Report No. 21
1. General.- This deals with partial loss of ship.
2. Application of the section.- All partial losses, including general and particular averages, are recovered. But the section is subject to any other express provision in the policy.
3. "Reasonable".- The section uses the expression "reasonable cost" and "reasonable depreciation". Section 88 of the English Act dealing with "reasonable time", etc. does not specifically mention reasonable "cost" and reasonable "depreciation". But obviously the question will be decided by the court in each case.
4. Tender clause.- Where it is intended to repair the ship, the insurer has right to exercise control over the cost of repairs under what is known as the "Tender clause".1
"Depreciation"-Sub-sections (2) and (3) speak of "depreciation". The following questions, namely,-
(i) whether depreciation should be taken to mean the estimated cost of repairs, and, if so,
(ii) what is the date with reference to which the repairs are to be estimated-is it the date of arrival at destination-are matters which need not be discussed, because in practice, most cases are settled by compromise.2
"Customary deduction-'New for old'".-For deductions under "New for old", see rule XIII of the York-Antwerp Rules, 1950.3
5. Suggestion to substitute cost of repairs considered.- It has been suggested that when the damage is only partly repaired or not repaired at all, the measure of indemnity of the assured (for the unrepaired damage) should Vith of the reasonable cost of the unrepaired damage, to be ascertained at the ship's home port on the last date of the expiry of the policy. This test differs from the test adopted in the English Act. The English Act puts it as the reasonable depreciation arising from the unrepaired damage (subject to certain maximum with which we are not concerned in this connection).
After giving careful consideration to the question, it appears that the test adopted in the English Act is the logical and the correct one. The contract of insurance is one of indemnity only, and the thing for which the insurer promises to indemnify the assured is the loss caused by the casualty. Reasonable depreciation reflects this "loss" aspect correctly.
6. It is true that it is not always easy to evaluate depreciation.4 But that difficulty applies even to the test suggested; because the process of fixing the hypothetical cost of repairing damage which has not been actually repaired cannot yield very accurate and precise results.5
7. In fact, the suggested test can give rise to over-payment occasionally. For example, if the original value of the subject-matter insured is Rs. 10,000 and the value at the home part is Rs. 8,000, but the surveyor estimates the cost of repair at more than Rs. 2,000, the assured will be over-paid. (The value at the home port will be a hypothetical figure; but so also will be the estimate of the cost of repairs.)
8. For these reasons the suggestion has not been accepted.6
9. Sale without repair.- Where a ship is injured by perils insured against but is sold without repair, what is the amount which the insurer has to pay? Section 69 of the English Act does not deal with this situation, presumably because the law on the subject was in an unsettled condition at the time when the proposal to enact legislation on marine insurance was first taken up in England7
10. Decision before the Act-Pitman's case.- Before the 1906 Act, this point arose directly in a case before the Court of Appeal.8 The rival contentions advanced in that case were:-
(i) the diminution in the value of the ship (depreciation) as shown by the difference between the original value of the ship and the price realised on sale, should be the measure of indemnity;
(ii) the estimated cost of repairs is the sole measure of indemnity, and no regard is to be had to the depreciation in value. It was contended that if the owner actually repairs the ship, he would certainly get the reasonable cost of repairs, and the fact that he chooses to sell it instead of repair it should not make a difference.
The first test was upheld by a majority of the Court of Appeal (Jesse! M.R. and Cotton L.J. confirming on this point the judgment of Lindley J.), while the second was favoured in the dissenting judgment of Brett L.J.
11. Importance of rule be applied.- The question as to which of the two tests mentioned above is to be applied, was of great importance in the case cited above,9 as will be seen from the facts. A ship valued at 3,700 consols was insured in that case. She sailed from Singapore to Moulmein, and in passing up the river to the port of Moulmein took the ground and remained aground for four days until she was got off and towed up to Moulmein. The plaintiffs (the owners) determined to abandon the vessel and gave notice of abandonment, but the underwriters declined to accept it. The plaintiffs, thereupon, having made some slight repairs, sold the ship and stores for 3,897 consols. In the statement of claim, the plaintiffs had stated the value of the ship at the commencement of the risk as 4,000 consols.
