Marine Insurance: Law and Practice

F D Rose

Document

CHAPTER 24 ABANDONMENT

I INTRODUCTION

Meanings of abandonment

24.1 In general, to abandon is to give up or renounce. However, the word abandonment is used in different senses in marine insurance.1 First, it may simply refer to the act of physically quitting a vessel, usually when a casualty is in danger, imperilling the safety of those on board. However, the mere fact that the master and crew have left the subject matter does not mean that an assured forgoes his rights over it. Secondly, and more specifically, where the condition of the casualty is extreme, the master and crew may abandon it animo dereliquendi sine animo revertendi et sine spe recuperandi— intending to leave it as derelict, without intending to return, and without hope of recovery. This may occur whether or not the subject matter is the subject of an insurance contract. Where there is a pertinent insurance contract, such a casualty may well be a constructive total loss and even become an actual total loss, but will not necessarily be so. 24.2 Thirdly, an assured may indicate that he no longer wishes to retain his interest in the subject matter but that he is willing for his insurer alone to take over his interest in the goods and their proceeds.2 Such an abandonment is an offer to the insurer by the assured to release his interest to the insurer. Such an abandonment could be said to occur where a third party alone is informed, for example if a salvor were told that it is now up to the insurer to decide what to do with a casualty. However, although in one sense this is an abandonment to the insurer, it is obviously not one of which the insurer can avail himself unless he receives notification of it—whether from the assured or a third party. 24.3 Fourthly, in a loose sense, the assured’s giving notice of abandonment is sometimes said to be an abandonment. In one sense this is not important, since the Marine Insurance Act 1906, section 62 (on notice of abandonment) assumes that the assured has abandoned the subject matter and is giving notice of this fact.3 So it must be true that an assured who is giving notice of abandonment has abandoned or—at least, and more likely—is abandoning at and by giving the notice. Furthermore, since a notice of abandonment must be given reasonably promptly to be effective,4 and in practice assureds are likely to give notice of abandonment in any case where there may be a possible entitlement to claim for a total loss, there is unlikely to be a material difference between the time of an abandonment and an effective notice of it. 24.4 However, giving timely notice of abandonment is merely a condition to be satisfied for an assured, in the case of a constructive total loss, to be able to claim for a total loss. The insurer is not bound to accept the notice of abandonment and the assured who abandons and gives notice of abandonment does not usually release his interest in the subject matter to the insurer until the insurer agrees to indemnify him or in fact does so. At that time, there is an abandonment in a fifth sense: whereby the assured actually gives up his interest in the subject matter on its assumption by the insurer. Unless otherwise agreed, this will occur where the insurer accepts liability, or pays, for a total loss: “that abandonment takes place at the time of settlement of the claim; it need not take place before”.5

Basic rules summarised

24.5 Any owner of property is entitled to transfer his interest to another; and this is therefore a possibility whether or not an assured suffers a loss, and whether or not a loss suffered is total or partial. But it is a general rule that, if a person suffers only a partial loss, he cannot become entitled to claim for a total loss by abandonment of the subject matter, and a notice of abandonment given by such an assured is similarly ineffective.6 In order to be entitled to claim for a total loss, in the case of a constructive total loss though not in the case of an actual total loss, the assured needs to give timely notice of abandonment to the insurer.7 However, whether there is an actual or a constructive total loss, in order actually to recover for a total loss, the assured must give notice of abandonment and abandon the subject matter to the insurer.8

Necessity for notice of abandonment

24.6 Prima facie a loss is either an actual total loss or a partial loss. A constructive total loss is a concept whereby an assured has the opportunity of converting claims for certain partial losses into claims for total losses. An assured who wishes to avail himself of this opportunity cannot also retain the choice whether to claim for a partial or total loss but must commit himself one way or the other and, if he wishes to be able to recover for a total loss, transfer to the insurer the opportunity of salvage from the loss.9 He is not obliged to claim for a total loss or to give notice that he intends to do so;10 indeed, he has a right to wait to see if his property is restored to him and to reap the advantages of retaining his interest.11 However, he will be unable to claim for a total loss if he does not give timely notice of abandonment. 24.7 Accordingly, “Subject to the provisions of [the Marine Insurance Act 1906, section 62], where the assured elects to abandon the subject-matter insured to the insurer, he must give notice of the abandonment. If he fails to do so, the loss can only be treated as a partial loss”.12 “In the case of actual total loss no notice of abandonment need be given.”13 Indeed, if there truly is an actual total loss, in principle, the assured gains no advantage in giving notice of abandonment. However, in practice, the giving of notice of abandonment is advisable if it is questionable whether the loss is total, especially since an assured who has failed to give timely notice of abandonment and subsequently attempts to remedy the situation may have lost his opportunity to do so. 24.8 It was accepted at common law14 that, where the subject matter becomes an actual total loss, the assured does not have to give notice of abandonment and this rule has been codified in the Marine Insurance Act 1906, section 57(2). However, whether the rule stated in this unadorned form was justified at common law, or justifiable under statute, is debatable. Chalmers, the draftsman of the Act, appears to have based section 57(2) on dicta of Lord Esher alone.15 However, relying on Idle v Royal Exchange Ass Co 16 (holding that notice of abandonment is unnecessary in the case of a right sale of the subject-matter),17 an earlier dictum of Bayley J, in Cambridge v Anderton 18 appears in a case in which the insured vessel was a wreck; and the leading authority for the proposition, Rankin v Potter,19 was a case in which it was held that notice of abandonment of chartered freight had actually been given in time, albeit not as soon as it might have been, but that no advantage accrued from giving notice anyway. The authorities, therefore, appear to go no further than the separate rules that: notice of abandonment is unnecessary in the case of a right sale; and, where there is an obligation to give notice of abandonment, the assured is excused if there is no possibility of benefit to the insurer.20 However, there may be a loss falling within the definition of an actual total loss, for example where the subject matter has changed its character but still retains some value, where there is good reason why the insurer should receive prompt notice of abandonment. Indeed, this situation is similar to a constructive total loss. In principle, therefore, it is unfortunate for the statement in section 57(2) to have been enacted. However, its practical effect is minimised by the fact that, even in cases of actual total loss, notice of abandonment may be required by contract and is usually given in practice anyway.

II CONDITIONS FOR NOTICE OF ABANDONMENT

Constructive total loss

24.9 For an assured who has suffered a partial loss to become entitled to claim for a total loss, the partial loss must constitute a constructive total loss. Therefore, a notice of abandonment is ineffective unless there is a constructive total loss; and, if notice is given prematurely, either because no loss has occurred or because there is a partial loss which has not yet become a constructive total loss, it is ineffective. Moreover, a premature notice of abandonment does not become effective when a constructive total loss does occur. An assured who has given a premature notice of abandonment is not thereby relieved of his obligation to give one when circumstances warrant it; and an insurer who has received a premature notice of abandonment cannot be prejudiced by the absence of a timely notice when a constructive total loss eventuates. 24.10 Where it is unclear whether or not, or when, a constructive total loss has occurred or a notice of abandonment has been validly communicated, it may be appropriate and advisable for the assured to give a succession of notices of abandonment.21

Authorised actors

24.11 To be effective, a notice of abandonment must be given either by the assured or by someone who has authority to give notice on his behalf.22 Likewise, the assured must prove that the notice of abandonment is communicated either to the assured or to someone authorised to receive notice on his behalf, and it is generally insufficient to communicate notice to a Lloyd’s agent.23

Continuing intention to abandon unconditionally the insured interest

24.12 It is a condition of an effective notice of abandonment and of an abandonment itself, that the assured has the intention of abandoning to the insurer the interest which he has insured in the subject matter, and that this intention is unconditional.24 The extent of what can be, and what must be, abandoned is limited only by the extent of the assured’s interest in the subject matter25 and the extent to which he has insured that interest. An abandonment is not deficient because the assured had, whether initially or as a result of the insured peril, a limited interest in the subject matter, so long as he abandons whatever interest he does have. 24.13 An assured whose notice of abandonment has not been accepted and who wishes to preserve his right to treat a constructive total loss as an actual total loss must continue to be prepared to abandon the subject matter to the insurer. If he acts inconsistently with such continuing intention—for example by selling the wreck without reference to the insurer or by recovering the subject matter for himself—he loses his entitlement to claim for a total loss and may only claim for a partial loss.26

