From Lex mercatoria to Edward Lloyd’s Coffee House and the Lutine Bell, modern marine insurance has a fascinating history. It was the first well developed system of insurance from which other kinds of insurance and reinsurance emerged. Yet, there are certain features that are unique to marine insurance and the principle of abandonment is one of them.
Abandonment in the context of marine insurance is to be distinguished from the physical abandonment of a vessel by the Master and crew. A much recognized definition of abandonment can be found in a book on French marine insurance titled Traite Theorique et Pratique des Assurances Maritime by De Smet, where he identifies abandonment as an exceptional remedy granted under special circumstances through which an insured can claim the full indemnity provided in a policy (even if the loss is not actually total) by transferring his proprietary rights in the subject matter to the insurer. Therefore, abandonment can be understood as converting the partial loss incurred to total loss for the purpose of claiming full value of insurance under certain circumstances, in lieu of transferring rights of the insured to the insurer. The special circumstance under which abandonment is pursued is understood to be constructive total loss (hereinafter referred to as CTL).
Abandonment, like subrogation, is a consequence of the indemnity principle of insurance and results in the transfer of certain rights to the insurer. Yet, abandonment is vastly different from subrogation. Subrogation is applicable in cases of both partial & total loss and transfers only the rights and remedies of the insured to the insurer. Abandonment on the other hand is available only in cases of constructive total loss and results in the transfer of all proprietary rights including ownership to the insurer. Further, the right of the insurer in subrogation extends only to the insurance value whereas in abandonment, the insurer becomes entitled to the actual value of the subject matter notwithstanding the policy amount.
There exist several theories of abandonment; indemnity theory, economic loss theory, presumption theory and the missing ship theory, each attempting to explain the origin and logical reasoning behind abandonment. The shared link between all these theories relates to the aim of the remedy: protection of the insurer where loss incurred is effectively total but actually partial. Both the English and Indian Marine Insurance Act (hereinafter collectively referred to as MIA as the section numbers and provisions are the exact same in both legislations) deals with abandonment in an elaborate manner, providing for the determination and effect of CTL, notice, effect of abandonment etc. which are covered below.
Constructive Total Loss (CTL)
A loss arising from an insured peril that acts as the proximate cause maybe partial or total. As per Section 56 (3) of the MIA, every marine insurance policy covers both actual total loss and CTL, unless expressly provided. The meaning of actual total loss is obvious, though the concept of CTL can be complicated and may vary across jurisdictions and policies. In simplest terms, CTL occurs when the loss appears to be actual total loss financially but may not embody actual total loss physically. CTL can be either of the goods (cargo insurance) or the ship itself (hull and machinery insurance). For instance, if a consignment cannot arrive at the discharge port due to the occurrence of an insured peril, it can be understood to be a CTL of the cargo (due to deprivation of possession) but not of the ship.
Section 60 of MIA widely defines CTL to include any situation where actual total loss in unavoidable. As per Section 60(2), CTL may occur when the insured is deprived of possession of the ship or goods in a manner that its recovery is unlikely or if the cost of recovering possession exceeds the recovered value. English courts have extended this in cases where recovery is merely uncertain but not unlikely. Deprivation is often seen in instances of capture by pirates, where the ship may be recovered and brought before the Admiralty Court and yet out of the possession of the insured. It is irrelevant whether the deprivation was wrongful or rightful. As per Section 57(i), in cases where deprivation is irretrievable, the loss is actual total loss and not CTL. For deprivation to not qualify as CTL, recovery of possession must be possible within a reasonable time.
Section 60 further provides that CTL may occur when there is damage to the ship or cargo and the cost of repairing the damage exceeds the value of the ship or cargo itself, effectively making actual total loss unavoidable. The American rule however, varies to the extent that the cost of repair need exceed only half the value of insured subject matter. In addition to the definition provided in the legislation, English courts often referred to the ‘prudent uninsured owner’ test formulated in an 1836 case where the courts would determine if a prudent uninsured shipowner would undertake further expenses to repair a damaged vessel in order to determine the existence of CTL. In the recent judgment of UK Supreme Court in The Renos however, the declining relevance of this test can be observed. Further differences exist between the English and American principles relating to CTL. The actual total loss must be appearing to be unavoidable and recovery of the ship or goods unlikely as per Section 60(1) of MIA in the former; total loss highly probable and recovery uncertain in the latter.
