Total and partial loss Marine Insurance Act 1906 - Essay Example

?Total and Partial Loss Marine Insurance Act 1906 s 57 Introduction Britain is the mistress of the seas, and its history is inextricably linked with the mastery of seamanship. The empire and its commerce were built upon transoceanic mercantilism, for which reason the UK has developed a relatively1 stable marine insurance law. Being well aware of the perils of the sea and the risks it poses to oceangoing vessels bearing valuable cargo, the development of marine insurance against losses due to oceanic misadventures is a natural development for a country like the UK. This paper shall treat specifically on the nature and types of losses that may be covered by marine insurance under the Marine Insurance Act 1906, and apply the provisions and jurisprudence concerning actual and constructive total loss to the case of Masefield AG (Insured) v Amlin Corporate Member Ltd (Insurer). The intention is to draw insight about the type of losses which marine insurance may or may not cover in the case of losses due to piracy. Marine Insurance Act 1906 s 56 The Marine Insurance Act 1906 is a codification of the law of marine insurance as it existed at the turn of the century.2 It defines a contract of insurance as ‘a contract whereby the insurer undertakes to indemnify the assured in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.’3 As such, it provides a viable framework by which to interpret the contract clauses that followed the UNCTAD report into the legal and documentary aspects of the marine insurance contract.4 The coverage of the Act is not solely for losses in the course of marine adventures in the open sea, but may be extended by the express terms of the contract to losses on inland waters, or land risks incidental to a sea voyage.5 Section 56 of the Act describes the partial and total loss which may be made the basis for claims against the insurance contract. There are five subsections in sec 56, as follows: ‘Section 56 – Partial and total loss (1)A loss may be either total or partial. Any loss other than a total loss, as hereinafter defined, is a partial loss. (2)A total loss may be either an actual total loss, or a constructive total loss. (3)Unless a different intention appears from the terms of the policy, an insurance against total loss includes a constructive, as well as an actual, total loss. (4)Where the assured brings an action for a total loss and the evidence proves only a partial loss, he may, unless the policy otherwise provides, recover for a partial loss. (5)Where goods reach their destination in specie, but by reason of obliteration of marks, or otherwise, they are incapable of identification, the loss, if any, is partial, and not total.’ 6 Actual total loss. From this enumeration, the kinds of losses which may be claimed against insurance are actual total loss, constructive total loss, and partial loss. Actual total loss is described in section 57, constructive total loss in section 60, and partial loss which is covered under sections 64 to 66, all under the Marine Insurance Act 1906. The Marine Insurance Act 1906, similar to common law, recognises only two principal kinds of loss – total loss and partial loss, pursuant to section 56 (1) and (2) of the Act. Actual total loss is defined in section 57 (1) as follows: ‘Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss.’7 This pertains to any subject matter insured, such as ship, cargo or freight. The first and last parts of section 57 originated from the observation by Lord Abinger made in Roux v Salvador,8 which constituted the basis of marine insurance was articulated in this manner: ‘The underwriter engages, that the object of the assurance shall arrive in safety at its destined termination. If, in the progress of the voyage, it becomes totally destroyed or annihilated, or if it be placed, by reason of the peril against which he insures, in such a position that it is wholly out of the power of the assured or of the underwriter to procure its arrival, he is bound by the very letter of his contract to pay the sum insured.’ Lord Abinger’s comment mentioned the instance when the thing insured is ‘totally destroyed or annihilated,’ which refers to total actual loss of the thing. The description of a ship totally destroyed was first encountered in Bell v Nixon,9 where the lost vessel, a wooden ship in this case, was described as: ‘her planks and apparels had to be scattered in the sea.’ Another instance is described by Chief Justice Abbott in Cambridge v Anderton,10 where he said: ‘If the subject matter of insurance remained a ship, it was not a total loss, but if it were reduced to a mere congeries of planks, the vessel was a mere wreck.’ Still a third description of a total wreck was made by Lord Watson in Sailing Ship Blairmore Co Ltd. v Macredie,11 where, to back up his contention that The Blairmore was not a total loss, Lord Watson stated that the ship - ‘…did not become, in the strict sense of the term, a total wreck, seeing that she was not reduced to the condition of a mere congeries of wooden planks or of pieces of iron which could not without reconstruction be restored to the form of a ship, and that she had sunk in a depth of water which admitted of her being raised to the surface and repaired.’ Likewise, the total loss of goods, whether actual or constructive, caused by an insured peril will result in a total loss of freight. Determination of loss is important because the payment of freight is a concurrent condition with the delivery of goods.12 This means that freight may only be paid upon delivery of goods at the point of discharge. If failure of delivery is a peril insured against, the assured would be able to claim for a total loss of freight. Mr. Justice Brett observed in Rankin v Potter13 that where the contract of insurance is under a general policy, the actual total loss of freight is conditioned upon the total loss of the whole cargo. By qualifying that the contract be under a general policy, this signifies that it is possible that the ship may be carrying other cargo on the voyage insured and thereby may earn some freight from this cargo. In that case, the assured cannot claim for a total loss of freight under the principle of indemnity, because he has earned some freight from the carriage of other cargo.14 Constructive total loss. Constructive total loss, on the other hand, is specific to marine insurance. Jurisprudence has established that ‘constructive total lost’ as applied to a ship has no meaning has no significant except in relation to marine insurance.15 This type of loss is defined in section 60, which describes constructive total loss in the general and the specific sense. Subsection 60 (1) defines in broad terms the meaning of constructive total loss: ‘Subject to any express provision in the policy, there is a constructive total loss where the subject matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.’16 In 60(1) the constructive total loss is conditioned upon the insured thing being ‘reasonably abandoned’. In 60(2), however, there is no reasonable abandonment, but that: (i) the assured is deprived of the possession of the thing; (ii) that the ship is damaged by a peril insured against and the cost of repair exceeds its value; and (iii) that the goods damaged can only be repaired and forwarded at a cost exceeding their value on arrival. IN the case of constructive total loss, the assured may choose either to: (a) treat it as a partial loss, or (b) abandon the thing to the insurer and treat the loss as an actual total loss.17 What is common to all three subsections under constructive total loss is that the thing is not completely lost in the manner contemplated in actual total loss section 60(1). It would have been possible to recover the thing insured (i.e., ship, or goods) except that the cost of retrieval and repair exceeds the total cost of the ship or the goods upon delivery. There is thus a choice the assured is to make, whether to treat the loss as partial, or to declare abandonment and treat it as total actual loss without further interest in its recovery. While 60(1) and 60(2) might appear contradictory, the House of Lords have declared in repeated cases that the two are in harmony and give two different definitions applicable in two different situations.18 In Asfar & Co. v Blundell,19 a vessel was sunk during the course of a voyage and was subsequently raised. On board the vessel were dates which were shipped under bills of lading making the freight payable on right delivery. Upon arrival at the port of discharge, it was discovered that the dates, while attaining the appearance of dates, were degraded with sewage and were in an advanced state of fermentation to be no longer marketable as dates. The complainant paid the chartered freight and then claimed from the insurer for the loss of profits resulting from the non-delivery of the dates. The court held in this case that the plaintiff was entitled to recover, but only up to the difference between the chartered freight and the total amount of the bill of lading freight which would have been received by the assured. The test applicable in this case was articulated by Lord Esher M.R.: ‘If [the original article of commerce] is so changed in its nature by the perils of the sea as to become an unmerchantable thing, which no buyer would buy and no honest seller would sell, then there is a total loss.’ In Robertson v Petros20 Lord Wright clarified the need for notice of abandonment in constructive loss: ‘Notice of abandonment is not an essential ingredient of a constructive total loss. The appellant’s argument confuses…constructive total loss with the right to claim for a constructive total loss…The distinction is explicitly stated in s. 61 of the Marine Insurance Act, which is as follows: “Where there is a constructive total loss, the 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 were an actual total loss.” The section makes it clear that the right to abandon only arises when there is a constructive total loss in fact. That is the necessary precondition to a right to abandon. The frame of the section makes it impossible to treat the right to abandon as identical with the constructive total loss. It is a superimposed right of election where there is a constructive total loss. Nor is it even a necessary ingredient of a constructive total loss, because though there is a constructive total loss, the assured may still treat it as a partial loss [for which abandonment is not necessary].’ Partial loss. Sec 56(1) also states that a loss may be either total or partial, and that any loss not deemed a total loss is classified a partial loss. Partial loss is therefore a catchall for losses not total, whether actual or constructive. In Sec 64, it is stated that a particular average loss is a type of partial loss which is not a general average loss. For a vessel the general rule for the measure of the loss is the reasonable cost of repairing the damage up to the sum insured.21 Masefield AG v Amlin Corporate Member Ltd Case summary. The case at bar involves the hijacking and seizure of a vessel by Somali pirates, and their subsequent demand for ransom payment of which caused the release of the vessel. By virtue thereof, a claim of actual total loss, and alternatively a claim of constructive total loss was filed based on sections 56, 57(1) and 60 of the Marine Insurance Act 1906.22 The salient facts are as follows: Masefield, the insured, was the owner of a cargo of biofuel insured by Amlin under an open cover policy providing that an insured is entitled to recover for loss of cargo form any physical cause other than those specifically excluded. The inclusion of piracy as an insured peril was not disputed. During the voyage the vessel was seized by Somali pirates wherein one crew member died. Within days, the ship owner arrived at a ransom agreement with the pirates for the safe return of the vessel, the crew and the cargo, although the cargo owners did not participate actively in negotiation with the pirates, which is not unusual. One month after, Masefield served notice of abandonment on Amlin with respect to the cargo, which Amlin rejected. It was mutually understood that legal proceedings had then commenced. Ten days after, the ransom was paid and the vessel, crew and cargo were released, after having been detained a total of six weeks. Masefield retrieved its cargo, but as a result of the delay had missed its market and suffered a decrease in market value. Despite recovery, Masefield continued to pursue legal proceedings. Masefield claimed that at the time it filed for notice of abandonment, it was irretrievably deprived of its cargo making it an actual total loss under sec 57(1). It also relied on Dean v Hornby23 where it is ruled that an automatic total loss takes place at the moment insured goods are captured by pirates with the intention of exercising dominion over them, despite the fact of the subsequent recovery of the goods.24 The notice of abandonment, however, pertained to the alternative claim of constructive total loss, pursuant to sec 60(1), inasmuch as the notice of abandonment was a condition precedent to filing for claims under constructive total loss. Masefield made no claim for partial loss. In the first instance judgment, the court held that the Somali pirates captured the vessels, but had every intention of releasing it, the crew and cargo after ransom has been paid, so there was a good chance of recovery. This was confirmed when the vessel was released 10 days after notice of abandonment. The presiding Steel J and concluded that to establish irretrievable deprivation of the goods for actual total loss to hold, the insured must prove that recovery was impossible, and rejected the suggestion that Dean v Hornby established that seizure by pirates automatically constituted actual total loss. Therefore, actual total loss was untenable. On the issue of the constructive total loss for which abandonment was filed, it was observed that the test for a constructive total loss on the occasion of seizure was whether or not the cargo was likely to be recovered within reasonable time. According to practice, 12 months from date of seizure was considered reasonable, although this is not a hard and fast rule but depends on the facts. In rebuttal of the observation that the goods were likely to be retrieved upon payment of ransom, Masefield countered