Form and contents of notice of abandonment

24.14 The Marine Insurance Act 1906, section 62(2) provides that: “Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word of mouth, and may be given in terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer”. The subsection is drafted in purely permissive terms and so does not stipulate clearly the minimum requirements for a notice of abandonment, which are partly compulsory and partly permissive. 24.15 The first part of section 62(2) records the familiar methods of communicating notice of abandonment at the time at which the Marine Insurance Act 1906 was passed and, it is submitted, is purely permissive. Thus, the method of communication may be one or a mixture of oral, written or any other suitable means. In particular, communication “in writing” may be by any suitable means by which information is recorded for transmission, including electronic means.27 24.16 The second part of section 62(2) paraphrases firm requirements: first, that the assured must intend to give notice of the unconditional abandonment of his insured interest;28 and, secondly, that he indicates this in notice of abandonment.29 The indication must be unequivocal but need not be in any particular form of words.30 However, it may obviously be advantageous in practice to use words which specify that the assured is making an abandonment and/or a claim for a total loss.31 Bankes LJ has said that, “Even if [a document] were not [a notice of abandonment] in form, yet, if it was intended to be such a notice and was accepted and acted upon as such, that might be enough. So it is necessary to consider both the construction of the document and the manner in which it was dealt with”.32 This may also be the effect of the cumulative dealings between the parties.33 24.17 It is at least helpful in practice to indicate in the notice of abandonment the grounds upon which it is given. A statement of grounds is not required by the terms of the Marine Insurance Act 1906 but, since the notice must be sufficient to profess the assured’s entitlement to claim for a total loss and to enable the insurer to decide what action he should take, an indication of the grounds of claim may be both desirable and necessary.34 Mere communication of information exploring the possibility of a claim for a constructive total loss does not constitute a notice of abandonment.35

Timely election

24.18 An assured who suffers a constructive total loss and wishes to claim for a total loss must elect to do so; and he must exercise his election with reasonable diligence. If he fails to comply with either requirement, in particular if he makes a positive election to claim for a partial loss, he cannot recover for a total loss.36 24.19 The concept of a constructive total loss is one conferring upon the assured an election to convert a claim for a partial loss into one for a total loss; and, in return for this privilege to subject the insurer to liability for a total loss, the assured must provide the insurer with ample advantage to take over his rights in the subject matter and maximise the advantages therefrom.37 This is, of course, subject to an excuse from the requirement of giving notice of abandonment: in particular, where there is no possibility of benefit to the insurer.38 Otherwise, the general rule is that “Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss”.39 24.20 The sufficiency of information available to the assured requiring him to exercise his election, and what is reasonable diligence40 for this purpose, are questions of fact. 24.21 In practice, the assured has a reasonable time in which to assess the nature of the loss; for example, a decision should be made “after the assured has had a convenient opportunity of examining into the circumstances which render abandonment expedient or otherwise; because it is on the result of that examination that he is to make up his mind, whether he will abandon or not”.41 Subject to that, notice of abandonment should be given as soon as the assured has such information as he realises, or a reasonable assured should realise, that the casualty constitutes a constructive total loss.42 24.22 A qualification of the requirement of a prompt election is that, “where the information is of a doubtful character the assured is entitled to a reasonable time to make enquiry”;43 and, again, what is a reasonable time for this purpose is a question of fact.44 There may be doubt because the veracity of the information is unclear or because it is unclear whether the nature of the casualty and its consequences are such as to justify giving notice of abandonment. 24.23 However, if all the necessary facts are known, the assured is not entitled to wait merely because opinions may fluctuate as to the results or proper conclusion to be drawn from the facts;45 or in order to ascertain or decide which is the more profitable way to him of exercising his election.46 24.24 Whatever the intentions or motives of the assured, if he has received information requiring him to make his election, and he omits to give prompt notice of abandonment to the insurer, he does not retain the opportunity to elect but is treated as having forgone his opportunity to claim for a total loss.47 If the assured considers it appropriate to treat the loss as a partial loss only, and it subsequently transpires that the cost of repairs exceeds the value of the subject matter, he cannot change his mind and claim for a total loss.48 24.25 As stated above, a premature notice of abandonment is and remains ineffective;49 and an assured who does not give timely notice of abandonment at the time at which he is or becomes aware of a constructive total loss loses the opportunity to claim for a total loss.50 However, if circumstances change, so that a constructive total loss does occur, either for the first time or of a different nature from a prior constructive total loss, a timely notice of abandonment may be given in respect of that later constructive total loss.51 In practice, in particular where a vessel is detained, there is as likely to be more of a fluctuation in perceptions of the likely outcome of the detention as in its actual circumstances; and the insurer who has once been apprised of the difficulty may be equally or better placed to calculate its likely resolution. Nonetheless, the safe course for the assured who wishes not to lose whatever election may arise to claim for a total loss is to give a series of notices of abandonment whenever appropriate or to negotiate with the insurer for a claim for a total loss to proceed if the circumstances should at any time justify it.52

III EXCUSED NOTICE OF ABANDONMENT

No possible benefit to insurer

24.26 In 1870 Cockburn CJ said: “where the interest to be made over to the insurer is of so shadowy and insubstantial a character that it cannot be supposed that it could have been of any benefit whatever to the underwriters, or that the latter, as reasonable men, would have thought of availing themselves of it, so that for all practical purposes abandonment would have been a merely idle and useless formality, the assured ought not … to be tied down to the necessity of giving notice of it; especially in these times, when it is notorious that the practice of underwriters is never to accept notice”.53 24.27 It is now provided by statute that “Notice of abandonment is unnecessary where, at the time when the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him”.54 Thus, notice has been held to be unnecessary: where the assured knew nothing of the fate of the subject matter until it was too late for the insurer to gain any advantage from the notice;55 where any notion of salvage was completely impracticable by reason of the place where, and the wartime circumstances in which, the insured vessel was sunk;56 and where a constructive total loss by the insured peril of fire of which the insured was unaware was followed by an actual total loss.57 A fortiori it is the case if there has been a right sale of the subject matter.58 24.28 In accordance with the underlying rationale, if there can be an advantage in the insurer’s receiving notice of abandonment, for example if freight can be earned by forwarding cargo by alternative means or by obtaining substitute cargo, notice should be given to an insurer of freight despite a total loss of ship or cargo.59 But where, by virtue of a total loss of ship or cargo, freight has become a total loss and there is no advantage to the freight insurer in receiving notice of abandonment,60 it need not be given.61 24.29 The general rule has been regarded as applying a fortiori to a contract of reinsurance.62 “Where an insurer has re-insured his risk, no notice of abandonment need be given by him.”63 “[i]t is wrong to say that in every case where notice of abandonment has been given the insurers are liable”;64 the reinsurers are unlikely to receive any advantage from receiving notice of abandonment;65 and, indeed, since the primary insurer has nothing to abandon until he accepts notice of abandonment of the subject matter primarily insured, a rule which encouraged the primary insurer to accept the assured’s notice of abandonment and to give notice of abandonment to the reinsurer would encourage the primary insurer to accept liability under the primary insurance, to the possible disadvantage of himself and the reinsurer.66 24.30 If the giving of notice of abandonment is correctly excused on the basis that, at the time when it should normally have been given, there was no possible advantage to the insurer, it makes no difference that the subject matter is restored before action.67

Waiver

24.31 “Notice of abandonment may be waived by the insurer.”68 Such waiver may be either express69 or implied.70 However, it must be clearly proved and must not be lightly inferred. The sue and labour waiver clause in hulls policies71 expressly provides that acts of suing and labouring shall not be treated as either an acceptance or waiver of abandonment;72 similarly, they should not per se be treated as acceptance or waiver of notice of abandonment.73 The clause has the presumably beneficial object of encouraging action to minimise loss without altering the positions of the parties. However, in the few reported judicial comments on the clause it appears to have been treated as simply stating the obvious—that equivocal acts should be treated as equivocal, whereas unequivocal acts should not be.74 24.32 Thus, the clause does not negative clear evidence, whether express or implied, of a decision to abandon or to accept abandonment or notice thereof.75 Arguably, the most that the clause does is to emphasise that the burden is on the assured to prove that otherwise neutral acts of the insurer in fact constitute acceptance of the (notice of) abandonment.76 Where the insurer does waive notice of abandonment, “the notice may be notionally taken to have been made at whatever date is most advantageous to the assured”.77

