Constructive total loss – what is it and when does it arise?

For many years the subject of whether it is worth repairing something has led to issues between insurers and their assured. Of course, it is easy enough when a ship sinks and is totally lost but what happens where there is a casualty and the ship is damaged? At what point can it be said that the ship is not worth repairing? At what point is it deemed to be a constructive total loss or a CTL as we commonly call it? Furthermore, what does one take into account when calculating if a ship is or is not a CTL?

For some years now, insurers have proceeded on the basis that costs of recovery or repair incurred prior to a notice of abandonment do not count towards the assessment of whether the vessel is or is not a CTL. The leading cases supporting this are The Medina Princess [1] and Hall v Hayman [2]. However, many commentators including the editors of Arnould’s [3] have expressed the view that these cases are wrong. Knowles J had reason to consider these issues in the recent case of The Renos [4]. He considered the issues and has sided with the critics. His judgment was recently unanimously upheld by the Court of Appeal. It now follows that, pending an appeal to the Supreme Court (which is possible) costs of recovery or repair incurred prior to a notice of abandonment do count towards the assessment of whether the vessel is a CTL. Furthermore, Knowles J has gone as far as to say that SCOPIC costs can also be included in the assessment notwithstanding that SCOPIC is generally acknowledged to be a P&I expense the primary aim of which is to protect the marine environment.

The facts in the Renos were pretty simple. She was insured for $12m and had increased value insurance of $3m. Fire was an insured peril. After a fire in the engine room in August 2012 salvors were appointed under a LOF and they invoked the SCOPIC clause.  All very straightforward and usual. As we all know SCOPIC is a tariff-based system and costs can quickly run up.

The Owners and Insurers could not reach agreement on the extent and costs of the repairs. Again, not unusual where the vessel is badly damaged and there are multiple options.  Is the cheapest yard/ quote the best option given the risks of overruns and the expense of getting there? Eventually, after some months, the Owners elected to abandon the vessel on the basis that it was a CTL.

The Hull and Insured Value insurers defended the claim on three fronts:

1. They said that Owners had lost the right to abandon the vessel as they had not done so with “…reasonable diligence after the receipt of reliable information of the loss…” as required section 62(3) of the Marine Insurance Act 1906 (the 1906 Act).
2. They said that when assessing if a vessel was a CTL the costs of salvage incurred prior to the tendering of NOA should not be included under Section 60(2)(ii) of the 1906 Act as it referred to costs incurred in respect of “future salvage operations” and “any future general average event”. They cited Hall v Hayman [2] and The Medina Princess [1].
3. They said that SCOPIC expenses were not a “cost of repair” for the purpose of s. 60(2)(ii) of the 1906 Act and that such a claim was precluded by paragraph 15 of SCOPIC.

The Court of Appeal upheld Knowles J’s decision in the Commercial Court.

1. with regards to the question of whether the NOA had been tendered too late, the Court of Appeal found that the Judge at first instance had been correct in deciding that the test applicable to section 62(3) of the 1906 Act was one of fact. When taking into consideration the conflicting opinions on the extent and cost of the repairs required, if the owners did not have reliable information of the loss, it was a matter of fact that no more than reasonable time had been taken “to make inquiry”. As such, the Notice of Abandonment was given with reasonable diligence thereafter as per the requirements of sections 62(3) and 88 of the 1906 Act. That was a question dependent on the factual context and circumstances.
2. the Court of Appeal concurred with the Judge at first instance that costs incurred prior to the tendering of the NOA could be taken into account when determining whether the vessel was a CTL. The Court found that section 60(2)(ii) of the Marine Insurance Act 1906 did not refer to a tendering of an NOA and that the references to “future” in s.60(2)(ii) of the 1906 Act should be construed as a word of inclusion rather than exclusion, allowing for future costs to be included along with those already incurred. The Court found little authoritative weight in the cases cited by the Insurers and referred to successive editions of Arnould’s [3] which stated that pre-NOA expenses were recoverable. This was a view endorsed by Lord Donaldson in his address given as Chairman of the Association of Average Adjusters in 1982.
3. the Court of Appeal also agreed with the Commercial Court that SCOPIC expenses could be taken into account when assessing whether the vessel was a CTL. Hamblen LJ reasoned that the whole amount due to salvors had to be paid for the Owners to recover the vessel, so whether it was salvage or SCOPIC remuneration made no difference. The SCOPIC expenses were an ‘indivisible’ part of the salvage. The Court also found that the owners were not contractually barred from ranking the SCOPIC expenses pursuant to paragraph 15 of the SCOPIC clause.

It is important to note that the decision of the Courts to validate the tendering of the NOA was mainly down to a question of fact. Owners should continue to tender NOA as soon as is practicable in order to avoid losing their right to abandon the vessel. The decision to allow SCOPIC expenses may yet be subject to an appeal to the Supreme Court. In the absence of a successful appeal, it is highly likely that Insurers will be looking into additional clauses in policies to exclude such expenses and to push for amendments to the SCOPIC clause.

[1] Helmville Ltd v Yorkshire Insurance Co Ltd (The Medina Princess) (QBD (Comm Ct)) [1965] 1 Lloyd’s Rep 361;

[2] Hall v Hayman (CA) (1912) 17 Com Cas 81; [1912] 2 KB 5;

[3] Arnould’s Law of Marine Insurance and Average (18th Edition);

[4] Sveriges Angfartygs Assurans Forening (The Swedish Club) & Ors v Connect Shipping Inc & Anor, Re Renos [2018] EWCA Civ 230.