Millers Marine War Risks

Michael Davey; James Davey and Oliver Caplin

Document

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CHAPTER 25 Total loss and notice of abandonment

Actual and constructive total losses

25.1 Issues of total loss may have a character of their own in War Risks cases, and this chapter will focus on those features rather than aiming for a comprehensive treatment. The Marine Insurance Act 1906 addresses “Loss and Abandonment” in sections 55–78. 25.2 Section 56(1) provides that a loss may be either total or partial, and that any loss other than a total loss is a partial loss. Total loss is further divided by sub-section (2) into actual total loss and constructive total loss. 25.3 Section 57(1) states that there is an actual total loss in three situations: (i) where the subject matter insured is destroyed; (ii) where the subject-matter is so damaged as to cease to be a thing of the kind insured; or (iii) where the Assured is irretrievably deprived of the subject-matter insured. War risk examples are not difficult to find: the insured object is destroyed by sinking after a missile strike; it is so damaged that it ceases to be a thing of the kind insured when the explosion of a mine breaks the ship’s back and one half sinks; and the assured is irretrievably deprived of possession where his ship is captured by a belligerent and condemned by a Prize Court. In the context of marine insurance, the existence of a doctrine of constructive total loss has meant that the concept of an actual total loss has been applied more strictly.1 In The Bunga Melati Dua,2 cargo owners claimed that their cargo was an actual total loss, on the basis that they were irretrievably deprived of it, when the vessel carrying it was captured by pirates. The Court of Appeal rejected their arguments that piracy (like capture) created an automatic actual total loss and that, in any event, the law could not take account of the payment of a ransom in calculating the prospects of recovery. Seizure by pirates who habitually released vessels against payment of a ransom did not lead to an inference that the property was irretrievably lost, though such an inference could be made in different circumstances.3 Capture and seizure are by their nature perils which lead to intermediate cases, where there is a prima facie total loss, but the property may be restored to its owner.4 The test under section 57(1) is irretrievable deprivation, and

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essentially that is an inference of fact.5 If the property is restored after deprivation, the effect may nevertheless still be a constructive total loss (see paragraph 25.17). 25.4 Section 57(2) provides that in the case of an actual total loss, no notice of abandonment need be given.6 However, such notice is required where a constructive total loss is claimed. Where there is a valid abandonment, section 63(1) provides that the insurer is entitled to take over the interest of the insured in what remains of the subject-matter insured.7 It may not be an easy question to answer whether a total loss is actual or constructive and thus whether notice of abandonment is required. 25.5 Constructive total loss is a more complex concept. The basic concept is that there is a constructive total loss if a partial loss is financially equivalent to a total loss, even though it is not in physical terms a total loss.8 In the majority of cases the distinction corresponds to that between physical and mercantile impossibility.9 Section 60(1) contains a general definition, subject to any express provision in the policy,10 so that there is a constructive total loss in two situations: (i) where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing11 to be unavoidable; or (ii) because the subject-matter could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred. 25.6 That general definition is then followed in section 60(2) by three particular instances of a constructive total loss. Sub-section (2) supplements sub-section (1) and does not merely illustrate it.12 The three instances are:

(i) Where the assured is deprived of the possession13 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,14 or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered; or
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(ii) In the case of damage to a ship, where she is so damaged by a peril insured against, that the cost15 of repairing the damage would exceed the value of the ship when repaired;16 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.

25.7 The complexity of section 60 reflected the common law, which the 1906 Act largely sought to codify. In the case of unvalued policies,17 which were previously common, there could be great uncertainty as to whether the cost of cure would exceed the value of the insured property. Modern policies are now almost always valued.18 Furthermore, the total loss provisions of the Institute Time Clauses—Hulls (Clause 19), as incorporated into the War and Strikes Clauses, provide that the insured value shall be taken as the repaired value.

Election for a constructive total loss

25.8 The assured is not compelled to treat a casualty as a constructive total loss. Section 61 provides that where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject matter insured to the insurer and treat the loss “as if it were an actual total loss”. The notice of abandonment is notice to the underwriters of this election between a partial loss and a constructive total loss.19 Unless notice is waived by the insurer or the circumstances are such that there would be “no possibility of benefit to the insurer if notice were given to him”, notice is a condition precedent to the assured’s right to claim for a constructive total loss.20 Such a notice is, however, not a condition precedent to the existence of a constructive total loss.21 The requirements and effect of such a notice, and of its acceptance or rejection, are dealt with in section 62. The election between partial loss and constructive total loss is a true election, though it differs from other cases of election, in particular in that it is irrevocable only if the abandonment is accepted by the underwriter.22

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25.9 Whilst the principle of indemnity requires that an insured who recovers for a total loss must cede to underwriters any remaining interest in the property insured,23 underwriters usually do not wish to take over responsibility for the property, which may result in a wreck removal order without the benefit of owners’ Protection and Indemnity Association cover. In practice the notice of abandonment is therefore simply rejected as a matter of course, with underwriters preferring to receive any salvage that may be obtained, pursuant to section 79(1).24