Actual total loss

24.33 It is common in practice for an assured who believes himself entitled to claim for an actual total loss to give notice of abandonment, thereby crystallising his entitlement to claim for a total loss should it prove to be merely a constructive total loss; and in any event an assured who institutes a claim for a total loss offers to abandon the subject-matter to the assured and gives notice of abandonment.78 However, there is no requirement for a notice of abandonment in the case of an actual total loss, and it is immaterial that actual total loss is preceded by a constructive total loss.79

IV ACCEPTANCE OF (NOTICE OF) ABANDONMENT

Evidence of acceptance

24.34 Assureds acquire rights by giving notice of abandonment, regardless of whether notice is accepted by the insurer.80 However, these rights may increase if the insurer accepts the notice.81 Moreover, an insurer exposes himself to liabilities to third parties if he accepts an abandonment so as to take over the assured’s proprietary rights.82 It is therefore important to ascertain whether notice of abandonment and/or abandonment have been accepted. Accordingly, there must be evidence that this has happened and the evidence must be unequivocal. This is essentially a question of fact83 and no particular form is required. 24.35 It was formerly held that the assured’s giving notice of abandonment within a reasonable time and the insurer’s response within a reasonable time were mutual obligations, so that silence is tantamount to acceptance or acquiescence.84 However, a notice of abandonment is an offer by the assured85 and the insurer is under no duty to accept, reject or otherwise respond to it.86 “The mere silence of the insurer after notice is not an acceptance”.87 The rule applies to both notice of abandonment and abandonment.88 24.36 “The acceptance of an abandonment may be either express or implied from the conduct of the insurer.”89 Mere payment of a claim is insufficient.90 Also, a mere reaction to a notice of abandonment is not enough, particularly if it is manifestly equivocal; for example, where the insurer advises “That the assured would do the best they can with the damaged property”;91 a fortiori where the assured is advised to act on behalf of whomever is interested, overtly leaving open who that person might be. However, “On the one hand, the owner, on the other hand, the underwriter, if they intervene, do so at their peril”,92 for their acts may, respectively, constitute retraction or acceptance of notice of abandonment. Although really it is circular, some assistance may be gathered from the test that the insurer has accepted the abandonment if he acts as though he has the rights consequent upon an accepted abandonment,93 for example, where he takes possession of the casualty, repairs it and continues to retain possession without repudiating the notice of abandonment or informing the assured as to the character in which he is acting;94 or where the insurer’s agent employs a salvor but omits to inform the assured that the salvor has suspended salvage operations.95 In practice, it is common for parties to hull insurance contracts to agree, by virtue of the sue and labour waiver clause, that acts of saving, protecting or recovering the subject matter shall not be treated as acceptance or waiver of abandonment or notice thereof; but the clause appears to have limited effect.96 24.37 An insurer may purport to accept the assured’s offer to abandon in narrower terms than those upon which the offer was made. The effect of this is considered below.97

V EFFECTS OF NOTICE OF ABANDONMENT

Limitation period

24.38 Prima facie the limitation period for the insurer’s liability runs from the time of the casualty, even in the case of a constructive total loss.98 Accordingly, even though in such a case the claim for a partial loss can at a later date be converted into a claim for a total loss, this does not affect the limitation period: a notice of abandonment is not an essential ingredient of the cause of action but an election between alternative quanta of damage.99

Assured entitled to claim for total loss

24.39 “If he duly elects to abandon on good grounds, the risk is ended, because the assured can recover as for a total loss.”100 Thus, “Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment.”101 Moreover, although an insurer may, without accepting (notice of) abandonment, intervene to take steps to minimise the loss, he does so on behalf of whomever is interested in the subject matter;102 thus, if the assured has an accrued right to claim for a total loss, this cannot be taken away from him by the insurer’s actions, even if the consequence of those actions is that the loss is in fact reduced to a partial loss.103

Master and insurer may act as neutral agents

24.40 Lord Murray has said that, after notice of abandonment was given, “The master remained in charge until relieved after intimation to the owner from the underwriters that they were attending to the salvage. No doubt after notice he was acting as agent for those ultimately concerned”.104 Also, “If [the insurer] declines the owner’s offer [of abandonment] and gives due notice of his position, he may intervene as acting in the interest of all concerned without assuming the responsibility of ownership”; he may accept the “continuation risk” and take up salvage on behalf of those ultimately concerned.105 Likewise, an agent appointed by the insurer for this purpose owes duties to both the insurer and the assured.106 However, the insurer also takes the risk that his actions may constitute acceptance of the (notice of) abandonment.107

Nature of notice of abandonment and acceptance; insurer liable

24.41 It is sufficient for an assured to be entitled to claim for a total loss that there has been either an actual total loss or a constructive total loss followed by an effective notice of abandonment. In such cases nothing is added by the insurer’s acceptance of notice of abandonment. However, regardless of whether the insurer is in fact liable for a total loss, the Marine Insurance Act 1906, section 62(6) states that, “Where a notice of abandonment is accepted the abandonment is irrevocable. The acceptance of the notice conclusively admits liability for the loss and the sufficiency of the notice”.108 The assured is thereby unable to retract his notice of abandonment, the insurer is personally liable to pay for a total loss and he is also entitled to exercise his right under section 63(1) of the Act to take over the interest of the assured in the subject-matter but his acceptance of notice of abandonment is not per se an exercise of an election under section 63(1).109 24.42 In Provincial Ins Co of Canada v Leduc 110 Sir Barnes Peacock said that the effect of the assured’s giving notice of abandonment and of the insurer’s acceptance is that the parties are mutually estopped from denying each other’s rights to recover, respectively, for a total loss and for salvage (even if it exceeds the amount of the loss). In one sense it is sufficient to treat the parties’ acts as estoppels, since they have existing rights under the insurance contract and the question is not so much the existence but the realisation of those rights. However, it is submitted that the effect of an accepted abandonment does more than to create estoppels,111 which as a matter of general principle may be an invalid, and certainly in practice a precarious, foundation for rights. It is as a matter of principle and practice better to regard it as creating a contract.112 24.43 A notice of abandonment is effectively and most obviously an offer by the assured to abandon his interest in the subject matter.113 As with any other offer to contract, the insurer/offeree may reject it114 or he may accept it, in which case it becomes irrevocable; if it has not yet been accepted, the assured/offeror may revoke it.115 As a matter of general principle, an offer to contract may be accepted in accordance with its terms, and these terms may be whatever the assured stipulates. Conventionally, however, an offer to abandon the subject matter is accepted when the insurer pays the agreed indemnity for a total loss.116 The insurer’s acceptance constitutes a contract with two elements; first, he is immediately liable to pay for a total loss, whether he was liable anyway or he could have resisted that liability;117 and, secondly, he becomes entitled, from the time that he actually pays, to take over the assured’s interest in the subject matter.118 24.44 Offers to contract are prima facie revocable. This is the case with an offer to abandon and an election to claim for an actual total loss. In either case, the offer may be withdrawn before acceptance. Therefore, if the assured has the opportunity of recovering the subject matter, he has the opportunity of recovering on behalf of himself, on behalf of the insurer, or in respect of the interests of both himself and the insurer.119 Similarly, an assured who has claimed for an actual total loss may retract his election and claim instead for a constructive total loss if he prefers the alternative claim.120 24.45 An insurer may purport to accept the assured’s offer to abandon in narrower terms than those upon which the offer was made,121 such as by appearing to qualify the acceptance, for example by endorsing the claim settlement “net open residual value of vessel to be accounted to insurers”.122 The effect of such a qualification will depend on the circumstances. One possibility is that the notice of abandonment is considered to be an indivisible offer to abandon, in which case it will simply not have been accepted. A second possibility is that it is divisible, so that the insurer may accept in part. A third possibility is that the insurer accepts in full but that the words used simply state one of the consequences of acceptance. A fourth possibility is that the insurer rejects the assured’s offer but makes a counter-offer in more limited terms, in which case a contract will be made if and only if the assured accepts the counter-offer. It is, however, likely to be the case that, if an agreement is concluded in more limited terms than those of the original notice of abandonment, it may constitute a contract but not a (full) contract of abandonment in the conventional sense. Certainly, insurers are unlikely to be able unilaterally to accept a claim in part and then claim full, or indeed any, rights in the subject matter.123 24.46 A contract of abandonment is, in common with other contracts, subject to being defeated by vitiating factors.124 However, if there was a ground, such as breach of warranty or breach of condition, upon which the insurer could have escaped liability and, with full knowledge of the facts, he accepts a notice of abandonment, he cannot later resile from liability on that ground.125 Similarly, an equivocal response to a notice of abandonment does not constitute a settlement.126

