Constructive Total Loss

From CEOpedia | Management online

"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).

Advantages of Constructive Total Loss

Constructive total loss is an insurance term that refers to a situation where an insured item has been damaged or destroyed beyond repair or is so expensive to repair that it is not worth the cost. There are several advantages to a constructive total loss, including:

  • The immediate end to the insurer’s liability for the lost item, which can provide peace of mind for the insured.
  • The insurer is not responsible for any additional costs associated with repair or replacement of the item, which can save the insured money.
  • The insured may be able to receive a full replacement cost for the item, which can help to make up for the inconvenience of being without the item.
  • If the item was damaged due to a peril that was covered under the policy, the insured may be able to receive compensation for the item’s full value.
  • The insured may be able to receive a tax deduction for the full replacement cost of the lost item.

Limitations of Constructive Total Loss

Constructive total losses are a viable option when dealing with losses in marine insurance, however there are a few limitations to be aware of. These include:

  • The manner in which the loss is calculated - the value of the subject matter insured is based on the market value at the time of the loss which may not accurately reflect the cost of replacement of the damaged goods.
  • The concept of approximate restoration or repair - the insurer must make a reasonable estimate of what it would cost to restore the subject matter insured or repair it to its pre-loss condition.
  • The principle of reasonable expenditure - the insured must be willing to spend a reasonable amount to restore or repair the subject matter insured in order for a constructive total loss to be declared.
  • The process of ascertaining the actual value of the subject matter insured - this needs to be accurately established before a constructive total loss can be declared.

Other approaches related to Constructive Total Loss

Constructive total loss is an insurance term that describes the situation when the subject matter insured is almost lost and is not worth the cost of repair, retrieval or restoration. There are several other approaches related to constructive total loss, including:

  • A proximate total loss, which is similar to constructive total loss, but occurs when the subject matter is destroyed by a peril, such as a fire, rather than being almost lost due to external forces.
  • A actual total loss, which occurs when the subject matter is completely destroyed and can no longer be used for its intended purpose.
  • An actual partial loss, which occurs when the subject matter is partially destroyed and can still be used for some of its intended purpose.

In summary, constructive total loss is a term used to describe a situation where the subject matter insured is almost lost and is not worth the cost of repair, retrieval or restoration. Other related terms include proximate total loss, actual total loss, and actual partial loss.


Constructive Total Loss — recommended articles
Declared value — Insurable value — Average clause — Period of indemnity — Disposition fee — Normal loss — Insured value — FOB destination — Unearned premium reserve

References

Author: Joanna Trąbka

Retrieved from "https://ceopedia.org/index.php?title=Constructive_Total_Loss&oldid=90676"