Abandonment

25.10 Although section 60(1) of the Act refers to an actual total loss “appearing to be unavoidable”, the question whether there has been a constructive total loss depends on the objective facts.25 So far as there are future or unknown facts, a reasonable assessment of the probabilities must be made, but the test does not depend on the opinion or predictions of the owner, however reasonable.26 One does not judge by the result, but from the probabilities as they would have appeared to a reasonable assured at the moment when he knew of his loss and could have given notice of abandonment, had notice been required.27 Although one may ask whether the prudent uninsured owner would repair, the factors to be taken into account are limited by the 1906 Act to a comparison between the cost of repair and the repaired value.28 The effect of an offer to abandon is that if the offer appears to have been properly made upon certain supposed facts, which turn out to be true, the assured has put himself in a condition to insist upon his abandonment; but it is not enough that the notice was properly given, upon facts which were supposed to exist at the time, if it turns out that no such facts existed, or that other circumstances had occurred which did not justify abandonment.29 Although the loss occurs at the time of the casualty, and includes any development of the damage thereafter, the loss must still be total at the time of notice of abandonment in order for the election to be valid.30 Strictly speaking, in determining the rights of the parties it is the circumstances at the time of the issue of the Writ, now the Claim Form, which matter.31 However, in practice underwriters agree at the time of rejection of a notice of abandonment to put the shipowners in the same position as though a Writ had been issued. Notwithstanding such an agreement, sue and labour expenses incurred thereafter may be recoverable.32

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25.11 In Hamilton v. Mendes,33 a ship was captured by a French privateer in the Seven Years War and then recaptured by a British man-of-war a few weeks later. The insured received notice of both at the same time, and purported to give notice of abandonment. Lord Mansfield held that he was only entitled to claim for a partial loss, as there had only been a short interruption to the voyage and no great expense incurred; there could be no vested right to abandon upon capture, since the insured had to make an election, and could not do so before advice was received of the loss.34 25.12 In Bainbridge v. Neilson,35 a ship was captured and a few days later recaptured. The insured received notice only of the capture, and gave notice of abandonment. He then received news of the recapture, and that the ship was safe, with minor expense being incurred, but persisted in the abandonment. It was held36 that the insured was not entitled to persist in his abandonment. Even though the notice had been genuinely made upon notice of capture, the true facts were that the vessel was safe and not lost. 25.13 In Roura & Forgas v. Townend,37 the insured had voyage chartered a ship to carry jute from Calcutta to Spain, and insured their anticipated profit against total or constructive loss of the vessel on its prior voyage to Columbo and then to the load port of Calcutta. The first news of the vessel was that it had been captured in the Indian Ocean by a German prize crew, and in their charge had stranded on the coast of Denmark. She was salved by her owner, and repaired, without notice of abandonment being given, her owner being uninsured. Roche J. held that there was a constructive total loss of the vessel, its return being unlikely, and the fact that it was restored to its owners before the insured brought their action was immaterial; restoration precludes recovery where it results in the loss of the insured being made good to him before action, and the restoration of the ship here did not make good the insured’s loss of profit on the voyage.38 25.14 In Bradley v. H. Newsom Sons & Co.,39 The Jupiter was in the course of a voyage with a cargo of timber from Archangel to Hull in October 1916. A German submarine surfaced and fired shots to force her to stop. The Master and crew were ordered to leave the ship and took to the boats. German officers boarded the ship and placed bombs on board to scuttle her. Explosions were heard from the ship and in the darkness it was assumed (wrongly) that she had sunk. The shipowners reported the sinking to the charterers. Shortly thereafter, the vessel was found, still afloat and barely damaged, and the Royal Navy beached her near to Leith. The charterers claimed to be entitled to take delivery of the cargo at that port without paying freight, on the basis that the shipowners had abandoned the voyage. The ship was in fact able to continue the voyage, and the cargo was delivered in Hull without prejudice to the charterers’ contentions. The House of Lords by a majority (Lord Sumner dissenting)40 held that there was no

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abandonment. Lord Finlay L.C. said that for this purpose there must be abandonment without any intention to retake possession, and without any hope of recovery.41 On the facts, the vessel had not been abandoned, the master and crew simply leaving by force and then assuming that the vessel was lost. 25.15 In another carriage case, Court Line Ltd. v. The King,42 the Lavington Court was in convoy from the United Kingdom to the Middle East via the Cape of Good Hope with a cargo of military stores in 1942. She was struck by torpedoes and, fearing that she was going to be torpedoed again, the Master ordered the crew to take to the lifeboats. The Master expressed the view that, failing another attack, the ship would float for a considerable time and could be saved. She was still afloat when a warship returned, and the Master and some of his officers made an inspection. They concluded that provided the weather stayed fair, she could be towed to safety. Tugs were requested from Gibraltar, but the warship and the Master and crew of the casualty could not remain with her. Tugs found the casualty and towed her for 500 miles before she foundered. The shipowners claimed charter hire for the period of the towage, a clause in the charter providing that the hire ceased on a constructive total loss. Scott L.J. considered the different senses in which there could be abandonment under the 1906 Act, and distinguished between abandonment of the property by the Master and crew (as where a total loss seems inevitable) from abandonment of the property to underwriters by owners making an election to treat a loss as a constructive total loss.43 Du Parcq L.J. considered that the word “abandoned” in section 60(1) had only one sense, and referred to the shipowner or his agent giving up the property for lost, that is renouncing all their rights in the ship except the right to recover insurance.44 The Court of Appeal by a majority held that the vessel had not been abandoned within the meaning of section 60: the vessel was entrusted to the tugs being sent out by the Royal Navy, an actual loss did not seem inevitable and if the owners were out of possession, it was not unlikely that the ship would be recovered.