VI EFFECT OF (NOTICE OF) ABANDONMENT 127

Non-acceptance of notice of abandonment

24.47 An assured whose notice of abandonment has not been accepted retains his interest in his property and the benefits accruing thereto. Thus, the insurer has no claim against him, whether for unjust enrichment or otherwise, and it is not unconscionable, where an assured’s claim for salvage has been satisfied under the policy and the assured thereby obtains a vessel that has been “improved” by the salvage service, for that is the natural consequence of the insurer’s obligation to indemnify and its decision not to elect to take over the wreck.128

Insurer’s right to take over assured’s proprietary rights

24.48 There are early dicta that, in cases where an assured who is entitled to make a claim for a total loss and makes such a claim, the assured’s proprietary interest in the subject matter insured automatically passes to the insurer, either when the claim is made129 or when it is paid.130 However, the Marine Insurance Act 1906, section 63(1) provides that: “Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever remains of the subject-matter insured, and all proprietary rights incidental thereto”. In other words, where an assured is entitled to claim for a total loss, whether actual or constructive, and makes such a claim (in the case of a constructive total loss, giving notice of abandonment), the insurer does not automatically acquire proprietary rights in the subject matter but obtains an entitlement to take over the assured’s rights in the subject matter.131 24.49 Indeed, an underwriter may decline to accept a notice of abandonment yet nonetheless pay for a total loss. 24.50 The insurer is free to exercise his election to take over the assured’s rights. Alternatively, he may not take over such rights, either by simply not exercising his election or by positively disclaiming an interest.132 Where an insurer’s actions at the time of a casualty are equivocal, a clear disclaimer of interest is advisable if the insurer wishes to avoid the liabilities of an owner, for example for wreck removal. 24.51 If the circumstances do not justify an assured’s giving notice of abandonment, he has no entitlement to recover for a total loss but he may nonetheless be offering the insurer the opportunity to take over the insured subject matter in return for the insurer’s agreeing to pay for a total loss. Since the parties can be expected to know and make a proper assessment of their own business, an assured recovering for a total loss is unlikely to be prejudiced and the insurer is not bound to accept the notice of abandonment, such a settlement is likely to be binding. However, there is the possibility that it may be upset on the basis that it was entered into as a result of a fundamental mistake or on the ground that there is a post-contractual duty of good faith which has been breached by the insurer.133 24.52 Abandonment of the assured’s interest in the subject matter only crystallises at the time of acceptance/payment; but it operates retrospectively, to the time of the casualty.134

