Consequences of Notice of Abandonment
Tendering of a valid Notice of Abandonment (hereinafter referred to as NOA) to the insurer signifies that the insured considers the loss to be constructive total loss (hereinafter referred to as CTL). Similarly, acceptance of the NOA by insurer means that the insurer accepts the loss to be CTL. Thus, as laid down in Section 62(2) of the English and Indian Marine Insurance Act, acceptance of NOA by the insurer makes determination of CTL final and abandonment irrevocable. By accepting the loss to be total, the insurer admits his liability to indemnify the insured and conveys his consent to pay for a total loss. For the same reason, it is almost never accepted by insurers in practice. Nevertheless, in the event of acceptance of NOA, Section 63 stipulates that the insured becomes entitled to indemnification for the total loss and the insurer obtains an equitable lien over all proprietary rights in the subject matter including ownership. The complete transfer of proprietary rights however, is subject to payment of the indemnity and compliance with other Merchant Shipping legislations. Although abandonment is crystallized only by an acceptance of the NOA or indemnification, it may have certain retrospective effects up until the time of casualty.
In cases of rejection, there is no change of ownership of the ship or acceptance of CTL. When insurers or underwriters reject or refuse to accept the NOA, they usually agree to put the insured in the same position as though a Claim Form had been issued. Earlier referred to as a Writ, the Claim Form is a document filled out by the insured to claim indemnification for the loss. Therefore, after rejection of the NOA, the insured is deemed to have claimed for indemnity and issued a Claim Form. However, the dispute between the insured and the insurer crystallizes only after the actual issuance of a Claim Form and hence, the insured can only claim for ‘sue and labour expenses’ until then.
Since NOA is in the nature of an offer or a proposal, the insurer may even provide the insured with a counter offer that may eventually lead to a settlement of claims between the parties. Once finalized, abandonment has several other consequences since it embodies a change in the title of the vessel or cargo. For instance, it may lead to the frustration of an underlying contract or charterparty. Another relevant consequence that arises from abandonment is with regard to liabilities arising from the insured subject matter. Although abandonment is a remedy provided for protection of the insured, it cannot be used as a tool to avoid liabilities such as liability for wreck removal and environmental damage. Since taking on rights to the insured subject matter signifies transfer of certain liabilities too, the insurer would definitely consider the liabilities associated with the casualty and the benefits of salvage before accepting abandonment. In practice, potential liabilities are factors that lead to rejection of the NOA and such risks are often insured against by a shipowner through a Protection & Indemnity Cover.
Examining some of the widely used marine insurance policies will provide further insight to the legal and commercial aspects of abandonment in marine insurance.
The Institute War and Strikes Hulls Clause (1983) provides that if the vessel has been arrested, captured, restrained, seized, confiscated, expropriated or detained to the effect that the insured has no access to its use and disposal for a continuous period of 12 months, the insured is deemed to have been deprived of its possession without any likelihood of recovery for the purpose of ascertaining CTL. This provides the insured with the remedy of abandonment due to deprivation of possession. A similar 12 month clause can be found in the Hellenic Mutual War Risks Rules (2020), which additionally provides that no claim for CTL can arise if the deprivation lasts for less than 183 days. The Rules and Bye-Laws of the Association also provide parameters for determination of CTL and empower the association to declare CTL without the owner’s NOA.
The Institute War and Strikes Cargo Clause (2016) on the other hand only provides for a waiver clause which stipulates that any measure taken by the insured or the insurer for protecting, saving or recovering the insured subject matter is not considered as waiver or acceptance of abandonment or acceptance of any related rights. A similar clause is contained in the Institute Time Hull Clause (1983). The purpose of such waiver clause is to protect the insurer as it prevents a subsequent claim that the NOA was impliedly accepted by the insurer through conduct as provided in Section 62(5) of the Marine Insurance Act. However, waiver clauses do not protect the insurers where their actions for recovery clearly and unequivocally embody acceptance of abandonment.
Since the Institute Clauses are widely used in the UK and are subject to English law, they are read with the provisions of the English Marine Insurance Act and do not contain aspects covered by the Act (such as NOA). Some other European policies however, such as the Nordic Marine Insurance Plan (2013) contains a vast majority of the relevant insurance regulations of the EU embedded in wordings of the policy. Another example of such a policy is the All Risk Marine Hull and Machinery Policy of the French Insurance Federation (2012) which has elaborate provisions for abandonment and is subject to French marine insurance law. It describes the various circumstances where CTL may occur and abandonment may take place. For instance, there is a deemed total loss (equivalent of CTL) if there has been no news of the vessel for more than three months or when the vessel cannot be repaired. Similarly, there is a remedy of abandonment when there is a continuous loss of use or deprivation of the vessel, although the time period for this is not mentioned and can be inferred to be three months. It further stipulates that the insurer must be notified of the abandonment within three months of the accident resulting in loss. This notice gives the insurer the right to accept abandonment or to settle the claim and he is bound to inform the insured of their decision within thirty days. A time bar of two years is given for claims and actions concerning abandonment.
The recent judgment of the UK Supreme Court in The Renos is a good example for studying aspects related to the validity and timing of a NOA. The facts of the case relate to a vessel damaged by a fire and later salvaged, with the estimates of repair costs varying greatly between the owner and the insurer. The NOA was served 5 months after the accident. The insurer’s contention before the Supreme Court was that the vessel was not in fact a CTL and that the NOA was tendered late. The Court held that since there was a bona fide confusion as to the costs of repair, there was no reliable information on the basis of which NOA could be issued. This entitled the owners to a reasonable time to determine the extent of loss and the NOA was therefore not tendered late. The Court further reversed the decision of the lower court and reiterated that all costs incurred in recovery and repair of the vessel after the date of casualty and prior to the NOA shall be taken into account for determining CTL.
As every marine adventure is one that entails a number of intertwined contracts involving great expenses, insurance becomes extremely crucial in the maritime industry. Though the concept of abandonment can be seen elsewhere in the form of a ‘write-off’, nowhere is the remedy so well established as it is in marine insurance. The remedy is a unique feature formulated for the benefit of an insured; usually the shipowner or a charterer and has a long history.
Abandonment as a remedy demands careful evaluation of the information regarding a casualty. Between the insured and the insurer, proprietary rights in the subject matter and admission of liability respectively are at stake in a claim for abandonment. As abandonment can be opted for only when there is a CTL, the definition and determination of CTL is a significant question of fact in any given case. The relevant factors of NOA are timely election for abandonment and unequivocal expression of the insured’s intention to abandon the subject matter unconditionally. Since the NOA is in the nature of an offer to contract, it is beneficial for the insured to send a series of NOAs corresponding to the information available so that at least one of them is not premature enough to be ineffective or late enough to be futile. In cases where it is rejected by the insured despite justifying circumstances, the insured may have to go to court in order to get full indemnification for his CTL. As can be seen from the policy examples discussed, an alternate and better course in cases of CTL is to negotiate with the insurer for a claim of total loss when the circumstances justify it.
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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