that the payment of a bribe should not be relevant in discerning whether retrieval may be anticipated, for the reasons that: (1) payment of bribes is contrary to public policy; and (2) the insured could not be considered under duty to pay the ransom. The court was not convinced, and both alternative claims for actual and for constructive total loss were dismissed. The Court of Appeal confined its consideration to the claim for actual total loss and discarded the argument for constructive total loss. In effect, the CA affirmed the first instance ruling that Dean v Hornby was based on other considerations than the mere fact of the piracy and that it did not establish an automatic ruling in favour of actual total loss. Likewise then did actual total loss not attach in the Masefield case. As to the contention that anticipation of the payment of ransom was contrary to public policy, the appellate Court concurred with the judge at first instance that payment of ransom was not illegal nor against public policy, and that payment of ransom was not analogous to payment of bribe. In the earned, the judgment at first instance was affirmed on appeal. Discussion and Conclusion The decision of the lower and appellate courts are reasonable and agreeable. There appear to be three issues to this case: (1) whether there was an actual total loss at the time of seizure; (2) whether there is moral ground to reject the consideration of ransom in determining retrieval, since the payment of ransom is under duress and contrary to public policy; and (3) whether the loss of market value due to delay is recoverable as insured loss. That there was actual total loss when the goods were seized by pirates is highly untenable, since from the beginning there at no time was any instance that the ship owners were not going to abandon the ship, its crew, and all its cargo to the pirates. The courts noted that the amount of ransom was relatively small compared to the value of the ship and of course the lives of its crew, therefore there was every intention on the ship owner’s part to have the vessel and all its contents recovered. While it is true that the claim was filed prior to payment of the ransom and recovery, and it may be argued that at the time the case commenced the insured was uncertain whether recovery was imminent and may have considered retrieval unlikely, it is a far cry to say that it was an impossibility. Furthermore, the claim of actual total loss at the time of negotiation seems premature, particularly since the crew would have to be considered also lost to the ship owners if Masefield considered its cargo lost, not due to destruction or deterioration, but because the vessel has no chance of being recovered. While arguably constructive total loss might provide some leeway in consideration, or maybe even partial loss, the final determination of the court was solely on actual total loss, which the claimant did not appear to contest. Neither did Masefield even consider filing in the alternative for partial loss, since losses were arguably incurred due to the detention of the cargo, although it was not actual total loss nor constructive total loss, as the court observed. It was entirely understandable on the part of Amlin to have rejected the notice of abandonment of Masefield, because as proven by later events, Masefield did secure recovery of the cargo, making the case for abandonment moot. Concerning the question of whether or not the payment of ransom subsequent to an act of piracy is contrary to public policy and morals, this is on its face a reasonable argument. After all, piracy is an illegal as well as immoral act, and payment of ransom is likewise contrary to morals and arguably contrary to law because it condones the act of piracy. In other jurisdictions like the United States, there is a hardline stance against condonation of piracy, and an Executive Order was even promulgated ‘forbidding US persons or entities from being involved in the payment of ransoms to Somali pirates under certain circumstances.’25 Indeed, the escalation of terrorism and its likely links to piracy makes payment of ransom to pirates more compelling than a moral issue. As Lewins and Merkin point out,26 the case would have taken a very different turn if the ship owners were American and therefore forbidden by law to pay ransom to the pirates, then the insured might have participated in the negotiation or considered the cargo abandoned. Under English law, however, there is no law preventing such transaction. As the appellate Court observed: “In these morally muddied waters, there is no universally recognised principle of morality, no clearly identified public policy, no substantially incontestable public interest, which could lead the courts, as matters stand at present, to state that the payment