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Report No. 21

Clause 61

General.-This defines constructive total loss. The concept of constructive total loss is peculiar to marine insurance. For a discussion of its origin, see the undermentioned case.1

Analysis.-Constructive total loss arises where the subject-matter is

(i) reasonably abandoned on account of its actual total loss appearing to be unavoidable; or

(ii) where the abandonment is due to the fact that it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure has been incurred.

First class of cases.-As regards the first class of cases, it must be noted that recovery of the goods must be "unlikely" and not merely "uncertain",2-3 under section 60(2) (i).

"Uncertain" and "unlikely".-The distinction between "uncertain" and "unlikely" has been clearly explained in a judgment of Lord Wright.4 He observes:

"There is a real difference in logic between saying that a future happening is uncertain and saying that it is unlikely. In the former, the balance is even. No one can say one way or the other. In the latter, there is some balance against the event. It is true that there is nothing in the Act to show what degree of unlikelihood is required. If, on the test of uncertainty, the scales are at level, any degree of unlikelihood would seem to shift the balance, however slightly. It is not required that the scale should spring up and kick the beam."

The word "unlikely" used in the Act marks a departure from the common law. Before the Act, the ship-owner was entitled to recover as for a total loss if it was uncertain that he could recover the goods (or ship, as the case may be). This is not so after the Act. The point came into prominence in a case before the Court of Appeal.5 There, a ship carrying a cargo of coal and insured against the consequences of war-like operations was captured by a belligerent, deprived of her cargo and detained for about six weeks, after which the ship was released.

The owners of the steamship claimed from the insurer for a constructive total loss, on the ground that they had given notice of abandonment and that it was at that time "uncertain" that the ship would be recovered. The insurers admitted that the ship was detained, but denied that she was captured, and contended that at no material time was it unlikely that the plaintiff could recover. It was held by the Court of Appeal that the Marine Insurance Act had substituted the test of unlikelihood for the test of uncertainty, and that the assured had failed to show that there was more likelihood that they would not recover than that they would recover. The claim was, accordingly, dismissed.

Relationship of section 60(1) and section 60(2).-As was pointed out by Lord Porter,6 section 60 is intended to be a complete definition of total loss (because of the words "as hereinafter defined" appearing in section 56); but it does not follow that the first subsection lays down the general rule and the second lays down merely the instances already covered by sub-section (1). Sub-section (2) which gives particular instances does not merely illustrate; it adds to the terms of the definition given as a general rule in subsection (1).

Section 60(2) is additional.-As to the relationship between section 60(1) and section 60(2), it has been pointed out that sub-section (2) gives an objective criterion which is more precise than, and substantially different from, the criterion in section 60(2); and therefore sub-section (2), as compared with sub-section (1) is "additional and not merely illustrative".7

Second class of cases.-As to the second class of cases, the well-known case of Irving v. Manning, (1847) 1 HLC 2878 illustrates its application. In such cases, the cost of recovery or reconditioning of the property is prohibitive, in the sense that the expenditure on the ship would exceed the post-repair value of the ship. For example, if a ship is damaged and the repairs are estimated to cost £ 10,000 and after repair the value of the ship would be £ 9,000 while the actual value of the ship when insured is, say, £ 8,000, there is a constructive total loss.9

Valuation Clause.-The repaired value is usually estimated by a ship's surveyor in the case of ships. Sometimes however, a Valuation Clause10 is inserted as follows:-

"In ascertaining whether the vessel is a constructive total loss, the insured value in the policies on hull and machinery shall be taken as the repaired value ...."

The significance of this clause lies in this, that by a fiction agreed to by the parties, the insured value is always taken as the repaired value. To put it in. other form, the assured will never be able to claim a constructive total loss (where such a clause is inserted) except where the cost of the repair exceeds the insured value. The clause comes in handy where the vessel is insured on a higher value than its actual value. To take a hypothetical case, if a ship is insured on E 10,000 and the damage caused will cost, say, £ 7,000 to repair and after repair its value (actual) will be £ 6,000 then:-

(a) if the Valuation Clause is not there, then the ship would be a total loss. The insurer would be liable to pay the full amount of the policy;

(b) if the Valuation Clause is there, then, by the fiction agreed to by the parties, its value on repair will be taken as £ 10,000 (insured value) and not £ 6,000 (actual post-repair value).

