by expense exceeding the value of the subject matter. In the case of freight, the subject matter is generally the contract to be performed in order to earn freight. It is convenient here to refer to this generally as “the freight contract”.Impossibility of performing adventure
23.61 There will be a total loss of freight if it becomes impossible to perform or complete the freight contract. This may be because performance of the contract is dependent on one or more of: a particular cargo, a particular vessel or a particular method of performance. 23.62 Thus, there is an actual total loss of freight:- (a) if the earning of freight is dependent upon the carriage of a particular cargo and there is an actual total loss of that cargo;129
- (b) if the contract—whether a demise or time charterparty or a contract of carriage—is to be performed using a particular vessel which suffers an actual total loss, eg, because it is seized or sinks at sea;130
- (c) a fortiori, if the contract is to carry a particular cargo by a particular vessel both of which suffer an actual total loss;
- (d) “if a vessel insured on freight generally131 loses entirely from perils insured against the only freight in respect of which it has a contractual interest, and no other freight can be obtained on the insured voyage”;132
- (e) if the contract is to be performed in a particular way and the adventure becomes impossible, whether permanently or within the time contemplated by the contract. This may occur even if the ship or cargo is not lost, for example if performance of the adventure becomes illegal,133 or if freight is for carriage of a particular cargo which is detained so that completion of the adventure ceases to be possible,134 or if the vessel is subject to a frustrating delay.135
Constructive total loss of ship or cargo
23.64 If freight is to be earned in respect of a particular ship or a particular cargo, the mere fact that the ship or goods suffers a constructive total loss does not automatically produce a total loss of freight. It may still be possible for the adventure to be completed and the freight earned. 23.65 If there is a constructive total loss of the particular ship or goods in respect of which freight is to be earned, and there is a right sale or abandonment of the property in question, it may thereby become impossible to complete the adventure (especially if both ship and cargo are so sold and/or abandoned), in which case there will be an actual total loss of the freight.137 However, it does not automatically follow from such a case that there will be an actual total loss of freight, for the abandonee may wish the adventure to be completed. In that case, there may or may not be a constructive total loss of freight. It will depend upon the facts. 23.66 Where the earning of freight is not dependent upon a particular ship or cargo, the effect of an insured peril upon ship or cargo will depend upon whether the freight contract obliges or merely entitles the completion of the adventure by alternative means. 23.67 However, if the contract of carriage is not dependent on carriage by a particular ship, and the goods are carried to their destination by another ship and the freight is earned, then the insurer will not be liable for loss of freight.138 But the insurer may be liable for loss of freight if the carrier is unable to carry in the originally contemplated vessel but merely has a liberty to carry by an alternative vessel and chooses not to exercise that liberty.139 However, if the carrier has a duty to carry the goods to destination by any (or any reasonable) vessel, then there should only be an actual total loss of freight if carriage to destination by any suitable vessel has been made impossible by the insured peril (for example, if political activity has made entry to the port of discharge impossible). 23.68 Whatever the position at law, under a freight insurance contract incorporating the Institute freight clauses, a claim for a total loss of the ship automatically entitles the freight assured to claim for a total loss of freight: where the vessel is an actual or constructive140 total loss, and a claim for a constructive total loss is not settled for a partial loss,141 the amount insured shall be paid in full, whether the vessel be fully or partly loaded or in ballast, chartered or unchartered.142Substitute freight
23.69 Where freight is insured generally, and as a result of insured perils the anticipated freight is lost, but a substitute freight is earned, the assured is not entitled to an indemnity for a total loss of freight.143 This is either on the ground that freight has not been lost or on the principle that a benefit received in substitution for a loss suffered will be treated as reducing the insurer’s liability.144
1 1.Ante, ; qv for a more precise account of the matters summarised in outline here.