Constructive Total Loss

Constructive Total Loss
See also

"A constructive total loss is one where the subject matter insured is almost lost to the point where it is commercially not worth spending any amount on reparation, retrieval or otherwise restoration thereof" (Kofopoulos K. 2013, p.2).

Law regulation

Constructive total loss is specified by marine insurance law. The most important is the Marine Insurance Act 1906 (Kofopoulos K. 2013, p.2). It contains the basic rules of the marine insurance law. Countries: New Zealand, Australia, Malaysia, India, Hong Kong, Canada, and Singapore have marine insurance legislation based on the Marine Insurance Act 1906 (Soyer B. 2010, p.181).

Example of constructive total loss

The constructive total losses usually take place in head-on collision, fire or different accidents. For example, Mr. Kowalski bought a ship. He paid 20 000 $. Afterward, he had an accident and his ship was totally destroyed. To make this ship fully functional he must pay 25 000 $. It is not worth repairing. The better option is to leave the destroyed ship and buy the new one.

A real live examples of constructive total losses are:

  • Accident of Costa Concordia
  • Accident of Titanic
  • California boat fire (sinking of Conception)

The difference between actual total loss and constructive total loss

Marine Insurance Act 1906 defined actual total loss as "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" (Marine Insurance Act 1906, S.57(1)). The constructive total loss in this act is described as "the subject-matter insured that 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" (Marine Insurance Act 1906, S.60(1)).

The differences between the actual total loss and constructive total loss are related to the estimation and objectivity (Kofopoulos K. 2013, p.2). The actual total loss is more materialized than a constructive total loss. In case of constructive total loss, the vessel may not be completely destroyed but the owners recognize it to be a total loss (Barry H. 1923, p.348).

References

Author: Joanna Trąbka