1. LOSS

In insurance, a loss is when something bad happens that causes harm or damage. The important rule here is causa proxima non remota spectatur, which means only the direct cause of the loss is considered for insurance, not distant causes. Loss can be either partial or total.

1.1. Partial Loss

• A partial loss happens when the insured item (the thing covered by insurance) is only partly lost or damaged.
• For example, In Francis v. Boulton (1895), a shipment of rice on a boat sinks but is later recovered and some of the rice can still be dried and sold, this would be a partial loss since not all the rice was a total loss.
• The insurance company will pay to cover the partial loss, but not for very small losses.

1.2. Total Loss

A total loss means the insured item is completely lost or destroyed. It can be an actual total loss or constructive total loss.

1.2.1. Actual Total Loss

1.2.1.1. Actual Total Loss of Ship:

• The ship is lost at sea and cannot be found after a reasonable amount of time. If later found, the insurance company will own the ship.
• The ship is completely destroyed, like if it sinks and breaks into pieces.
• The ship is captured by enemies during war

1.2.1.2. Actual Total Loss of Cargo: [lost, pirates, commercial value, transformed]

1. Cargo is missing: If a cargo is lost or cannot be found, it is considered an Actual Total Loss.
2. Cargo loses its commercial value: If a cargo is damaged to the point where it can no longer be sold or used for its intended purpose, it is considered an Actual Total Loss. For example, if a shipment of hides is damaged by seawater and becomes rotten, it loses its commercial value and is no longer saleable. In the case of Roux v. Salvador, a cargo was damaged by seawater and was sold at an intermediate port because it would have become entirely worthless if it had continued to its destination.
3. Cargo is seized by pirates: If a cargo is stolen by pirates, it is considered an Actual Total Loss because it is no longer in the possession of the owner and cannot be recovered.
4. Cargo is transformed into something else: If a cargo is transformed into something entirely different and becomes worthless, it is considered an Actual Total Loss. For example, if a shipment of cement is damaged and turns into stone, it is no longer usable as cement and has lost its commercial value.

1.2.1.3. Actual Total Loss of Freight: [lost, abandoned, frustrated]

1. Ship and cargo are lost: When both the ship and cargoes are lost, so the freight (money paid to transport cargo) can no longer be earned.
2. Voyage is abandoned: When the voyage is abandoned because the ship is severely damaged, or the cargoes cannot be salvaged even by transferring to another ship.
3. Voyage is frustrated: When the voyage is cancelled, like if a ship is chartered (rented) from a certain port on a certain date, but something happens to prevent the ship from reaching the port on time, so the charter agreement is cancelled. This causes an actual total loss of freight.

1.2.2. Constructive Total Loss

• Even if the insured item is not completely destroyed, it can be considered a constructive total loss if the cost to repair it would be more than the item is worth. In this case, the insurance company will treat it as a total loss and pay the full claim amount.

1.2.2.1. Constructive Total Loss of a Ship [repair cost, unnavigable]

This occurs when:

1. Repair cost is higher than the ship’s value: If the cost of repairing a damaged ship is more than its actual value, it’s considered a Constructive Total Loss. For example, if a ship is worth £17,500 and the repair cost is £10,500, but its value after repair would be only £9,000, it’s a Constructive Total Loss.
2. Ship is un-navigable and cannot be repaired: If a ship is damaged to the point where it cannot be repaired and is no longer seaworthy, it’s considered a Constructive Total Loss.

1.2.2.2. Constructive Total Loss of Cargo [repair cost, loss of control]

This occurs when:

1. Cost of Repair > Value of Cargo: Similar to ships, if the cargo is damaged and the cost to repair, unload, store, and resend it is more than its value, it’s a constructive total loss. This was the situation in Farnworth v. Hyde.
2. Loss of Control and Possession: If the owner loses control and possession of the cargo, like in the case of Rickards v. Forestal Land Timber Co. (1942), where ships were under German control during World War II, and the cargo was lost, it’s considered a constructive total loss.

1.2.2.3. Constructive Total Loss of Freight [sink, salvage]

The same principles apply to the money expected to be earned from transporting goods (freight).

1. Ship Wrecks or Cannot Complete Journey: If a ship is damaged and cannot reach its destination, the owner cannot earn the freight money. This is because the goods were not delivered under the original terms agreed upon.
2. Salvage Instead of Delivery: Sometimes, when a ship is in trouble, another party may help save the goods from the ship. This is called salvage. If the goods reach the destination because of a salvage effort, not by the ship that was originally supposed to deliver them, the original shipowner cannot claim the freight money.
   • For example, in the case of Guthrie v. North China Insurance Co., a ship was going from Chittagong to Dundee but wrecked 50 miles away from Dundee. The insurer managed to save the cargo and brought it to Dundee, but not under the original shipping contract. Instead, it was under a new agreement called a salvage contract. Because of this, the shipowner could not earn the freight money, and it was considered a constructive total loss of freight.

2. Notice of Abandonment

In the case of Constructive Total Loss, the insured must give the insurer a Notice of Abandonment within a reasonable time. This notice declares that the insured is giving up their interest in the property and transferring it to the insurer. If the insured fails to give this notice within a reasonable time, they will only be entitled to indemnity for a partial loss, not for a Constructive Total Loss.