Difference between Warranty & Condition in Marine Insurance

Actual total loss in marine insurance or ATL happens when the insured cargo or assets are so severely damaged that they cannot be recovered or repaired. In such a case, the insured (ship/cargo owner) can claim the total settlement amount of the insurance.

Therefore, it becomes the liability of the insurer (insurance company) to pay the total claim amount and undertake the cargo or its remains; or if the insured cargo or assets are found in the future, then the insurer can claim it.

However, there are certain circumstances or reasons under which an actual total loss is compensated. If the insurer finds that those circumstances are not met, then it can refuse to pay for the claim. These reasons are discussed in the next section.

To consider a loss an actual total loss, there are specific reasons or circumstances to be involved; these include.

The insured cargo or goods get destroyed because of fire, explosion, or natural calamities like tsunamis, hurricanes, cyclones, or earthquakes. For example, a cargo ship carrying a shipment wrecks and sinks entirely in the ocean because of a cyclone.

When the cargo is so extensively damaged, it is impossible to recover it economically.

When the cargo carrying shipment goes missing or robbed. For example, if the thieves rob all the valuable things from the vessel or the cargo is hijacked by pirates and goes missing without any news to the concerned authorities.

There is a stepwise procedure that is followed for the claim settlement of actual total loss in marine insurance.

• If your cargo incurs actual total damage, the first thing you need to do is to file a claim with your insurer.

• After that, the insurer will investigate the claim made by the policyholder.

• Once the investigation is done and the insurer is satisfied that the loss is indeed an actual total loss, then they will pay the full value of the cargo or goods as stated in the marine cargo insurance to the policyholder.

However, it should be noted that to get the total settlement amount, you need to submit the ownership proof of cargo to the insurer and inform the value of cargo or goods to calculate the claim.

Constructive total loss in marine insurance is considered when the damage to the cargo is so significant that its amount of repair exceeds the amount of the insured cargo’s value.

In such cases, the insurer can consider the damage as a total loss and offer the settlement amount equal to the value of the cargo, less other charges like depreciation. The insured (cargo or ship owner) also has the option of retaining the damaged cargo with a reduced settlement amount or leaving the possession of the cargo to the insurer.

To get the settlement amount for the constructive total loss in insurance, it should meet specific reasons or circumstances leading to the damage; these include:

• The insured cargo or goods are damaged beyond repair because of natural disasters like earthquakes, hurricanes, cyclones, etc.

• The damage done to the insured cargo happened because of a man-made disaster. For example, a cargo-carrying shipment collided with another vessel because of a captain’s mistake.

• The cargo carrying shipments grounded or stranded cannot be floated again, or its cost is beyond expensive.

• The insured cargo gets stolen or hijacked by thieves or pirates and cannot be recovered.

The process for claim settlement in case of constructive total loss is relatively more complex than in the actual total loss.

• First of all, the insured (cargo or ship owner) needs to file the claim with the insurance company.

• Then, they need to surrender the title of the insured cargo to the insurer, and the insurer will take its possession for salvage after selling it.

• Lastly, the proceeds incurred from the sales are used to compensate the amount out of the insured.

However, in some cases, the insured can decide to salvage the damaged property themselves. In that case, the estimated salvage amount will be deducted by the insurer from the claim amount paid to the insured.

This whole process can seem complex and lengthy to understand. Thus, it is advised to sit with your insurer and understand it sincerely, along with other cargo insurance policy terms and conditions.

Now that you know what actual total and constructive total losses in marine cargo insurance are, you might understand their importance in the contract. These losses are termed when the damage to cargo or goods is beyond repair. However, there are some differences between the two.

In case of an actual total loss, the damage that occurred to the insured cargo is beyond repair, leaving it unseaworthy or sunken. Thus, the insured (cargo or ship owner) can claim for full claim settlement, and the insurer is liable to pay it, and the ownership of wreckage or left cargo remains with the insurer.

However, in case of a constructive total loss, the amount of damage repair exceeds the insurance amount. Thus, the insurer pays the insured value to the policyholder, who can retain the ownership of remaining cargo.

The difference between the two losses is that in case of constructive loss, the insured retains the ownership; however, in actual total loss, the ownership goes to the insurer.

Profit and losses are part of any kind of business. However, just like making efforts to make a business profitable is in the business person's hands, so is controlling the losses incurred.

When it comes to maritime businesses, it becomes much more crucial for the business to control damages that can occur to cargo because of natural or human-made disasters.

That is why marine cargo insurance was introduced in this business field, which covers both actual total and constructive total losses that might happen.

Tata AIG offers cargo insurance policy with customisable features and affordable premium rates.

What is the general average loss in marine insurance?

It is the loss incurred from the intentional act of sacrificing a part of a ship or margo to save most of the ship or cargo.

What is physical damage in marine insurance?

Physical damage in marine insurance covers the accidental loss or damage that occurred to the cargo/ship and its machinery.