When Is a Ship a Constructive Total Loss? Court of Appeal Guidance

When should a damaged vessel be considered a constructive total loss (CTL)? And how should ship owners go about giving notice of abandonment (NOA)? In a ruling of particular interest to marine insurers, the Court of Appeal considered both those issues in the context of a disastrous engine room fire.

The vessel was en route to the Philippines, laden with rock phosphate, when she had to be salvaged after the fire broke out. Over the following six months, various expert reports were prepared in respect of the cost of repairs. Quotes from shipyards ranged between less than $3 million and around $9 million.

The owners of the vessel eventually took the view that she was a CTL and gave her insurers NOA. The insurers rejected the notice on the basis that she was only a partial loss, and argued that the owners were only entitled to £1,422,687, that sum reflecting the diminution in the vessel’s value arising from the fire. The owners’ arguments were, however, preferred by the High Court.

In dismissing the insurers’ appeal, the Court of Appeal found that, in accordance with Section 62(3) of the Marine Insurance Act 1906, the NOA had been given with reasonable diligence. Faced with widely differing quotes in respect of repair costs, the owner had been entitled to a reasonable time to make inquiries.

The nature of the damage meant that obtaining reliable information as to whether the vessel was a CTL was bound to be a complex task that took time. When the owners received conflicting information, they reasonably attempted to resolve contradictions. The salvage and other costs incurred by the owners prior to the NOA were also recoverable from the insurers.