A constructive total loss in marine cargo insurance means that the cost of repair of a damaged item is more than the current value of the item. The insurer settles the insured the entire amount on the basis of the fact that the repairing cost exceeds the replacement or market value. Often a loss equal to 50% or 60% of the stated value of the item is considered by insurance companies for ascertaining constructive total loss.
The situation of constructive total loss arises when the ship is abandoned as it is not commercially viable to retrieve the ship or cargo. Though, the ship or cargo is not completely damaged, it is not feasible to get it repaired or restored to its original position. When the ship is badly damaged and the cost of repairs is expected to be more, it will be recommended to abandon the ship.
Read More: What is Marine Insurance?
Similarly, if the ship is abandoned, but the cargo is safe on it, however, if the cost of bringing the cargo to the coast is more than its total cost, it will be fine leaving the cargo. All these scenarios will be considered as a constructive total loss.
When a constructive total loss arises, the policyholder informs the insurance company and surrenders its interest in the subject-matter to the insurance company.
In particular, there is a constructive total loss in marine cargo insurance when:
- The policyholder is deprived of the possession of goods by insured perils and it is unlikely that the policyholder can recover the ship or goods as the case may be, or the cost of recovering the ship would be more than its recovery value
- The ship is severely damaged by an insured peril and the cost of repairing a ship is more than its value.
In the case of damage to goods, it will be considered as a constructive loss if the repairing cost is more than their value on the arrival.
T.J Engineer sent a consignment of engineering items from India to Sri Lanka. However, the ship was attacked by pirates who seized the ship. Though, T.J Engineering tried for the release of the ship with the help of the government, it was not clear when it will be released. A lot of discussions went into this, but in vain.
Even the company tried to get back its ship in exchange for money, however, they did not get any success in it. As T.J Engineer had a marine cargo insurance policy, the company approached the insurer who, after carefully evaluating the situation decided that it was uncertain whether they would recover the ship or not. So, considering it as a constructive total loss, the insurer settled the claim.
Insurers consider the constructive total loss in those situations as well when the policyholder is uncertain about the recovery of the ship. In this case, T.J Engineer was uncertain when it will get its ship back, therefore, the company’s marine insurer settled the claim after considering it as a constructive total loss.
It was the sixth journey of Limo when it sailed from India to Germany on 9th December 2015, with a cargo of machinery items. On 15th December, the ship was caught in a thunderstorm and sank. While crew members were rescued by other ships which were floating at the same time, the entire cargo was lost along with the ship. The owner of the ship, J.N Associate sent its senior professionals to analyse the situation completely.
The company also contacted coast guards to seek their help in tracking the consignment. After a one month frantic search, finally the coast guards were able to find the ship in a damaged state. As J.N Associate had a marine insurance policy, they approached the insurer who, after a thorough investigation, considered it as a constructive total loss and settled the claim accordingly. As the cost of repairing ships and bringing goods back to the shore was more than the total value of the ship and cargo, the insurer took it as a constructive total loss.
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