Rights over subject matter

24.53 The identification of rights and liabilities in respect of subject matter which has become an actual or constructive total loss has long been regarded as an uncertain and difficult process, particularly in the light of a number of, ex hypothesi non-binding, obiter dicta in respect of shipwrecks which may have become more of a burden than an asset and for which neither the assured shipowner nor the insurer wishes to accept liability. However, a review of the applicable rules was necessitated in litigation involving the vessel WD Fairway. 24.54 WD Fairway was a mega-sized trailer hopper dredger of specialised construction, owned by a company in the Boskalis group and registered in the Netherlands. Her hull and machinery were insured by seven primary underwriters for up to â5 million and by the 15 claimant insurers under an excess policy for an extra â145 million. Following a collision off China, the vessel became a constructive total loss. Notice of abandonment was given but, in the conventional way, the insurers did not accept it though agreed to treat the assured as if a writ/claim form had been issued.135 The vessel was then towed to Thailand, where she remained. The underwriters paid their proportions of both the constructive total loss claim and the separately covered claim for salvage/wreck removal. The parties disagreed on the value of vessel (the underwriters estimating it was â75 million, the assured offering â25 million). There arose an unprecedented departure from the traditional practice in the London market for disputes over realisation of the value of a wreck to be resolved consensually. The insurers were anxious that the vessel be put out to global tender with a view to effecting a sale or, at the least, ascertaining the open market value. However, the assured were unwilling to permit access to the vessel for inspection by their competitors and allowing them to ascertain confidential information. The majority of the insurers therefore elected to exercise their right under the Marine Insurance Act 1906, section 79(1) to take over the interest of the assured in what remained of the subject matter insured. The assured therefore removed the vessel from the Dutch Register of Shipping and sold her to another company in the Boskalis group (the fourth defendant in the ensuing litigation) for the nominal sum of â1,000. Thereafter, those insurers who had not previously exercised their right of election under section 79(1) purported to do so. 24.55 Given the importance of the issue to the parties to the dispute and to the market generally, Tomlinson J was asked, on the basis of an agreed statement of facts, to decide a number of preliminary issues.136 Essentially, he decided that insurers’ acceptance of notice of abandonment and election to take over the assured’s interest in the subject matter confers an equitable lien on the insurers, entitling them to apply for an injunction to restrain disposal of rights in the vessel and for legal title to be transferred to them. Nonetheless, under the vessel’s lex situ (Thai law) title to it could be and was lawfully transferred to the fourth defendant. However, under the Insolvency Act 1986, section 423 (which is not subject to territorial limitations), where a debtor sells property at an undervalue in order to defeat the interests of its creditors, the court has a discretion to restore the position or otherwise protect the interests of the creditors; and that discretion would be exercised to compel the fourth defendant to transfer the vessel to the claimant’s nominees with a view to her sale. 24.56 The relevant issues in the WD Fairway litigation will be considered together with the applicable general principles as follows. 24.57 First, the mere appearance or presence of a constructive total loss does not end the assured’s interest in his property or transfer it to the insurer, for: as a minimum there must have been a true constructive total loss and a valid notice of abandonment; a constructive total loss entitles the assured to choose to claim for a partial rather than a total loss;137 and, even if the assured has given notice of abandonment, a constructive total loss may be adeemed before action,138 so as to remove the basis of the assured’s claim for a constructive total loss.139 Thus, although the insurer’s acceptance of notice of abandonment entitles the insurer to take over the assured’s rights, and although the insurer’s election to do so operates retrospectively,140 until the insurer exercises his election and manages to vest the assured’s interest in himself, the assured retains the power to transfer a right in the subject matter to a third party.141 24.58 Secondly, an assured who gives notice of abandonment, and who ex hypothesi has made an abandonment, may simply intend to abandon to the insurer in the sense of offering to allow the insurer to assume his interest in the subject matter, but intending to retain all other rights over the subject matter until his claim is satisfied. This is likely to be the situation where the status of the subject matter is uncertain, so that the assured wishes to recover for a total loss if his claim is justified but not otherwise to relinquish his claims over the subject matter. 24.59 A more difficult question is whether an owner can simply abandon all interest in his property, regardless of whether his interest is taken over by the insurer or a stranger. There is some support in maritime law cases that this is possible. Thus, for certain purposes, the Admiralty Court has recognised that maritime property may be abandoned so as to become derelict, for example for the purpose of entitlement to a salvage reward;142 there are obiter dicta in a number of cases concerning liability for wrecks that a shipowner may abandon his property outright;143 and Bailhache J has opined that an unaccepted notice of abandonment divests the assured of ownership and probably makes the subject matter a res nullius.144 24.60 However, the Admiralty law rules are inconclusive on this point; the obiter dicta referred to were no more than that; and Bailhache J’s view has been disapproved in the Court of Appeal.145 Therefore, there is at the most only a superficial divergence between the apparent approach in some maritime law cases from the general common law rule that an owner retains title to property unless and until his interest therein is acquired by another: it is a general rule that property cannot simply be abandoned so as to become ownerless, ie, a res nullius.146 24.61 The relevant provisions of the Marine Insurance Act 1906 are consistent with the general common law principle. Section 63(1) states that, “Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever remains of the subject-matter insured, and all proprietary rights incidental thereto”; and section 79(1) states that, “Where the insurer pays for a total loss … he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for”.147 An insurer may exercise his right under section 79(1), irrespective of whether a right under section 63(1) remains available to be exercised.148 24.62 These sections rest on the implication that the acquisition of the assured’s proprietary interest by the insurer does not occur automatically on abandonment or payment but depends on the insurer’s election. They specifically provide that, where the assured still has an interest, the insurer may take it over. They do not address the possibility that the assured may no longer have an interest because he has abandoned it entirely. If that is possible, the sections are either inapplicable (because there is no longer an “interest of the assured” to be taken over) or merely declaratory of the general common law rule that any person—the insurer included—may acquire an interest in apparently unowned property. 24.63 However, that creates a difficulty; for, if an assured could divest himself completely of all rights over his property, a stranger could intervene and acquire rights over it, so defeating the insurer’s opportunity to take them over. Certainly, the insurer may have recourse against the assured for prejudicing his interests149 but he may nonetheless wish to take over proprietary rights in the subject matter. The Marine Insurance Act 1906 is equivocal on whether his ability to do so can be defeated by abandonment to the world and assumption of rights by a third party, especially if the third party can successfully argue that the provisions of the Act are merely intended to regulate the relationship between assured and insurer, and do not specifically affect third parties. However, the better view is that, upon conclusion of a contract entitling the assured to claim an indemnity, particularly one which confers upon the assured an entitlement to claim for a constructive total loss, for his part the insurer acquires a vested statutory entitlement to take over the rights of the assured in cases of abandonment and payment for a total loss, and this cannot be defeated by an abandonment which allows third parties to intervene and defeat the insurer’s entitlement. This was the view of Bigham J, who said of such a case, “If the vessel was a total loss the plaintiffs [the assured, who had given an unaccepted notice of abandonment] had ceased to be interested in her, and the salvage, if it did not become the property of the underwriters, could at all events be claimed by no one else; … no one had any interest in the wreck except the underwriters”.150 24.64 The matter was considered more recently in The WD Fairway (No 2) 151 by Tomlinson J, who accepted that, after insurers had purported to exercise their rights under the Marine Insurance Act 1906, section 63(1) to take over the assured’s interest in the subject matter, the assured could nonetheless transfer a good legal title to a bona fide purchaser without notice of the insurer’s right. 24.65 Nonetheless, insurers have it within their power to create in their favour proprietary rights in the subject matter either by acceptance of notice of abandonment (and thereby making an election under section 63(1)) or, if it is different, by irrevocable election to take over, on the promised payment for a constructive total loss, the interest of the assured in the subject matter (by virtue of section 79(1) of the Act).152 On payment, they can claim their full proprietary interest and acquire the right to control or dictate the sale thereof.153 24.66 The interest acquired by an insurer on acceptance of notice of abandonment and exercise of his consequent right to a proprietary interest is, at least, an equitable lien.154 This is a security interest which arises by operation of equity from the relationship between the parties and confers a charge upon the property. Unlike a common law lien, which depends on possession and is effectively a negative right of retention, it exists independently of possession and confers positive rights entitling the lienee to enforce it by means of an order for transfer of legal title, an order for sale and/or an injunction to prevent disposal of the property subject to it without satisfaction of the obligation the performance of which it secures. The lien therefore constrains the assured’s freedom to deal with his property. However, being equitable, it will not avail against a bona fide purchaser for value of a legal estate without notice of it. 24.67 It has been suggested that it is sufficient to create an equitable lien that an insurer has conclusively admitted liability for a constructive total loss and irrevocably elected to take over the interest of the assured in the subject-matter, even though he has not yet paid155—albeit he would need to pay in order to enforce the lien. A fortiori the lien arises where the insurer also pays.156 However, it has been held that the lien is dependent on the insurer’s exercise of his entitlement to elect to claim an interest in the subject matter and to accept the burdens of ownership.157 Thus, it does not arise before such election, even if the insurer has paid for a constructive total loss. At such time, therefore, it is not necessarily unconscionable for the assured to dispose of the subject matter without consulting the insurer, for example to rid himself of further or potential liability for wreck removal or pollution, and the Marine Insurance Act 1906 does not require the insurer’s consent in such a case (albeit in practice the parties will generally come to an agreement over such a course of action).158 24.68 It does not necessarily follow that a security interest that is subject to payment of an indemnity is also subject to acceptance of the burdens of ownership of the subject matter; but this consequence may be justified in this situation because the insurer’s interest is specifically dependent upon his entitlement to “take over” the interest(s) of the assured.159 However, the meaning of “take over” in the Marine Insurance Act 1906 is open to more than one construction. In particular, section 63(1)’s provision that the insurer “is entitled to take over the interest of the assured in whatever remains of the subject-matter insured, and all proprietary rights incidental thereto”160 may appear to indicate: first, that there may be a distinction between, on the one hand, “the interest of the assured in whatever remains of the subject-matter insured” and, on the other hand, “proprietary rights incidental thereto”; and, secondly, that, so far as the assured’s interest is divisible, the insurer may elect to take over some but not all of those interests. This interpretation is to some extent supported by the fact that judicial recognition of the insurer’s equitable lien and acquiescence in his not having acquired the legal interest amount to fragmentation of the assured’s interest in the subject matter. Thus, where an assured has a legal interest in the subject matter and the insurer has been recognised as acquiring an equitable lien but not yet a legal interest, he has arguably not yet in fact taken over the assured’s interest. If this situation is justifiable by the maxim that equity regards as done what ought to be done, that raises the further issue that an insurer who exercise his election to take over the assured’s interest has not merely an entitlement but also an obligation to perfect it. 24.69 A different aspect of this issue is whether an insurer would be entitled to decide to take over part but not all of the subject matter, for example where the equipment of a wrecked ship retained value but not the hull. It may be assumed that an insurer would be expected to make a decision one way or the other whether or not he is going to take over the assured’s interest and that he would not be allowed to exercise his election selectively and selfishly. This is supported by the Act’s use of the singular “interest”, rather than the plural “interests”, in its statement of the insurer’s rights. And the position would, of course, be both different and clear where the assured had obviously different interests and they were insured separately. But the position would be problematic in unusual circumstances, for example where a vessel and her cargo were insured under a single policy. 24.70 Where there is a single subject matter but liability for risk is apportioned between different parties, each party has a proportionate right in respect of the subject matter.161 Marine insurance is commonly effected by more than one underwriter162 and the entitlement to take over the interest of the assured under the Marine Insurance Act 1906, section 79(1) arises “Where the insurer pays for a total loss”. However, each insurer has a separate contract with the insured, the Act is concerned with the incidents of each individual contract of insurance and the rights of one insurer are unaffected by another insurer’s decision on whether or not to accept abandonment or his circumstances (for example, insolvency). “Provided that any one underwriter has paid his proportion of a total loss of the ship, or his proportion of a total loss of an apportionable part of or of the whole of the goods, he has a right of election. [T]he process of abandonment must be available, pro tanto, if the insurance extends only to a proportion of the value of the thing insured.”163 The rule applies equally whether there is more than one insurer or the assured himself retains a portion of the risk. It should also apply in the case of double insurance;164 and, in principle, where the policy contains a deductible, though in practice, presumably in order to simplify the process of abandonment, deductible clauses are usually disapplied in claims for total loss, so the point is unlikely to arise.165 24.71 The issue of entitlement to a proprietary interest in shipwrecked property is likely to hinge on the value of the wreck. If it exceeds the measure of indemnity, it is in the assured’s interest to retain his right of ownership; if it is less than the measure of indemnity but nonetheless of some value, the insurer has both a right to assume the benefit of salvage and an advantage in doing so; if it is worthless or a burden, no one is likely to claim it. This last situation highlights the reverse side of the coin: the question, not of who has rights over the subject matter, but who is liable for it.

