Kastor Navigation v. AXA Global Risks, CofA
This case raised the interesting problem of a constructive total loss followed within hours by a separate (and uninsured) actual total loss. The insured had no opportunity to serve a notice of abandonment before the ship sank, but did this mean the loss should be treated as partial loss, which was then swallowed up by the second loss? After a detailed review of the law in this area, the Court of Appeal agreed with the judge that the two losses were distinct and that the insured could recover for the constructive total loss. The judgment, however, stands as a reminder that the "winner takes all" principle not longer applies to the award of costs.
DMC Category Rating: Confirmed
This case note is based on an Article in the June 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers,DLA. DLA is an International Contributor to this website.
The owners claimed that the fire led to explosions which caused the sinking. At first they put their claim as an actual total loss, but they later amended their pleading to add a claim for a constructive total loss. Insurers, however, asserted that the vessel had been lost because of entry of seawater from unexplained causes and put the owners to proof that the sinking had been caused by the fire. On the eve of trial, insurers did admit an accidental fire had occurred, but continued to argue that the fire and the entry of seawater were independent events and that only the seawater caused the vessel's loss.
At trial, the judge held that the owners' constructive total loss claim succeeded but their actual total loss claim failed. He agreed with insurers that the ship had sunk because of an independent entry of water from some unexplained cause that had not been shown to be fortuitous. However, he found that, by that time, the fire had already rendered it a constructive total loss. He accordingly awarded the owners £3.49 million including interest". On costs, however, he took the view that the owners' unsuccessful claim for an actual total loss had taken up most of the time and caused most of the expense of the trial. He therefore made a costs order that effectively meant the owners had to pay insurers 70% of their costs.
Insurers appealed from the constructive total loss finding and the owners cross-appealed on the costs order.
Requirements of a constructive total loss
In cases of constructive total loss, the insured may either treat the loss as a partial loss, or abandon the subject matter to the insurer and treat the loss as if it were an actual total loss (s. 61). Normally, the insured must give notice to the insurer indicating his intention to abandon and, if he fails to give such notice, the loss can only be treated as a partial loss. If the insurer accepts the notice, it admits liability for the loss and can take advantage of whatever remains of the subject matter.
The notice of abandonment is, however, unnecessary where, at the time the insured receives information of the loss "there would be no possibility of benefit to the insurer if notice were given to him" (s.62(7)).
Under s.77 of the Act, the insurer is liable for successive losses unless the policy provides otherwise, but where, under the same policy, a partial loss that has not been repaired or otherwise made good, is followed by a total loss, the insured can only recover in respect of the total loss.
Decision to abandon
Insurers, however, relied on s.77 of the Act to argue that a constructive total loss overtaken by an actual total loss during the period of insurance is like any other unrepaired damage and will be swallowed up by the subsequent total loss. Where, as here, that subsequent actual total loss is not covered by the insurance, it wipes out any previous claim the insured might have had.
The emphasis in the Act is on the insured's conduct - on how he treats the loss - rather than on his decision. If he treats it as a partial loss (for instance by continuing to treat the subject matter as his own) he cannot then start claiming a constructive total loss. If, however, he shows he is treating the thing as if it were an actual total loss, he has exercised his choice to abandon.
In this case, the Court of Appeal accepted the judge’s finding
that the fire had caused a constructive total loss. Because that loss was so
quickly followed by an actual total loss, there was no time to serve a notice of
abandonment and, in the circumstances, the requirement for a notice could be
dispensed with under s.67(7).
The insured's cause of action under the policy arises at the time of the casualty. Where there are successive total losses and the first falls outside the cover, the insured will not be able to recover for the second. But if the first total loss falls within the cover, the insured's right to claim arises at that point and is not extinguished by the second.
The same approach applies in cases where the first loss is a constructive total loss but the requirement for a notice of abandonment is excused (unless there is some special reason why the constructive total loss must be treated as a partial loss). In this case, if (as had been found) the insured was entitled to claim for a constructive total loss as a result of the fire, the subsequent, uninsured actual total loss was irrelevant.
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