The plaintiffs claimed 781 consols and odd as a partial average loss, apparently on the basis that the loss to be made good is to be measured by the amount which it would have cost to repair the ship (deducting one-third as the customary allowance for new material). On this basis, the plaintiffs argued that the cost of repairing the ship so as to make her as good as she was before she took the ground, would have been about 5,300 consols, and, therefore, the difference between that 5,300 and the value of the ship minus 4,000, that is 1,300, less one-third, was the measure of indemnity. It was on this basis that the plaintiffs claimed 781 and odd consols.
The defendants, on the other hand, took the stand that since the plaintiffs had actually sold the ship, all that they could receiver was the difference between the "sound" value of the ship-4,000 consols-and the sale price realised 3,897 consols. The difference would have come to about 113 consols, and adding to this certain amounts actually spent by the plaintiffs on slight repairs, the defendants paid 245 consols into court. Thus the adoption of the one or the other rule made a considerable difference in the amount to be borne by the insurer.
12. Judgment of Lindley J.- In the court of the first instance, Lindley J., adopted the first test, viz., rule of depreciation. He held, that the cases were conclusive to show that events which had happened and not those which might have happened are to be regarded. He stressed the indemnity aspect of insurance, and repelled the contention that there was authority for the rules suggested by the plaintiffs. Analysing the plaintiff's contention, he said, that it was based upon three assumptions,-
(i) that the plaintiffs might have repaired if they had chosen;
(ii) that if they had repaired, the cost of repairs would be the measure of their loss;
(iii) that it is immaterial to the insurers whether the repairs were actually effected or not.
As to the first, Lindley J., took it to be well-founded, because a ship-owner could always repair if he chose and thus refrain from insisting on a total loss. As to the second assumption, he thought that it was well-founded if the repairs are made bona fide and with reasonable discretion. But he pointed out that if the repairs are so extensive and so out of proportion to the value of the ship when repaired, as to show want of bona fides or a total disregard of what is: reasonable, then, it is by no means clear that their cost could be thrown on the underwriter. As to the third assumption, namely, that the plaintiffs had the right to repair and to recover the cost, whether the right is exercised or not, he regarded it as entirely erroneous.
"Against what do the underwriters agree to indemnify the assured? Surely against such loss as he may in fact sustain by reason of the perils insured against".10 "Apart from all authority I should have thought it plain that a loss actually sustained under the circumstances which did happen, is to be preferred as a measure of indemnity to a loss which would have been sustained under circumstances which did not happen." He found no authority to the contrary. Accordingly, he held that the depreciation in the value of the ship was the real criterion, and was to be measured by the difference between the value of the ship when sound and what she is sold for when damaged. (The detailed calculation need not be considered at this stage).
13. Judgment of the Court of Appeal.- (a) The plaintiffs appealed, and a majority of the Court of Appeal affirmed the judgment on the main point, namely, which of the two rival tests mentioned above was to be adopted. Jesse' M.R. observed:11 "The contract of insurance is, as I understand, a contract of indemnity to the insured against the loss incurred by him through the ship being injured by the perils of the sea. It follows from this, that as a general rule in no case can the insured become richer by reason of these perils, or in other words, that the insured are not to be entitled to receive from the insurer a larger sum for a single partial loss than if the ship was wholly lost.12 He further observed, that the rights of the ship-owner who actually repaired the vessel to recover the amount expended in repairs are not the same in all cases as those of a ship-owner who declines to repair because the ship is not worth repairing and who, therefore, sells the ship during the risk.
(b) Cotton L.J., also took the view that where the ship-owner elects to take the course of selling the ship, he "as against himself, fixes his loss", i.e., he cannot, as against the underwriters, say that the depreciation of the vessel exceeds that which is ascertained by the result of the sale. "To hold that in the present case the insured is entitled to recover two-thirds of the estimated cost of repairs would be contrary to what, is one of the principles applicable to all insurance cases, that the policy is a contract of indemnity"13 While he took note of the fact that as a general rule the estimated cost of the repairs is the measure of deterioration, he pointed out, adopting the language of Maule J. in an earlier case,12 "that the insured must recover the expenses not eo nomine as expenses but as the measure of the loss". Probably, he observed,14 the most accurate was of stating the measure of what, under such circumstances, the ship-owner is to recover, is, that it will be the estimated cost of repairs less the usual deduction, not exceeding the depreciation in value as the vessel as ascertained by the sale.