of ransom should be regarded as a matter which stands beyond the pale, without any legitimate recognition. There are only elements of conflicting public interests, which push and pull in different directions …”27 (Emphasis supplied.) That very grey area allows for the possibility of reasonable expectation due to the payment of ransom, because as observed by the court, if there is a public policy interest against paying the ransom, there is also public policy interest against abandoning the lives of the crew to the pirates in exchange for what the decision considered a relatively small sum within the capability of the ship owner to pay. In that case, it is incumbent that the ransom will be paid, as it was, and the cargo recovered intact by Masefield. This leads the discussion to the losses incurred by Masefield. While the goods were recovered intact and undiminished or undeteriorated, there was a loss suffered in the market value, because apparently the strong demand for biofuels had abated and the market price had receded by the time the goods reached the market. This may be considered loss of profit, which is arguably not an insured risk. This is not even material, however, since there is an explicit clause in the policy which states: 4 In no case shall this insurance cover … 4.5 loss damage or expense proximately caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above) … Therefore, the loss due to the delay could not be construed to be among the insurable losses, not only because of the clause which appears explicit, but more so because the nature of the loss is that of market value. Sec 55(2) of the Marine Insurance Act requires that damage which may be claimed against the insurance to be established by comparing the landed value of the goods as described at their origin with the actual value of the goods in the condition they were at when they reached their destination.28 Looking at the bigger issues, it is evident that Masefield may claim against its insurance on losses that it may have sustained as a result of the piracy. The loss cannot be actual or constructive total loss, because the goods were eventually recovered. Nor can it be based on damages sustained, because the good arrived in good condition, or at least the same condition it had been at the point of origin. The only loss sustained by the insured was loss of market value due to delay, which is precluded by the delay clause include in the policy, and which anyway is speculative. In truth, market value is a fluctuating measure, and Masefield may recover the same value or even higher if it should wait for a likely rise in prices before bringing the goods to market. That aside, there is no legal basis for Masefield to recover insurance on losses it did not incur, because such would amount not to restitution, but to profit. Bibliography Articles Derrington, Sarah. Marine Insurance Act 1906 – An Introduction. FindLaw Australia. (2013) Available at: http://www.findlaw.com.au/articles/780/marine-insurance-act-1906--introduction.aspx [Accessed 16 April 2013] Hodges, Susan, Law of Marin Insurance, London: Cavendish Publishing Ltd., (1996) Kalis, Peter J., Thomas M. Reiter, & James R. Segerdahl, Policyholder’s Guide to the Law of Insurance Coverage, Vol. 1. Wolters Kluwer, 2013 Supplement Lewins, Kate & Robert Merkin, ‘Masefield AG v Amlin Corporate Member Ltd; The Bunga Melati Dua.: Piracy, Ransom, and Marine Insurance.’ Melbourne University Law Review, Vol. 35, pp.717-734, 2010 Marine Insurance, CMI Review Initiative. CMI Yearbook 2000, pp. 34-121. Available at: http://web.uct.ac.za/depts/shiplaw/fulltext/singpore.pdf [Accessed 18 April 2013]. O'May, "The New Marine Policy & Institute Clauses" (1985) Lloyd's Maritime & Commercial Law Quarterly 191. ‘US Threat to Hostages’ (2010) 24(4) Maritime Risk International; Legal provisions ‘Executive Order Concerning Somalia’ (Barack Obama, Executive Order, 13 April 2010) Marine Insurance Act 1906, s.1 Marine Insurance Act 1906, s.2(1) Marine Insurance Act 1906, s.56 Marine Insurance Act 1906, s.57 Marine Insurance Act 1906, secs. 60-66 Marine Insurance Act 1906, s. 69(1) Legal Cases Asfar & Co. v Blundell (1896) 1 Q.B. 123 Bell v Nixon (1816) Holt NP 423 Cambridge v Anderton (1824) 2 B&C 691. Court Line Ltd v R, The Lavington Court (1945) 2 AII ER 357 Dean v Hornby (1854) 3 El & Bl 180; 118 ER 1108. Irvine v Hine (1949) 1 KB 555 Manchester Ship Canal Co. v Horlock (1914) 2 Ch 199 at p 208. Masefield EWHC [2010] 2 All ER 593, 597 [11] (Steel J). Rankin v Potter (1873) LR 6 HL 83 at 99, HL. Rickard v Forestal Land, Timber and Railway Co Ltd (1941) 3 All ER 62 Robertson v Petros M Nomikos Ltd (1939) AC 371 Robertson v Petros M. Nomikos Ltd [1939] A.C. 371 Roux v Salvador, (1836) 3 Bing NC 266 Sailing Ship Blairmore Co Ltd. v Macredie (1898) AC 593 Read More