The determination of CTL is crucial in marine insurance; as per Section 61 of MIA, it empowers the insured to either treat the loss as partial loss or to abandon the subject matter to the insurer and treat the loss as actual total loss. If the insured elects to claim for partial loss, he may not be able to claim for total loss even if the circumstances change after the claim in this regard is submitted. If the insured elects to abandon the subject matter, he is required to send a notice of abandonment (hereinafter referred to as NOA) to the insured and the loss incurred becomes constructive when the notice is accepted by the insurer.
Notice of Abandonment (NOA)
Section 62(1) of MIA provide for the NOA to be sent when the insured elects to claim CTL, without which he can only claim for partial loss. As per Section 57(2), NOA need not be given when the loss is actual total loss. Similarly as per Section 62(9), it may not be issued when the insurer has reinsured the risk. Under Sections 62(7) and 62(8) respectively, it may also not be given when there is no possibility of benefit to the insurer or when it is waived by the insurer himself. Abandonment practically converts a partial loss into total loss for the purpose of indemnification and tendering of NOA is a condition precedent to the insured’s right to claim for such conversion (CTL). Therefore, it is extremely important that the NOA is sent in a proper form and at the appropriate time.
NOA is to be tendered by the insured shipowner or his agent to the insurer or his agent; expressing the intention to renounce all rights in the subject matter except for the right to insurance. As provided in Section 62(2), the notice may be written or oral as long as it indicates the intention of the insured to unconditionally abandon the insured subject matter to the insurer in lieu of full indemnification. In commercial practice, it is often suggested that mention of grounds on which the abandonment was based is desirable and necessary.
As per Section 62(5) of MIA, acceptance of the NOA by insurer may be express or implied (through conduct) but not through mere silence. Section 62(6) stipulates that a valid acceptance from the insurer makes the abandonment irrevocable. In practice however, the NOA is almost never accepted by the insurer as acceptance of abandonment signifies admission of liability for loss. As per Section 62(4) of MIA, non acceptance of the NOA does not affect the rights of the insured. Therefore, a NOA is in the nature of an offer which remains executory until accepted by the insurer.  The insured can also revoke the NOA before its acceptance. Consequently, an insured may send more than one notice and it is open for the courts to determine which notice was a valid one; providing reasonable time for both the insured and the insurer.
The most relevant question however, remains as to when the NOA is to be sent. Section 62(3) of MIA stipulates that the notice is to be given after receipt of reliable information of the loss as the insured is entitled to a reasonable amount of time to make enquiries with respect to the loss. Further, NOA is to be given to the insurer within a reasonable time so that the insurer has an opportunity to salvage from the loss. The determination of what amounts to reliable information and reasonable time are questions of fact, often complicated by the political, legal situation and various other conditions persisting in the region or country where the loss occurred. It is at this juncture that the interpretation and determination of CTL becomes critical. Section 60 of MIA restricts the determination of CTL to the cost of repair and the repaired value. Therefore, the reliable information has to be with regard to the extent of loss, scope of repairs or recovery and repaired value. The loss must appear to be total and includes any costs and damages subsequent to the casualty till the time of notice of abandonment. Once reliable information with regard to CTL is obtained and NOA tendered, if it turns out that the information as existed at the time of notice was true, the insured can insist upon abandonment. However, if the case is that the supposed facts were not true or if other circumstances that did not justify abandonment arise subsequently to the notice, there can be no abandonment and the insured may choose to claim for partial loss. For instance, if the insured issued a NOA knowing that the ship was captured by pirates, he cannot claim abandonment if the ship is then recaptured within a reasonable time and without great many expenses.
About the Author
Devika Radha is a penultimate year law student at Symbiosis Law School Pune, keen to pursue her interest in admiralty law. She can be reached at firstname.lastname@example.org or http://www.linkedin.com/in/devikaradha for feedback and queries.
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