Liability for subject matter

24.72 There may be tension between the interest of an assured shipowner, who is exposed to potential liability for wreck removal expenses and wishes to divest himself of it, and the insurer, who will have to consider taking the benefit of salvage but avoiding potential liabilities. In practice, this tension may be exacerbated by a worsening situation in which neither side is clear as to what it wants to do but action needs to be taken quickly. One possible practical course of action is to agree that action should be taken but to postpone the decision as to who should bear responsibility for it. However, it will depend on the circumstances whether the rights and liabilities of the assured and the insurer are to be superseded by the agreement made at the time of the casualty or remain to be determined by the insurance contract and the general law.166 24.73 As a matter of general principle, it is clear that a person cannot simply by his own act divest himself of an accrued liability. Thus, a shipowner whose vessel sinks through his negligence cannot rid himself of accrued wreck removal expenses by abandonment.167 Likewise, although obviously an assured’s liability may be indemnifiable by his insurer under the terms of an appropriate policy, the assured cannot unilaterally transfer an accrued liability and impose it upon the insurer or any other party. By the same token, although an owner may unilaterally transfer a proprietary right, most obviously by gift, the transferee cannot be made to accept it and he may disclaim it. In any event, tortious liability in respect of property does not normally depend on ownership but fault. Thus, a shipowner will remain liable to all those to whom he causes loss by his negligence, regardless of whether he has successfully divested himself of ownership of his wrecked ship; an insurer who assumes ownership of a wreck will in general not incur liability if he is not at fault; and loss caused by a physically abandoned ship may be attributed to act of God.168 24.74 Nevertheless, a person may be liable by virtue of his ownership of property because of his common law duty of care to avoid liability being caused to another by his property, for example from collision with an unmarked wreck, or where strict liability is imposed on the current owner of property. Thus, where an assured shipowner abandons his vessel and gives notice of abandonment which is accepted by the insurer, the insurer who assumes rights over the property may thereby incur liabilities, in particular the statutory liability for wreck removal expenses falling upon the “owner” of the vessel at the time at which the expenses are incurred.169 24.75 However, since an insurer is not obliged to assume ownership, he may similarly avoid incurring such liability. Given that abandonment by an assured affords the insurer with an election to assume ownership of the subject matter, an assured should not be able to maintain that the insurer has an implied duty to assume ownership and relieve him of the liability falling upon the owner of the wreck. It would also be contrary to the legitimate interests of persons prejudiced by a wreck for the assured to divest himself of responsibility for it where neither the insurer nor any other party steps into his shoes. 24.76 Accordingly, where the consequence of “abandonment” is not to transfer ownership to another, it will remain with the assured, together with any attendant liabilities, for which he will be able to recover an indemnity if he has taken out appropriate insurance cover. In practice, a standard marine policy does not cover such risks and they are usually insured specifically by shipowners as part of their P&I cover.170 24.77 Regardless of whether he automatically acquires or is obliged to take over the rights of the assured, an insurer who asserts those rights acquires attendant liabilities; for exsample, an insurer on freight who demands payment by way of freight earned after abandonment must bear the expense of earning the sum claimed.171 24.78 A person who assumes ownership of property may have to accept it subject to encumbrances, even though he does not become liable to satisfy the claims of the previous owner which the encumbrances secure. Thus, an insurer who has accepted notice of abandonment of a ship cannot ignore maritime or possessory liens or mortgages existing over the vessel. Yet, if the assured fails to satisfy his liabilities and his creditors enforce their security over the abandoned property, so that the insurer is made to discharge those liabilities, the insurer should be entitled to claim restitution from the assured. Nonetheless, the insurer will be subject to liabilities accruing to him by virtue of his becoming owner of the property, for example to reward a salvor who has salved the vessel from the consequences of the insured peril.

Conventional exercise of insurer’s election

24.79 Although insurers who have paid for a constructive total loss have an interest in reducing the amount of their expenditure by taking over and realising the value of the assured’s rights in the subject matter, they are unlikely to want in fact to deal with the subject matter itself, whereas the assured may well wish to continue to deal with it. In practice, therefore, the insurers and the assured generally enter into a cooperative arrangement, based on the assumption that, for example, the insurers are entitled on payment for a constructive total loss to take over the assured’s interest in the vessel and dispose of it as they see fit172 but that ordinarily they will be relieved of the need actually to exercise that entitlement by the assured’s either assisting in facilitating the sale of the vessel to a third party, often for scrap, or, if he wishes to retain the vessel, account for the residual value to the underwriters.173 The latter situation may be described loosely as “buying back” the vessel from the insurers, though in practice this is incorrect since the parties’ arrangement is based on the assumption that the underwriters are entitled to take over the assured’s interest but do not need to do so.174 Indeed, rather than the underwriters’ paying for a constructive total loss and then the vessel’s being sold or valued and the residual value being paid to them, it is sometimes possible simply for the residual value to be ascertained or agreed and for this sum to be deducted from the amount payable by the underwriters.175 24.80 Since the underwriters’ entitlement to either the residue or the residual value of the subject matter is dependent on their actual or notional exercise of their right to take over the assured’s interest in the subject matter, it is unlikely that they will be found to have elected to waive this right without an express disclaimer of their entitlement.176 Therefore, unilateral arrangements by the assured to deal with the subject matter are potentially prejudicial to underwriters’ interests in that they deprive, or attempt to deprive, them of the opportunity to control the manner of disposal of the vessel.177 Thus, it was held in The WD Fairway (No 3),178 sale of the subject matter may be set aside under insolvency law179 as a sale at an undervalue. In that case, the underwriters argued that the vessel was worth â75 million, the assured that it was worth â25 million. In order to thwart the underwriters’ intention to ascertain the market value by putting the vessel out to global tender, the assured took “the unusual if not unprecedented … step” to sell it unilaterally, to an associated company for â1,000. On the basis that the court had the power to order the sale of the vessel and prescribe the method thereof, the Admiralty Court decided that the vessel should be transferred to the underwriters’ nominee with a view to her sale.

Extent of insurer’s interest

24.81 An insurer who takes over the assured’s interest in the subject matter can only succeed to the extent of what remains of the interest which the assured had in the subject matter and which he insured. In Whitworth Bros v Shepherd 180 a vessel was insured on a valuation of £9,000 with the Henderson syndicate for £8,000, with the pursuers for £500, and with a third syndicate for £500. When she stranded, the assured gave notice of abandonment to all the underwriters. It was rejected by the Henderson syndicate, who were held liable for a partial loss.181 The pursuers accepted liability for a constructive total loss. The ship was repaired for an amount of 20 per cent of her value and was mortgaged for £13,168.182 The pursuers claimed a share in the vessel but the assured refused to transfer a share and, because of the mortgage, were unable to transfer an unencumbered share. Accordingly, the Court of Session ordered the assured to pay to the defenders £400, a sum equivalent to the value of their share, namely one-eighteenth of the value of the ship less the cost of repairs.

Nature of insurer’s interest

24.82 As stated above, it was held by Tomlinson J in The WD Fairway (No 2) 183 that an insurer who accepts notice of abandonment and exercises his consequent right to a proprietary interest in the subject matter is entitled, at least, to an equitable lien over it.184 Tomlinson J went on to hold that the insurers in that case acquired an equitable interest under a trust and considered the possibility that insurers might have a legal interest in the subject matter. It is therefore necessary to consider the relationship between: on the one hand, the insurer’s acceptance of notice of abandonment, his decision to exercise his right(s) take over the interest of the assured (under the Marine Insurance act 1906, sections 63(1) and 79(1)), and his payment of an indemnity; and, on the other hand, the equitable lien, the equitable interest under a trust, and the legal interest. The position seems to be that, on acceptance of notice of abandonment, the insurer is entitled to exercise his right under section 63(1) to take over the assured’s interest, the effect of which is that the assured is personally liable to transfer the interest and the insurer has a charge over the subject matter entitling him to demand the transfer but that two more factors are necessary to complete his title. First, it is also necessary actually to pay the indemnity in order to exercise his right under section 79(1) to take over and obtain the relevant interest. Secondly, he can only obtain the interest that it is possible for him to obtain. 24.83 Thus, if the assured has absolute legal title to the subject matter and title can be transferred without legal formalities, as is likely to be the case with ordinary chattels such as cargo, then, on acceptance of notice of abandonment, election to take over the insured’s interest and payment of the indemnity to him, the insurer may have no concern with the possibility of an equitable lien over the cargo, since he may immediately become its legal owner. In less straightforward cases, however, although the law of marine insurance provides generally that an abandonee is entitled to take over the interest which the assured has abandoned, this may not be achieved completely without compliance with other rules for the holding, transfer and registration of interests.

