According to S. 57(1) of the Marine Insurance Act, there is an actual total loss where the subject matter insured is destroyed or so damaged as to cease to be a thing of the kited insured or where the assured is irretrievably deprived thereof.
Losses are deemed to be total or complete when the subject- 9.1 matter is fully destroyed or lost or ceases to be a thing of its kind. It should be distinguished from partial loss where only part of the property insured is lost or destroyed.
In case of total loss, the insured stands to lose to the extent of the value of the property provided the policy amount was to that limit.
1. Actual Total Loss :
Actual total loss is a material and physical loss of the subject-matter insured. Where the subject- I 4 matter insured is destroyed or so damaged as to cease to be a thing of the kind insured, or where the insured is irretrievably deprived thereof, there is an actual total loss.
When a vessel is foundered or when merchandise is so damaged as to be valueless or when ship is missing it will be an actual total loss.
The actual total loss occurs in the following cases:
1. The subject-matter is destroyed, e.g., a ship is entirely destroyed by fire.
2. The subject-matter is so damaged as to cease to be a thing of the kind insured. Here, the subject- matter is not totally destroyed but damaged to such an extent as the result of the mishap; it is no longer of the same specie as originally insured.
The examples of such losses are foodstuff badly damaged by sea water became unfit for human consumption; hides became valueless as hides due to admission of water.
These damaged foodstuffs or hides may be used as manure. Since the characters of the subject-matters are changed and have lost their shapes, they are all actual total loss.
3. The insured is irretrievably deprived of the ownership of goods even they are in physical existence as in the case of capture by enemy, stealth by thief or fraudulent disposal by the captain or crew.
4. The subject-matter is lost. For example, where a ship is missing for a very longtime and no news of her is received after the lapse of a reasonable time. An actual total loss is presumed unless there is some other proof to show against it.
In case of actual total loss, notice of abandonment of property need not be given. In such total losses, the insurer is entitled to all rights and remedies in respect of damaged properties.
In no case, amount over the insured value or insurable value is recoverable in a total loss from the insurers. If the property is under-insured, the insured can recover only up to the amount of insurance. If it is over- insured he is not over-benefited but only the actual loss will be indemnified.
Where the subject-matter had ceased to be of the kind insured, the assured will be given the full amount of total loss provided there was insurance up to that amount, and the insurer will subrogate all rights and remedies in respect of property. Any amount realised by the sale of the material will go to the insurer.
2. Constructive Total Loss :
Section 60 of the Act defines constructive Total Loss. Where the subject-matter is not actually lost in the above manner, but is reasonably abandoned when its actual total loss is unavoidable or when it cannot be preserved from total loss without involving expenditure which would exceed the value of the subject-matter.
For example, the cost of repair and replacement was estimated to be Rs. 50,000, whereas the ship was estimated to be Rs. 40,000.
The ship may be abandoned and will be taken as constructive total loss. But if the value of ship was more than Rs. 50,000 it would not be constructive total loss. Here it is assumed that retention of the subject-matter would involve financial loss to the insured.
The constructive total loss will be where (a) the subject-matter insured is reasonably abandoned on account of its actual total loss appearing (a be unavoidable;
(i) the subject-matter could not be preserved from actual total loss without an expenditure which would exceed its repaired and recovered value.
The insured is not compelled to abandon his interest, where the goods are abandoned; the insurer will have to pay the full insured value.
Where there is constructive total loss, assured may either treat the loss as a partial loss or abandon the subject-matter insured to the insurer and treat the loss as if it was an actual total loss.
Notice of Abandonment:
The notice of abandonment is essentially given to the insurer to claim the loss as constructive total loss. If he fails to do so, the loss can only be treated as a partial loss. The notice can be given orally or in writing.
The notice should be unconditional and absolute. The insurer may either elect to accept or decline the proposal.
But, when the insurer elects to object the notice, the insured should at once commence legal action against the insurer to claim ‘the loss’ under constructive total loss. In brief, the notice of abandonment involves the following:
1. Subject to the contrary provision, where the insurer elects to abandon the subject-matter insured to the insurer, he must give notice of abandonment. If the insured fails to furnish the notice, the loss can be treated as a partial loss.
2. The notice can be given in writing or orally. It may be given in any terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer.
3. Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of loss, but where the information is of a doubtful character, the insured is liable to furnish the required information.
4. If notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment.
5. The acceptance of abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer is not an acceptance.
6. Where notice of abandonment is accepted the abandonment is irrevocable.
7. Notice of abandonment is unnecessary where there is no possibility of benefit to the insurer if notice was given to him.
8. Notice of abandonment maybe waived by the insurer
Effect of Abandonment :
1. In case of valid abandonment the insurer is entitled to take over the interest of the assured in, whatever may remain of the subject-matter insured.
2. At the time of abandonment of ship, the insurer is entitled of any freight in course of being earned.
In case of constructive total loss, the insurers have a right, after the settlement of the claim in full, to take over the property or whatever may remain of it. Where the insurers elect to take over the remainders of the wreck, the cost of removing the wreck is borne by the insurers.
But, in case insurers elect not to take over the destroyed party, it becomes the liability of the ship-owners to remove the wreck and incur necessary expenditure for the same. The constructive total loss in the case of vessels is distinguished from the constructive total loss in cargo or freight.
In case of cargo, the constructive total loss will be there where the assured is deprived of the goods by insured perils. In case of damage to the goods there is a constructive total loss where the cost of reconditioning the goods and forwarding the goods to the destination would exceed their value an arrival.
Hull policy covers total and partial losses and partial losses are paid in full irrespective of the insured amount, the insured amount merely serves as the maximum limit.
Difference between Actual and Constructive Total Loss :
Actual total loss is related with the physical impossibility and the constructive total loss is related with the commercial impossibility. For example, if the hides are so damaged that it is impossible to prevent the hides from the destruction and it may become a mass of putrefied matter, the case is of an actual total lass.
But if it was possible to restore the hides to their original condition, though the cost of so doing would exceed their value at destination, the damaged hides can be claimed as constructive total loss because the completion of the adventure has became commercially impossible.