5.3 Total Loss
Chapter 11 of the Nordic Marine Insurance Plan applies when a casualty results in damage that is so extensive that the vessel must be considered a total loss. Chapter 12 only applies when the rules in Chapter 11 are inapplicable. As a consequence, Cl. 12-4 regarding error in design and faulty material does not directly apply in the event of a total loss. Still, due to the consolidated structure and logic of the Nordic Marine Insurance Plan, many of the same considerations and principles will apply if faulty material or error in design results in a total loss. The purpose of this chapter is to present the rules regarding total loss and discuss how they are affected in relation to faulty material and error in design, in light of the considerations and principles discussed in Chapter 4.2.
A vessel may become a total loss in three ways. The vessel may be “lost without there being any prospect of it being recovered” or be “so badly damaged that it cannot be repaired”, cf. Cl. 11-1. Cl. 11-1 does not contain any information about excluded peril, and the all-risk principle must apply. As the partial exclusion for faulty material and error in design only directly applies for Chapter 12, the aforementioned alternatives of total loss will not be affected if the cause of the casualty is faulty material or error in design.
The third way a vessel may be a total loss is by condemnation.(1) Sometimes referred to as Constructive Total Loss (CTL). However, the term is not used in the Commentary or case law. Furthermore, the term CTL is much wider under English insurance conditions, and the term should thus be used with caution. See C. Haugli Sørensen, Konstruktivt totalforlis – Kondemnasjonsvilkår og totaltapsoppgjør etter Norsk Sjøforsikringsplan og spesialvilkår, 2008, p. 26According to Cl. 11-3, the conditions for condemnation are met when:
“(…) casualty damage is so extensive that the cost of repairing the vessel will amount to at least 80 % of the insurable value, or of the value of the vessel after repairs if the latter is higher than the insurable value.”
The first two alternatives for total loss represent objective total losses, where the vessel is objectively lost or is so damaged that it is objectively impossible to repair. The rules regarding condemnation represent a borderline to Chapter 12, as Chapter 12 applies as long as the threshold for condemnation is not met.(2) C. Haugli Sørensen, Konstruktivt totalforlis, 2008, p. 33Consequently, Cl. 11-3 will be influenced by the concept of damage in Chapter 12, and the cover may be affected if the cause of the casualty is faulty material or error in design.
The decisive question is thus how to calculate the costs related to the “casualty damage” and how this calculation will be affected if the cause of the casualty is faulty material or error in design.
The term “casualty damage” implies that the casualty must be recoverable in accordance with the Nordic Marine Insurance Plan. However, the term “cost of repairing the vessel” is general and implies that all costs that occur in order to restore the vessel should be considered.
The Commentary to Cl. 11-3 states that the term “casualty damage” only includes damage that “according to its nature is covered by the insurance”.(3) Commentary, p. 266 Based on this statement, it could be argued that only recoverable costs should be included in the calculation. Such a solution would coincide with the general principles, as the assured should not benefit from an insurance claim. If unrecoverable damage is included in the calculation, the assured could in theory claim for a total loss due to a minor recoverable damage by including severe unrecoverable damage due to lack of maintenance.(4) C. Haugli Sørensen, Konstruktivt totalforlis, 2008, p. 45Such a solution would clearly benefit the assured.
This aspect is elaborated in the Commentary states on page 266:
“The assured shall not be able to obtain a constructive total loss by ignoring the upkeep of the ship. However, if the damage is of such a nature as to make the insurer liable under Cl. 12-3 or Cl. 12-4, this will also have to be taken into consideration when determining the question of condemnation.”
The remarks in the Commentary are somewhat ambiguous, as they do not refer to which costs related to damage caused by Cl. 12-4 that should be taken into consideration. However, the general remarks imply that only recoverable costs should be included. This indicates that in the event of a loss caused by faulty material or error in design, only the recoverable costs should be included.
Such a solution would also be in line with the general considerations and principles mentioned above. The calculation would not include the risks that the assured is responsible for. It would, however, include the consequential and unforeseen losses. Consequently, the calculation only includes the costs the assured would have received compensation for if the damage were less extensive and the rules in Chapter 12 applied.
The solution also ensures an internal logic in line with the consolidated structure in the Nordic Marine Insurance Plan. It would create a random solution if the excluded losses due to faulty material or error in design were to be included in the calculation of condemnation but excluded for hull damage.
To summarize, the rules relating to total loss are not directly influenced if the casualty is caused by error in design or faulty material. To form a consistency within the contract, the rules in Chapter 12 will still have an indirect effect if the total loss occurs by way of condemnation. This way, the calculation of a possible condemnation includes the unforeseeable losses but excludes losses that must be considered to be a business risk and the costs of improving the quality of the vessel by rectifying a defect.