Total loss
In cases of marine insurances, the total loss has been categorised into two
divisions, namely, actual total loss, and constructive total loss.
Actual Total Loss
As per section 57 of the MIA, an actual total loss could occur in three situations-
1. Destruction of the insured object.
2. When extensive damage is caused to the insured object which changes
its very inherent nature and quality.
3. Irretrievable deprivation of the insured object to the assured.
While the first two cases make the ascertainment of a loss as actual or
constructive relatively easier, it is the third scenario where determination
becomes difficult or a little dubious to fathom. In the case of George Cohen
Sons and Co v/s Standard Marine Insurance Co Ltd, an insured ship had been
taken to the port but it somehow went shore. The British Court observed that
the assured had not been irretrievably deprived of the ship. The process of
retrieval, the Court opined, would be difficult and also expensive to a large
extent but would not be impossible. Therefore, the Court held the
aforementioned loss to not be in the nature of an actual total loss. Further, in
the case of Loyal Marines v/s National Insurance Co Ltd, it was found that the
insured ship had got submerged in the sand up to its deck and it was therefore
not possible to retrieve it for the use of the assured. The Court declared the said
loss to be an actual total loss and asked the insurers to indemnify the assured
for the same.
Apart from the foretasted three scenarios, a missing ship that is insured, of
which nothing has been heard about even after the passage of a significant time
period, would also be deemed to have been actually totally lost and the assured
would be eligible for claiming indemnity.
Constructive total loss
The term constructive stands for something which is not explicit but derived
from conjecture. Applying the said definition to understand a constructive total
loss, it can be said that when an actual total loss defined under Sections 57 and
58 have not explicitly taken place but the loss caused is such that the insured
object is as useless as it would have had been in case of an actual total loss.
Section 60(1) of the MIA, giving out a general definition of a constructive total
loss, states that in case an actual total loss of the insured object becomes
inevitable, or that prevention from the same demands the incurring of an
expense higher than the value of the insured object, it is said that a
constructive total loss has taken place. In the case of Marstrand Fishing Co Ltd
V/s Bear, it was stated that the inevitability or unavoidability of the actual total
loss must be determined on the basis of the facts and not on the basis of what
the assured believed to be true. If what the assured believed to be true but was
not true in fact, it is out of the question to consider such loss as a constructive
total loss.
Further, Section 60 states the following to further explain what particular
instances could lead to a constructive total loss-
1. Where the assured loses the possession of the insured object owing to
a peril of the sea they were insured against and recovery of possession
is either a) not possible, or b) can be made possible but only by
incurring such cost that would go beyond the value of the object.
2. The damage caused to the insured object, owing to a peril of the sea
the assured was insured against, is so severe that it could only be
repaired by incurring such cost that would exceed the value of the
object.
Effect of a constructive total loss
In case the loss in the nature of the aforementioned takes place, the assured
could either abandon the object or continue possessing it. In the case of the
former, the loss is to be treated as an actual total loss, whereas if the assured
does the latter, they are said to be treating the loss as a partial loss.
Abandonment is thus a necessary prerequisite for a loss to be deemed as an
actual total loss. The concept of abandonment has been discussed in greater
detail in the subsequent chapter.
Defining the said term, Lord Atkin in the case of Moore & Gallop v Evans, (1918)
AC 185, remarked that it is a form of amalgamation of a total loss and a partial
loss. It lies somewhere in between of the both with its determination dependent
upon the doctrine of abandonment (discussed in the subsequent chapter).
However, the application and exhaustibility of a constructive total loss as
defined under Section 60 depend upon the terms and conditions as stipulated in
the marine insurance policy on a case to case basis. The Supreme Court of
India, in the case of Peacock Plywood (P) Ltd v/s Oriental Insurance Co
Ltd, ruled that if any provision of a marine insurance policy does not correspond
to what is mentioned in Section 60 of the MIA, the former will prevail over the
latter.
Difference between an actual total loss and
constructive total loss
In simple words, the difference between the two aforementioned types of total
losses is that while the former is a factual total loss, the latter is but a legal
fiction, created to give those losses that are akin to an actual total loss
equitable protection. Thus constructive total loss is a total loss in law and spirit.