(c) Brett L.J., however, in a dissenting judgment, held that a contract of marine insurance has nothing to do with gains or losses which are outside the contract. He observed that it was the cost of repairs against which the owner was indemnified and not the diminution in the value. He cited Arnould's statement15 to the effect that if the damage done to the ship has not been repaired, the only mode of ascertaining, its amount is by the estimate of surveyors. He cited certain cases also where the actual sale price was never considered as relevant. He further pointed out that the underwriters had for years paid for repairs. A policy on marine insurance is mainly construed according to long settled and admitted usage of merchants and underwriters, and the startling facts of the case in question which were wholly abnormal, should not, he said, justify any tampering with a settled rule of adjustment of liability. He was, therefore, of the opinion that the plaintiffs' claim ought to be allowed.
14. Mode of calculating depreciation.- While the judgment of Lindley J., was thus approved on the main question as to the test to be applied, the subordinate question, namely, how depreciation is to be calculated was not discussed at length by the Court of Appeal. The formula suggested in this connection by Lindley J, can be put as follows:16 The sound value of the ship in the port of distress (Moulmein in this case) is to be ascertained. Her damaged value, i.e., the value for which she was sold, less the amount spent on repairs before sale, should be next ascertained.
The difference between the sound value as so calculated and the damaged value as so calculated, represents the proportion of loss sustained by the shipowner. (To this may be added whatever other sums are properly chargeable against the underwriters, and the final proportion of loss thus arrived at). The proportion of loss so arrived at is to be applied to the ship on its declared value (or, if the policy is an unvalued one, then on its real value) at the commencement of the risk. The proportion of the loss so calculated will be what the insurers have to pay. In the Court of Appeal17 Jessel M.R. stated:
"As to the value, I think, the value to be regarded is the value of the ship at the port of departure, but in this case it is not material because, I think, the value at Moulme in before the injury wag about the same." Cotton L. J., does not appear to have touched this point (beyond stating that the measure of indemnity should not exceed the depreciation as ascertained by the sale.)
15. Departure from the English Act.- It would seem that there is no reason why the case of the ship being sold without repair in damaged state should not be covered. The amount to be recovered by assured should not exceed the depreciation as ascertained by the sale. Subject to this restriction, the reasonable cost of repairing damage can be allowed.18
Necessary departure has been made accordingly from the English Act.19
The effect of this decision has been thus stated in Arnould20:
"If the ship after sustaining an average loss is sold by her owner unrepaired, the measure of what he is entitled to recover against the insurer is the estimated cost of repairs less the usual deduction, not exceeding the depreciation in value of the vessel as ascertained by the sale."
[Arnould, of course, observes that it is impossible not to feel the force of the powerful dissenting judgment in view of which the law can hardly be stated to be settled.]
1. The clause is cited in Dover, p. 424.
2. Cf Dover, pp. 423-424.
3. Reproduced in Keate, p. 175, Dover, p. 760.
4. See Dover, p. 423, last para.
5. In practice, claims for such damage arc usually compromised; see Dover, p. 424, second para.
6. As to the possible tests of depreciation, see also Haisbury, Vol. XXII, p. 138, para. 266, footnote (a), where two tests have been mentioned:-
(i) difference between conventional value and damaged value,
(ii) proportion of the actual depreciation to be ascertained and applied to conventional value.
The point was left open in Irvin v. Hyne, (1949) 2 All ER 1089.
7. Cf. Chalmers, p. 108.
8. Pitman v. The Universal Marine Insurance Co., (1882) 9 QBD 192.
9. Pitman v. The Universal Marine Insurance Co., (1882) 9 QBD 192. .
10. Pitman v. The Universal Marine Insurance Co., (1882) 9 QBD 192 (197).
11. Pitman v. The Universal Marine Insurance Co., (1882) 9 QBD 192 (204).
12. (1882) 9 QBD 192 (218).
13. Stewari v. Steele, 5 Scott NR 921 (948)
14. (1882) 9 QBD 192 (218, 219).
15. Amould, 5th Edn., Vol. 2, p. 901. Now see 14th Edn.. Vol. 2, p. 954.
16. (1882) 9 QBD 192 (203); first 13 lines.
17. (1882) 9 QBD 192 (205).
18. Cf the judgment of Cotton LJ., discussed above, para. 10(b).
19. See also the body of Report, para. 10.
20. Arnould, 1954 Edition, Vol. 2, p. 954, Article 1034.