Legal requirements for transfer of interest

24.84 First, the relevant system of law for determining the incidence of proprietary interests in property is the lex situs.185 Secondly, in English law Merchant Shipping Acts have laid down requirements for the registration of interests in United Kingdom ships and it has been remarked that abandonment of a ship could not per se make the insurer its owner unless there was compliance with the statutory requirements.186 Thirdly, there is a long-established rule that the property in a United Kingdom ship shall be divided into 64 shares;187 and, since there is no requirement that insurable interests be similarly divided, an abandonee’s entitlement may not be of a registrable size. The problem is reduced by the fact that the legislation does not prohibit unregistrable, or registrable but unregistered, interests, so that an insurer who succeeds to an unregistered interest is no worse off than the assured, and there is unlikely to be a difficulty with an assured who has a registrable interest and insures his full interest; but even an assured with a registrable interest may insure an unregistrable proportion of his interest. 24.85 However, in Scottish Mar Ins Co of Glasgow v Turner 188 Lord Truro said that “The act of abandonment, if it did not operate as an assignment of the ship, at least enured as a binding agreement to assign it, and thereby invested the insurers of the ship with all the rights which belonged to the owners”. The Merchant Shipping Act 1995189 provides that “the registered owner of a ship or of a share in a ship shall have power absolutely to dispose of it provided the disposal is made in accordance with this Schedule and registration regulations” but this “does not imply that interests arising under contract or other equitable interests cannot subsist in relation to a ship or a share in a ship; and such interests may be enforced … in the same manner as in respect of any other personal property”. In Whitworth Bros v Shepherd 190 the Court of Session held that an insurer entitled to a share in the vessel, which had become encumbered by a mortgage, was entitled to be paid a sum equivalent to the value of his share. 24.86 Therefore, an acceptance of notice of abandonment and abandonment are effective to entitle the insurer to take over the interest of the assured without further formality; yet compliance with the requirements of the Merchant Shipping legislation is necessary for the insurer to acquire full title; and before this occurs an abandonee has an equitable interest in the abandoned property which can be satisfied either by a formal transfer of that interest, if possible, or payment of its value. 24.87 A further issue arises where an insured vessel has become a wreck. As a general rule, any transfer of a registered ship must be effected by a bill of sale satisfying prescribed requirements;191 but semble this requirement only applies to a vessel which is at the time of transfer capable of being used as a ship. The Merchant Shipping Act 1894, section 21192 provided specifically that, “In the event of a registered ship being either actually or constructively totally lost, … every owner of the ship or any share in the ship shall … give notice thereof to the registrar … and the registry of the ship in that book shall be considered as closed”. Since “constructive total loss” only derives its meaning from the law of marine insurance, the effect of the provision was that vessels which were a constructive total loss could be sold without the necessity for a bill of sale.193 The current registration provisions194 provide that “The Registrar may … terminate a ship’s registration … on the ship being destroyed (which includes, but is not limited to, shipwreck, demolition, fire and sinking)”.

Summary

24.88 Where title to property is transferable without formality and an insurer has effectively taken over the interest of the assured, he will be the legal owner of it. Where an assured owner is acting as his own insurer for part of the risk and an electing insurer has effectively taken over part of the assured’s interest, they become co-owners of the property in their respective proportions, as joint tenants.195 It was suggested in The WD Fairway (No 2) 196 that, where majority underwriters had elected to take over the interest the assured and the assured had deregistered the vessel, then those underwriters and the assured became co-owners of the vessel as tenants in common at common law, but the judge declined to express a view, wisely, it is suggested. In cases where insurers are, initially at least, unable to take legal title, the assured becomes a trustee and the relevant underwriters acquire a beneficial interest under a trust: they are entitled to have the appropriate number of whole one sixty-fourth shares transferred to them to be registered in their name, with any remaining part one sixty-fourth share held on trust by the assured owners for themselves and for the insurers in their respective proportions.197

Subsequent transfer

24.89 If an insurer has acquired a legal title to the subject matter, that title survives though the assured purports to confer legal title on another, for example by selling his ship to him. Similarly, if the insurer has an equitable interest in, or equitable lien or charge over, the subject matter, that will prevail if the property comes into the hands of a party taking with notice of it. However, if the insurer has only an equitable interest, it will not survive against a bona fide purchaser for value of the legal interest without notice of the equitable interest.198 A fortiori, once the assured transfers his interest in the subject- matter to such a bona fide purchaser, he no longer has an interest to cede to the insurer, so the insurer cannot take over the assured’s interest after the sale and acquire an equitable interest.199 Indeed, though the exercise of the election to take over the assured’s interest operates retrospectively to the time of the casualty,200 if the action necessary by the insurer to acquire an equitable lien or equitable interest is not done before the assured transfers his interest to another, it may make no difference whether that other is or is not a bona fide purchaser without notice, because there is nothing of which to take notice other than the possibility of acquiring the equitable interest.

Salvage

24.90 An insurer who accepts or discharges liability for a total loss becomes entitled to salvage of the interest remaining in the assured in the insured subject matter.201 This includes the physical remains of the insured subject-matter and any rights in respect of it,202 in particular to recovery for its loss. 24.91 Whether or not an insurer has accepted a notice of abandonment, and whether the loss is an actual or constructive total loss, “Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for”.203 “[T]hat abandonment takes place at the time of settlement of the claim; it need not take place before.”204 However, although the insurer who pays for a total loss “thereupon” (ie, on payment) becomes entitled to take over the interest of the assured, the insurer’s rights date from the time of the casualty.205 24.92 Thus, an abandonee is entitled to exercise proprietary rights over the subject matter,206 whether those rights can be exercised immediately or whenever the subject matter subsequently becomes available,207 or to the proceeds of sale of it.208 The insurer is entitled to be subrogated to claims by the assured against third parties209 and the assured holds the subject matter or its proceeds in trust on behalf of the insurer.210

Salvage of freight

24.93 “[T]he ship is to be considered as having passed to the underwriters after the abandonment has been accepted, as from the time when the damage occurred to her which entitled the shipowners to abandon her. From that time the underwriter is entitled to everything which that ship, then being his, can earn; that is to say, that he can earn by her as being her owner… . he is not entitled to anything that has been earned by the use of that ship before she was his ship.”211 24.94 It would arguably be fair for entitlement to freight to be apportioned between carrier and insurer in respect of the periods before and after the casualty.212 However, that is not the rule in English law. The parties’ entitlements hinge on whether or not freight is at the carrier’s risk at the time of the casualty. Thus, an insurer’s right or ability to salvage freight depends initially on the type of freight in issue.213 24.95 Where the right to freight, or part of it, accrues before the casualty, the carrier remains entitled to retain the freight if it has been paid or to recover it by action if it has not; therefore, advance freight or freight for cargo delivered at an intermediate port before the time of the casualty is generally no longer at risk when the casualty occurs and so not salvable by the insurer.214 24.96 Lord Cottenham LC has said that, as a matter of law, “the freight which the ship is in course of earning, is a benefit or advantage belonging to it, and is as much to be given up to, or to become the property of the underwriters, paying for a total loss of ship, as any other matter of value belonging to or incident to the subject insured”.215 The leading case is Case v Davidson.216 Ship and freight were insured by separate underwriters and abandoned to them on the ship’s capture. On her recapture, the shipowner completed the voyage and received freight on behalf of whomever was entitled to it. He was held liable to pay it over to the insurer on ship.217 A rule which lays down that, where ship and freight are insured separately, an abandonment of ship entitles the hull underwriter rather than the freight underwriter to remuneration by way of freight may seem odd. But it is clearly established.218 24.97 Brett MR has remarked that, as a general rule the insurer’s entitlement is not based on the insurer’s acquisition on abandonment of the shipowner’s contractual right to earn freight but on the fact that, by assuming ownership of the vessel, the insurer has acquired the means to earn remuneration by completing the voyage.219 However, the position is not quite so straightforward since the insurer also acquires an entitlement to claim in respect of the work done before the abandonment.220 24.98 The freight salvable by the insurer is the sum which the assured shipowner would have earned but for the insured loss and which the insurer earns in his place. Thus, if the shipowner would have earned chartered freight to be paid by the charterer from bill of lading freights, the charterer retaining the surplus from the bill of lading freights, the insurer has no claim to the charterer’s surplus.221 Similarly, charges against freight must be deducted, for example the freight’s proportion of general average and particular charges,222 though not disbursements incurred other than to earn the freight, for example in order to get the ship home.223 If no freight would have been earned, for example because the shipowner was carrying his own cargo, the insurer has no claim in respect of it, ie, for carriage prior to abandonment; but he is entitled to remuneration for his own efforts in completing the voyage.224 24.99 The Marine Insurance Act 1906, section 63(2) now specifies that, “Upon the abandonment of a ship, the insurer thereof is entitled to any freight in course of being earned, and which is earned by her subsequent to the casualty causing the loss, less the expenses of earning it incurred after the casualty;225 and, where a ship is carrying the owner’s goods, the insurer is entitled to a reasonable remuneration for the carriage of them subsequent to the casualty causing the loss”. 24.100 An abandonee of chartered freight is entitled to receive by way of salvage pro rata freight payable under foreign law.226 24.101 In practice, the insurer and the assured commonly agree that the insurer will waive his entitlement to claim freight from the assured.227 One interpretation of the combined effect of a rule which provides that hull insurers are entitled to the benefit of freight being earned, and an agreement between an assured shipowner and his hull insurer that the insurer waive such claim, might be that this allows the shipowner to keep the freight. However, the effect is that such freight is not lost and so must be deducted from any claim which the shipowner has against his freight insurer.228 Whatever the position might be as between the hull and freight insurers, as between the shipowner and the freight insurer any freight earned must be paid over to the latter;229 and, if it has not yet been paid, it can be claimed by the insurer, as the assured’s assignee, from the person from whom freight is due.230 This is so even if, as is usual, the assured is entitled to be paid by the freight insurer “in full”,231 as this does not mean “without benefit of salvage”.232

