What constitutes constructive total loss?

Under section 60 of the Marine Insurance Act 1906, an assured shipowner can claim for a constructive total loss (CTL) if the costs of repairing the damage (inclusive of salvage charges and other expenses) would be more than the value of the ship when repaired.

In the case of Swedish Club v Connect Shipping Inc (the “Renos”) the hull insurers challenged a claim for a CTL on the grounds that the shipowners’ calculation of repair costs included two categories of expense which shouldn’t be taken into account. The High Court and Court of Appeal rejected Swedish Club’s challenge, but their appeal to the Supreme Court was partly successful.

Calculating the costs at the right time

The insurers first argued that the position should be assessed at the time when the shipowner gives notice of abandonment, and the calculation of costs must exclude those incurred before then. In this case the owners had incurred salvage costs and further expenses at a port of refuge before giving notice of abandonment. If those costs weren’t included in the calculation, the repair costs would be less than the vessel's insured value and there would be no CTL. 

The court analysed basic principles of insurance law when making its decision. In particular, the court noted the general rule that a loss under a hull and machinery policy occurs at the time of the casualty, not when the measure of indemnity is established. It followed that damage leading to a CTL was in principle the entire damage arising from the casualty from the moment that it happened, and it made no difference when the costs were incurred. On this point, the Supreme Court agreed with the lower courts that the salvage costs and other expenses incurred from the time of the casualty should be taken into account in determining whether the vessel was a CTL.

SCOPIC charges

The second issue the insurers raised was whether the relevant costs also included SCOPIC charges, the special compensation paid to salvors (under the addendum to the Lloyd's Open Form salvage contract) to prevent/minimise damage to the environment following a maritime casualty. The shipowners argued that these charges should be considered as repair costs, because they were part of the salvors’ remuneration which had to be paid in order to repair the ship, and this was accepted by the lower courts. However, the Supreme Court noted that SCOPIC charges are expressly excluded from general average and are generally paid (as they were in this case) by the vessel’s P&I insurers. 

The court considered that the objective of SCOPIC charges wasn’t to enable the vessel to be repaired, but to protect the shipowner against liability for environmental pollution. That was not related to the subject-matter insured by the hull and machinery policy, and was not part of the measure of the damage to the ship. On this point, therefore, the insurers’ appeal succeeded.