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.
Reasons to claim constructive total loss
The insurer can claim a constructive total loss when a ship is abandoned and it is not commercially viable to retrieve the ship or cargo. Ship or cargo may not suffer total damages. Thus, repairing or restoring it to its original position is not a feasible option. It is best to abandon the ship if it is badly damaged and there is a high cost of repair.
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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
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.
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.
It was the sixth journey of Limo when it sailed from India to Germany on 9th December 2015, with a cargo of 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. 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.