Assured’s surviving rights

24.102 The abandonee of insured subject matter does not acquire an entitlement to benefits which are not incidental to the proprietary interest abandoned. Thus, the insurer’s right to freight after abandonment depends upon the cargo being carried on to destination in what has become the insurer’s ship; but, if arrangement is made for its on-carriage in a different vessel by the assured, or by the master acting as agent of the assured and not of the insurer, the freight is earned by the assured and the insurer is not entitled to it.233 In Sea Insurance Co v Hadden 234 the assured was entitled to damages from the owner of a vessel which negligently collided with the insured ship, causing a loss of freight. It was held that the insurer of the ship was entitled to the damages in respect of the value of the ship but not those for loss of freight, since the contract to earn the freight was not an incident of ownership of the ship and so did not pass to the insurer by way of salvage. It was the insurer on freight who was entitled to those damages.235 24.103 The House of Lords reached a similar conclusion in Glen Line Ltd v A-G.236 The German Government seized a British ship in Hamburg at the outbreak of the Great War. The club insurers accepted notice of abandonment and paid for a total loss, 80 per cent of which was borne by the British Government under a reinsurance agreement with the insurers. At the end of the war the vessel was delivered to the assured, who received her on behalf of the insurers.237 The assured subsequently received compensation, under the Treaty of Versailles, as compensation for loss of profits caused by the seizure. If this had represented a series of claims for detention from day to day after the loss, the abandonee would have had a case for claiming it. But it was a personal entitlement of the assured which arose once and for all at the time of the loss; and was different from the proprietary rights incidental to the ship which pass on abandonment. Accordingly, the assured was entitled to retain it.238 As Lord Atkin pointed out, an insurer may have a right to be subrogated to an assured’s claim for damages, up to the amount of the indemnity paid to the assured, but that is not the same as his proprietary and incidental rights qua abandonee.239

Subrogation

24.104 As well as becoming entitled to salvage, an insurer to whom the insured subject matter has been abandoned is normally entitled to be subrogated to the assured’s rights against third parties arising from the casualty. However, subrogation is not an inevitable incident of the insurer’s acceptance of notice of abandonment or of abandonment itself. It is a consequence of his actually indemnifying the assured. It is therefore more appropriately considered below.240

Insurer as intended recipient of payment

24.105 It has been noted that an insurer who has paid an indemnity for a total loss has two clearly recognised rights: of salvage; and of subrogation. The question arises whether two “reprisal cases”, Randal v Cockran 241 and Blaauwpot v Da Costa 242 are illustrations of such rights, require their redefinition or exemplify a further entitlement of the insurer. 24.106 By Order of Council on 18 June 1741, the British Government authorised reprisals for British ships taken by Spaniards and the equal division of proceeds between the captors and the owners of the ships taken. The payment to be made was therefore a voluntary act of the British Government.243 In the two cases it was held that the owners of captured British ships who received such payments held them on trust for insurers who had paid them for a total loss. Lord Hardwicke LC and Sir Robert Henley LK244 respectively based the insurers’ entitlements on their rights of salvage, though the cases are not obvious examples of succession to rights which are proprietary or incidental thereto.245 A second explanation of the decisions is that the insurers were entitled to a form of subrogation, albeit the cases do not appear to conform to the rule that subrogation in insurance law is normally to a right of the assured.246 24.107 In Burnand v Rodocanachi Sons & Co 247 (a prominent decision in discussions on subrogation though not a case in which the insurer’s claim succeeded) the House of Lords found the reprisal cases supportable, though the four judges did not give identical reasons. Lord Selborne LC248 and Lord Blackburn explained the reprisal cases on the test of the intended beneficiary of the payment, ie, on the ground that the intention of the British Government was to compensate those who had suffered as a result of the Spanish action and that, where insurers had indemnified the shipowners for the loss, they became the intended beneficiaries of the payment. Of course, any person, whether an insurer or anyone else, is capable of being the intended beneficiary of a voluntary payment. However, the view of Lords Selborne and Blackburn provides specific support for the proposition that, independently of his rights of salvage or subrogation, an insurer who has paid an indemnity may displace the assured as the intended beneficiary of a payment resulting from a loss.249 However, this explanation is not likely to prevail in many cases. Moreover, Lords Selborne and Blackburn do not explain why, if the insurers in the reprisal cases were the intended beneficiaries of the prize money, it was not paid directly to the insurers—indeed, in Randal v Cockran a previous application by the insurer for direct payment had been rejected by the prize commissioners.250 24.108 At root, however expressed, the underlying reason for recovery in the reprisal cases is probably best found in Lord Watson’s general “principle that one who has been already indemnified against [the loss against which they were insured] must impart to those who have indemnified him any benefits which he subsequently obtains of that description”.251

Assured’s personal liabilities

24.109 An assured remains subject to personal liabilities even though they were incurred in respect of subject matter which is abandoned to the insurer.252

Insurer’s personal liabilities

24.110 An insurer, like any other person, is responsible for discharging his own personal liabilities. Thus, an abandonee who has acquired a right to complete the voyage must bear the expenses of doing so and cannot deduct them from the indemnity payable to the assured.253

Cargo insurer’s liability for freight

24.111 Where cargo is a total loss, an assured cargo-owner who has paid pro rata freight cannot recover the sum from his insurer, as this is not part of the insurer’s obligation to indemnify.254

Capacity of master

24.112 A traditional view is that, on abandonment of a ship, the master becomes the agent and servant, and the crew become the servants, of the insurer. In reality, the picture is unlikely to be so simple and will depend on a range of possibilities presented by principles and rules of the law of agency and employment law and, of course, the facts of the case in issue.255 Certainly, where the master of the insured vessel charters a substitute vessel to complete the voyage, he is likely to be acting as agent and employee of the assured shipowner and not the insurer, so that the insurer is not entitled to the benefit of freight earned thereby.256

VII NON-EXERCISE OF INSURER’S RIGHTS

24.113 As a general rule, where an insurer declines the opportunity to assume the rights that he is entitled to exercise on the assured’s giving notice of abandonment, the assured retains the rights and liabilities that he had before the casualty. 24.114 In particular, if notice of abandonment has not been accepted, the assured remains entitled to elect to claim for either a partial or a total loss even after proceedings have begun and whether or not there has been recovery or partial recovery of the subject matter.257 24.115 In Brooks v MacDonnell 258 the Brazilian Government captured a British ship and its cargo and condemned them as prize. The cargo insurer refused to accept an offer of abandonment but compromised the claim, the assured delivering up the policy for cancellation in return for 35 per cent of the insured sum. Subsequently, the Brazilian Government agreed with the British Government to return the goods and to pay compensation to the assured. It was held that, on the facts and in accordance with the agreement between the parties, the loss was only a partial loss. Therefore, the insurer was not entitled to any share of the compensation. 24.116 The fact that one insurer has elected not to exercise his right to take over the interest of the insured does not necessarily mean that the following market, ie other insurers, is bound by his election. “An election of that nature, which … would be most unusual if not … extraordinary, goes beyond what is normally inherent in a claim settlement agreement”,259 given the conventional process260 whereby underwriters exercise their right to take over the insured’s interest in order to preserve their rights to the residual value of the subject matter.261

1 1.See eg The Kastor Too [2004] EWCA Civ 1275; , [53]; The WD Fairway (No 2) [2009] EWHC 889 (Admlty); , [25].

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