A constructive total loss in marine hull insurance 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 that the cost of repairs is expected to be more, abandoning the ship is recommended.
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.
There is a constructive total loss when:
- The insured is deprived of the possession of his ship by the peril it is 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, where it is 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 claim for a total loss of the vessel.
Read More: What is Hull Insurance?
vessel ‘Irene IX’ was traveling towards Somali. Its job was to load the consignment of shipping materials from a construction company and transport it to another site.
On its voyage, the vessel was captured by Somali Pirates on 8th August 2001. When the vessel was under the capture of the pirates, the vessel’s machinery was not fully maintained and was ultimately damaged. One of the auxiliary generators exploded and one of the cylinders on the main engine leaked. The ship was later evacuated by pirates and it sank due to water flooding. With the help of Government, the location of the ship was traced.
As the owning company had insured ‘Irene IX’ with a Marine Hull insurance policy, they immediately contacted the insurers once the ship was located. The Insurance company carefully evaluated the situation and found that the cost of recovering the ship and 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 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 was caught in a thunderstorm and sank. The crew and the cargo were saved with the help of rescue boats but the entire ship was lost. The owners of ‘Gazette II’ contacted their Insurance company. Immediately investigators were sent to analyze the situation.
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 as mentioned in its marine hull insurance policy. The claim was settled based on a constructive total loss.
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