DMC Category Rating: Confirmed

Background
On 9 March 2000, a fire began in the engine room of the Kastor Too. 15 hours later she sank. The vessel was insured under a slip policy in the MAR 1991 form under which her agreed value was US$3 million. The insured perils included fire and perils of the sea, but it was common ground that perils of the sea did not include entry of sea water due to ordinary wear and tear in the absence of some accident or fortuity.

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
Under the Marine Insurance Act 1906, a marine loss may be either total or partial. Any loss other than a total loss is a partial loss and a total loss may be either an actual total loss or a constructive total loss. A constructive total loss is where the subject matter of the insurance is reasonably abandoned because an actual total loss appears unavoidable, or because it is not economic to try to save the subject matter from becoming an actual total loss. In particular, in the case of damage to a ship, there is a constructive total loss if the cost of repairing the damage would exceed the value of the ship when repaired (section 60(2)).

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 argued that, even if notice of abandonment could be dispensed with, the owners had not made any decision to treat the loss as a constructive total loss before the vessel sank, and now it was too late for them to do so as the choice could only validly be made while the subject matter insured was still in existence. The election to abandon and the giving of the notice were two separate stages in the process. Even in cases where the service of a notice was unnecessary under s.67(2), there still had to be the preceding decision. Because the fire had not been claimed as a constructive total loss before the sinking, the claim could only be for a partial loss, which was then superseded by the (uninsured) actual total loss when the ship sank.

Successive Losses
The judge had found as a question of fact that there were two independent losses, an insured loss (the fire) followed by an uninsured loss. Experts giving evidence at the trial agreed that, even if the vessel had not sunk, it was a constructive total loss as a result of the fire.

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.

Costs
Under the Civil Procedure Rules, the court has a wide jurisdiction when it comes to awarding costs and the old "winner takes all" principle no longer applies. The judge had taken an issue-by-issue approach and decided that the owners should be penalised for persevering with the actual total loss argument even though it was seriously flawed. Most of the costs incurred on both sides had been directed to this point.

Judgment
Decision to abandon
The Court of Appeal agreed with the judge in rejecting the insurers’ arguments on this point. There was nothing in the Act that required such an election to precede the notice of abandonment. The idea of the insured making an irrevocable choice to abandon was misleading. Under s.62, service of a valid notice does not, of itself, effect the abandonment since it only becomes irrevocable when accepted by the insurer (s.62(6)). Until then, the notice can be withdrawn. Even when it is accepted, the insurer's right to take over the insured's interest in the subject matter only arises when the insurer has paid out under the policy (s.79(1)).

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).

Had the insured treated the constructive total loss as a partial loss in some other way? Insurers argued that the fact that the claim was initially put forward as an actual total loss was inconsistent with his later, alternative claim for a constructive total loss. But the Court of Appeal could not accept this logic. The important point was that the owners had never treated the loss as a partial loss. Whether they claimed an actual total loss or a constructive total loss, both were total losses and demonstrated that they were willing to abandon the vessel to insurers.

Successive losses
After reviewing the authorities in detail, the Court of Appeal disagreed with the insurers’ arguments on this point. An unrepaired loss is completely different from a constructive total loss. Where a vessel is properly treated as a constructive total loss, there can be no question of her being repaired (at any rate by the insured).

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.

Costs
The Court of Appeal thought there was nothing wrong in principle with the judge's order, but that he had been too rigorous in his approach and had not taken account of other relevant factors - such as insurers' own conduct in denying any constructive total loss for such a long time and, even then, only making the minimum possible concession at the last moment in the hope that something might turn up which would justify an allegation of scuttling. Had they admitted the factual basis of the constructive total loss claim earlier, it could have been dealt with as a preliminary issue and the actual total loss claim would have fallen away. Taking all this into account, the Court of Appeal ordered that each party should bear its own costs.