(In actual practice, when this clause is there, settlement is made by compromise, so that the ship-owner may not be compelled to spend more in repairs than the ship would be actually worth to him when repaired. The reason is, that after all, the Valuation Clause provides a legal fiction which may not be in conformity with realities in some cases),11-12

Anomaly in the absence of valuation Clause.-How the absence of a Valuation Clause may lead to an anomaly can be illustrated by the following example:-

(Valuation Clause absent in both cases)

Case A

Case B

Insured Value £ 5,000

£ 5,000

Cost of repair £ 4,700

£ 4,590

Value after repair £ 4,600

£ 4,600

In the Case A mentioned above, the insurer will be liable to pay the full amount of £ 5,000, (because there will be a total loss) while in the Case B mentioned above there will be no total loss as the cost of repair is less than the value after repair and the insurer will pay only the actual cost of the repair. Thus, a slight difference in the amount of the cost of repair affects considerably the insurer's liability-a position which is certainly anomalous. (If the Valuation Clause were there, neither of the cases would be a total loss and in both cases the insurer will pay only the actual cost of repairs.)

Arranged or compromised total loss.-Sometimes, to avoid disputes, the insurer may compromise the total loss. This will be a "compromised total loss". Sometimes the parties may agree that a total loss has occurred. This would be an "arranged total loss". The importance of these two concepts arises in re-insurance, where the original insurer, having paid a compromised total loss or arranged total loss, claims the amount which he has paid from the re-insurer. Often, re-insurance against total loss of ship is effected against "constructive and/or compromised and/or arranged total loss only", to make the matter clear. An explanation of the words "compromised" and "arranged" has been given by Lawrence L.J.13 as follows:-

"Compromised assumes that a mutual concession has been made by both parties and that each party has got something less than he claimed".

As to "arranged", His Lordship said:-

"The word arranged to my mind is a wider word altogether than compromised. In certain cases, and in my judgment in this case, it is equivalent to agreed".

American rule.-In the United States, there is a constructive total loss if the damage to a ship or cargo exceeds 50% of the value.14 But even in the U.S.A. the rule is subject to any express agreement to the contrary. The English rule is well established, and has been adopted; parties can, where they so choose, adopt a different rule.

"Future Salvage Operations" and "Future General Average Contributions.-Section 60(2)(ii), second paragraph, which provides that account is to be taken (in estimating the cost of repairs) of the expenses of future salvage operations and future general average contributions to which the ship would be liable if repaired, is to be applied from the date of the casualty. The word "future" would include all post-casualty salvage operations or general average contributions. (Contributions or operations prior to the casualty are not relevant for the purpose of the section).

1. Moore v. Evans, 1918 AC 185 (194) HL.

2. See the illustration in Lord Chorley's Shipping Law, 3rd Edn., p. 331. See also Polurrian S.S. Co. v. Young, (1915) 1 KB 992, CA.

3. The word "unlikely" was substituted at the suggestion of the Lord Chancellor's Committee. See Chalmers, p. 83, footnote 7.

4. Rickzvard v. Forestal Land Co., (1941) 3 AER 62 (81).

5. Pollurrian Steamship Co. Ltd. v. Young, (1915) 1 KB 922 CA.

6. Robertson v. Nomikos Ltd., (1939) 2 All ER 723 (734) HE

7. Richard v. Forestal Land Co., (1941) 3 AEF 62 (79).

8. Discussed under section 27 of the English Act-clause 29.

9. The value fixed by the policy is not conclusive for determining whether there is a constructive total loss; see section 27 (4) English Act-clause 29 (4).

10. This is not the same thing as "Dual Valuation clause" discussed under clause 24.

11. Such compromises would fall under "Compromised total loss".

12. Cf. Dover, p. 401.

13. Gurney v. Grimmer, (1932) 38 Comm Cases 7 cited in Dover, p. 472. See also Lord Chorley Shipping Law, p. 396.

14. 45 Corpus Juris Secundum, Insurance, p. 1150, para. 956, right-hand column.

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