Consequences of rejection of notice of abandonment

25.16 When underwriters refuse to accept notice of abandonment but agree to put the assured in the same position as though a Writ (now a Claim Form) had been issued, there is no change in ownership of the property insured as between insured and insurer. As between insured and third parties, it is an open question as to whether a person may divest himself of ownership by abandonment.45 The answer will depend on the context in which the question arises and the law of the place where abandonment takes place. Whether an owner is liable for wreck removal or for port or other charges is a different question to

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whether (say) a salvor is entitled to keep long-sunken cargo for himself on the basis that it became res nullius by abandonment.

Restoration

25.17 Where underwriters agree to put the insured in the same position as if an action had been brought (or an action has in fact been brought) the subsequent full recovery of the property by the insured has no effect on the claim for a total loss.46 However, where the property is restored, in part or in whole, before the action is brought, or deemed to be brought, the effect of that restoration is relevant as to whether there is no more than a partial loss. In principle, the test should remain the same, namely whether on the basis of all the circumstances, restoration included, there has been a total loss. With the passage of time, speculation as to the likelihood of recovery of the ship or goods will have been resolved in whole or in part. Nevertheless, a question may remain as to whether the property has been “recovered”. If there is a capture, followed by recapture, and the property is returned with only a short interruption and no great expense, there is no total loss.47 However, if a recapture puts the ship in such a position that the owner cannot get her without paying more than she is worth, there is a constructive total loss.48 In Lozano v. Janson,49 Lord Campbell C.J. said that if, before action brought, goods had been restored to the assured, or he had had the means of getting possession of them, under such circumstances as ought to have induced a prudent man to take possession of them, his claim could only be made for a partial loss.50 Where the cargo may be recovered by the insured taking steps to do so, including incurring expense, the test corresponds to the duty to sue and labour.51

Time for giving notice of abandonment

25.18 Notice of abandonment must be given with reasonable diligence after receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make enquiry.52 It may be difficult to determine whether the information is reliable or doubtful. Aside from the difficulty in ascertaining the nature of any physical casualty, additional difficulties arise in parts of the world where local authorities will not permit easy entry through their frontiers, or which are dangerous in a military or a political sense. Where ships are detained, it may not be immediately clear whether they have been seized or have otherwise suffered an insured peril of the War or Strikes insurance, and it is often very difficult to get a clear explanation for a ship’s detention.53

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25.19 Questions arose in The Anita as to when notice of abandonment should be given so that it was not too early so that it had no meaning, and not too late so that it was ineffective. The shipowners had to prove that their ship was a constructive total loss because they had been deprived of possession and it was unlikely that they would recover them within a reasonable time (section 60(2)(i) of the Marine Insurance Act 1906). In The Anita,54 the vessel was detained by Vietnamese authorities on account of smuggling shortly after her arrival on 7 March 1966. After a hearing before a Special Court on 25 April, an order was made for the confiscation of the vessel. The vessel remained detained until August 1967, and four separate notices of abandonment were sent. Mocatta J. considered55 that the first notice given on 2 May was too early, but that as from the second notice, after six months of negotiations, it was unlikely that the shipowner would recover his ship within a reasonable time and the unlikelihood increased as time went on. In such cases it may be a matter of fine judgement by the assured as to when notice of abandonment must be given, with successive notices being advisable with each development in the situation. Given that underwriters are unlikely to accept any notice, this is unsatisfactory. However, there is no objection in principle to repeated notices, since a notice is merely an offer, which remains executory unless and until it is accepted.56

The 12-month Clause

25.20 Clause 3 of Institute War and Strikes Clauses Hulls provides that in the event that the vessel shall have been the subject of capture, etc.,57 and the assured shall thereby have lost the free use and disposal of the vessel for a continuous period of 12 months then for the purpose of ascertaining whether the vessel is a constructive total loss the assured shall be deemed to have been deprived of the possession of the vessel without any likelihood of recovery. 25.21 The Mutual War Risks Associations use a clause in a different form. The Hellenic Association’s Rule 3.14, for example. It reads:

If an Owner is deprived of the free use and disposal of an Entered Ship by capture, seizure, arrest, restraint, detainment, confiscation or expropriation:

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