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. Since the repairing cost exceeds the replacement or market value so the insurer settles the entire claim. Insurance companies often consider the loss equal to 50% or 60% of the stated value of the item This helps them ascertain the constructive total loss.
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What Is Constructive Total Loss
Constructive total loss is a term used in cargo insurance when the cost of repairing or recovering a damaged cargo surpasses its insured value. This results in the cargo being declared a total loss, and the insurance company compensates the policyholder with the full insured amount. This loss can be caused by natural disasters, accidents, or theft. If claimants don’t insure their property for the full value, they may not receive full compensation in case of a loss.
Understanding Constructive Total Loss
Reasons to claim constructive total loss in Marine Cargo Insurance
In cases where a ship or cargo cannot be feasibly retrieved, the insurer can assert a constructive total loss, even if partial damages exist. Thus, repairing or restoring it to its original position is not a feasible option. Thus, it is advisable to abandon a heavily damaged ship with costly repair requirements.
Read More: What is Marine Insurance?
Similarly, it is best to leave the cargo when the cost of bringing it to the coast is more and it is safe on an abandoned ship. In such scenarios, a marine business can claim a constructive total loss.
In case of a constructive total loss, the policyholder informs the insurance company. It surrenders its interest in the subject matter to the insurance company.
Situations where constructive total loss arises in Cargo insurance
There is a constructive total loss in marine cargo insurance in the following circumstances.
- It is a constructive loss when the insured perils deprive the policyholder of the possession of goods. Moreover, it is highly unlikely for the policyholder to recover the ship or goods. Furthermore, the cost of recovering the ship is more than its recovery value.
- When the ship is severely damaged by an insured peril and the cost of repairing a ship is more than its value.
Therefore, a constructive loss occurs when the goods are totally damaged and the repairing cost is more than their value on the arrival.
Case: 1
T.J Engineer sent a consignment of engineering items from India to Sri Lanka. However, pirates attacked the ship and seized it. T.J Engineering tried for the release of the ship with the help of the government. However, there was no clarity about its release. 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. After carefully evaluating the situation, they felt 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 where 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.
Read more: What is covered under Marine Cargo Insurance?
Case: 2
On December 9, 2015, Limo embarked on its sixth journey from India to Germany carrying machinery items. Thunderstorms caused the ship to sink on 15th December. Other ships floating at the same time rescued the crew members. Unfortunately, there was the loss of entire cargo 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 the Coast Guard 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. After a thorough investigation, the insurance company considered it as a constructive total loss and settled the claim accordingly. Due to the repair costs exceeding value of the ship and cargo, the insurer declared it a constructive total loss.
