A constructive total loss in the marine insurance policy means that the cost of repair of a damaged ship/vessel is more than the value of the ship/vessel.
In a constructive total loss, the insured vessel is abandoned as its actual total loss appears to be unavoidable. Retrieving the ship from the place where it is abandoned does not become commercially viable. In the case of ships/vessels damaged to the extent, the expected cost of repairs can to more, recommending abandoning the ship.
The vessel, in this case, cannot be preserved from actual total loss as the expenditure on its repairs/replacement will exceed its value when the expenditure had been incurred.
Additional Read: What is Marine Hull Insurance?
There is a constructive total loss when:
- Deprived the insured of the possession of his ship by the peril, insured against.
- The insured is unlikely to recover the ship.
- The cost of recovering the ship would exceed its value when recovered.
- In the case of damage to a ship, if damaged to the extent that the cost of repairing the damage would exceed the value of the ship when repaired.
A constructive total loss is a concept peculiar to marine insurance. It is an intermediate form of loss between partial and actual total loss. If the insured meets the requirements for a constructive total loss, then he may file a Hull Insurance claim for a total loss of the vessel.
Cases of Constructive Total Loss in Marine Hull Insurance :
vessel ‘Irene IX’ was travelling towards Somalia. Its job was to load the consignment of shipping materials from a construction company and transport it to another site.
On its voyage, Somali Pirates captured the vessel on 8th August 2001. When the vessel was under the capture of the pirates, due to poor maintenance of the vessel’s machinery ultimately resulted in damage. One of the auxiliary generators exploded and one of the cylinders on the main engine leaked. The pirates evacuated the ship later and it sank due to water flooding. Traced the ship’s location with the help of the Government.
As the owning Marine Insurance company had insured ‘Irene IX’ with a Hull insurance policy, they immediately contacted the insurers once the ship was located. The Insurance company carefully evaluated the situation and found the cost of recovering the ship. And also, the cost of repairing the ship will exceed the value of the ship when repaired.
So, the insurance company decided to settle the claim with the help of the constructive total loss clause mentioned in the Marine hull insurance policy. Considering it as a constructive total loss, the insurer settled the claim for ‘Irene IX’.
The day was on 16th April 1999, when ‘Gazette II’ sailed from India to Malaysia. It had a cargo of large machinery of a construction company. On 18th April, the ship sank due to a terrible thunderstorm. The rescue boats helped in saving the crew and the cargo but, lost the entire ship. The owners of ‘Gazette II’ contacted their Marine Insurance company. Immediately investigators reached out to analyze the situation.
The owners of the ship had a marine insurance policy. Upon investigation, it was found that the ship could not be retrieved. As the cost of retrieving and repairing the ship was more than the total value of the ship, the insurer took it as a constructive total loss mentioned in its marine hull insurance policy and settled the claim.