Types of Marine Losses

1. Total Losses

The first among the various types of marine losses is Total Losses. A total loss occurs when the insured property/cargo has lost 100% or near 100% of its value. If not, it is when the insured is irretrievably deprived of them. You can further divide a total loss into two subcategories: actual total loss and constructive total loss.

Actual Total Loss

An actual total loss is a material and physical loss of the subject matter insured. It happens when the situation satisfies one or more of the following conditions:

It happens due to complete or irreparable damage to the insured cargo or goods. For example, a storm or fire sinks a ship, or seawater spoils a cargo of perishable goods.

The insured cargo or goods are in a state the insured business cannot access. For example, pirates or enemies capture a ship, or thieves steal a shipment of valuable goods.

The vessel transporting the shipment has gone missing, and there are no rational chances of its recovery. For example, a ship goes missing at sea, and no concerned authority receives any news about it for a long time.

When an actual total loss occurs, the insured business becomes entitled to the full value of the insured goods per the policy. The insurance company becomes liable to pay the claim and take over the ownership of the goods or their remains. If the goods are found or recovered in the future, the insurance company will have the right to claim them.

For example, suppose you export some electronic goods from India to Canada and have paid ₹1 crore as their market value. Unfortunately, the ship carrying your goods collides with another ship and sinks in the Atlantic Ocean. Since you lost your entire shipment of electronic goods, your policy entitles you to a compensation of ₹1 crore. If salvageable parts of your goods are ever found, the insurance company will also claim ownership.

Constructive Total Loss

A constructive total loss is a legal concept that allows you, as an insured, to claim a total loss when the cost of saving or repairing the subject matter insured is more than its value after the loss. It happens when one or more of the following conditions are met:

Your insured cargo or goods are not completely destroyed or damaged, but they are in such a condition that you cannot restore them to their original state without incurring expenses exceeding their value. For example, a fire or an explosion severely damages a ship, but it can still float.

You can only access the cargo by incurring expenses exceeding their value. For example, a ship is stranded on a remote island or a reef but can still be towed or salvaged.

You voluntarily abandon the cargo insured for your business because it is not worth saving or repairing. For instance, your ship is in a war zone or a piracy area but can still escape.

In a constructive total loss, you can either abandon the insured goods for full policy value or keep it for a partial loss claim based on its condition. The insurance company will decide on acceptance and payment.

For example, suppose you import some furniture from Italy to India and have paid ₹50 lakhs as their market value. You also take a marine insurance policy to cover the goods for any loss or damage during transit. Unfortunately, the ship carrying your goods catches fire near Sri Lanka, and most of your furniture is burned. You can salvage the remaining furniture, but it will cost ₹40 lakhs. Since your furniture is worth only ₹10 lakhs after the fire, you choose to abandon it to the insurance company and claim its total value as per your policy.

2. Partial Losses

A partial loss in marine insurance happens when only a portion of the insured goods suffer loss or damage, reducing their value but not completely destroying them. As per the insurer, this loss can either be particular average losses or general average losses.

Particular Average Losses

This loss affects only one party or interest in the marine venture. It happens when the loss or damage is caused by a peril insured against and is not shared or distributed among other parties or interests. For example, a cotton cargo is damaged by seawater due to a leak in the ship's hull, or a mechanical failure damages a ship's engine.

You can claim per your policy if there is a particular average loss. The insurer compensates based on the difference in the property's value before and after the loss. You retain ownership and possession of the insured goods.

For example, suppose you export some spices from India to China and have paid ₹20 lakhs as their market value. You also take a marine insurance policy to cover the goods for any loss or damage during transit. Unfortunately, some of your spices are wet by seawater due to a storm, and their quality has deteriorated. You sell them in China for ₹15 lakhs instead of ₹20 lakhs. Since you have suffered a partial loss of ₹5 lakhs, the insurance company will pay you this amount, and you will keep the remaining spices.

General Average Losses

The general average in marine insurance occurs when the loss or damage is caused by a deliberate sacrifice or expenditure for the ship's and cargo's safety. For example, the crew dumps some cargo to cut down the ship's burden and prevent it from sinking, or a ship's captain hires a tugboat to tow the ship to a port after an engine breakdown.

If a general average loss in marine insurance happens, your insurer will compensate you based on the contribution rate determined by an average adjuster. This rate is calculated by dividing your interest's value by the total value of all parties involved in the marine venture. You can still own and possess the goods insured.

Here is a general example to help you understand this loss in cargo insurance.

Suppose a ship carrying cargo from India to France encounters a storm, and some cargo is jettisoned to save the ship from sinking. The value of the ship is ₹100 lakhs, the value of the cargo is ₹200 lakhs, and the value of the freight is ₹50 lakhs. The total value of all parties’ interests is ₹350 lakhs. The contribution rate for each party is:

• Shipowner: ₹100 lakhs / ₹350 lakhs = 28.57%

• Cargo owner: ₹200 lakhs / ₹350 lakhs = 57.14%

• Freight owner: ₹50 lakhs / ₹350 lakhs = 14.29%

The average adjuster determines that the amount of the general average loss is ₹40 lakhs, which is the value of the jettisoned cargo. The share of the loss for each party is:

• Shipowner: ₹40 lakhs x 28.57% = ₹11.43 lakhs

• Cargo owner: ₹40 lakhs x 57.14% = ₹22.86 lakhs

• Freight owner: ₹40 lakhs x 14.29% = ₹5.71 lakhs

The shipowner and the freight owner must pay their share of the loss to the cargo owner, who has suffered the most loss due to the jettison. The cargo owner will receive ₹17.15 lakhs (₹22.86 lakhs - ₹5.71 lakhs) from the freight owner, for a total of ₹22.86 lakhs.

Businesses inevitably experience marine losses in international trade, but you can reduce them by selecting the right marine insurance policies. By understanding the different kinds of losses in marine insurance and how they get assessed, you can pick the ideal policy for your company, safeguard your interests against unexpected events, and be ready to make claims and receive compensation promptly.

Tata AIG offers marine insurance that helps ensure prompt claim settlement, minimising financial impact on the customers, protection against financial losses, and more.

What is a particular partial loss?

In marine insurance, a particular partial loss happens when only some of the goods in a shipment are damaged or lost during a voyage, but not everything. Suppose a ship is carrying a load of toys. If a storm causes damage to only a portion of the toys, that is a particular partial loss.

What is a total loss in the marine hull?

A total loss in a marine hull refers to a situation where a ship is completely destroyed or lost during a voyage. For instance, if a ship sinks in a storm and cannot be recovered, it is a total loss. In such cases, insurance can compensate the ship's owner for the full value of the lost vessel.

What is a marine loss?

Marine loss involves damage to ships or cargo during sea journeys. It includes damage, sinking, or complete loss of a ship. Cargo damage is when the goods being transported get ruined, but the ship may be fine. For instance, a ship sinking is a marine loss, while crates of goods getting wet due to a leak are cargo damage.

What are salvage charges in marine insurance?

It is the amount paid to protect the ship against additional damage or loss. Usually, a marine insurance policy covers salvage charges, however, you can contact your insurer to know its exact scope of coverage.