Hull claim: constructive total loss vs. repair option
A 1998-built 12,000 dwt general cargo vessel is insured under a hull & machinery policy with an agreed value of USD 6.0 million and a deductible of USD 100,000. She grounds and suffers bottom damage; the assured obtains two quotes. Yard A quotes USD 4.9 million for permanent repairs requiring 7 months in dock. Yard B (a smaller facility) quotes USD 4.1 million but cannot start for 5 months and needs 9 months to complete. The insured value net of deductible is USD 5.9 million. The policy is written on a standard Institute Time Clauses (Hulls) basis with a 75% notice-of-CTL provision. Salvage costs of USD 400,000 have already been paid by the insurer and are not included in either repair quote. The assured wants to declare a constructive total loss and claim the full agreed value.
1. Determine whether the assured can validly claim a constructive total loss, showing the arithmetic and applying the 75% notice condition.
Read the worked answer
Compare repair cost with insured value net of deductible: 5.9m - 0.1m = 5.8m threshold. Yard A: 4.9m / 5.8m = 84.5% - exceeds 75%, so a CTL is available on that basis. Yard B: 4.1m / 5.8m = 70.7% - below 75%, so no CTL if the cheaper/slower yard is the correct measure. The clause requires the assured to give notice of CTL within a specified period (typically 30 days) after receipt of information; the assured must elect. Critically, the assured may not simply pick the more expensive quote to manufacture a CTL if a reasonable repair option exists. The underwriter should test whether Yard B is genuinely available and competent; if so, the assured is expected to repair and claim a partial loss (4.1m less deductible = 4.0m). If the assured validly elects CTL, the insurer pays the agreed value (6.0m) and takes over the wreck, but the 0.4m salvage already paid is separate. Conclusion: CTL depends on which yard is reasonable; a CTL claim based solely on Yard A is contestable.
2. The assured elects CTL and the insurer accepts. Explain the consequences for the wreck, the deductible and the already-incurred salvage cost.
Read the worked answer
On acceptance of a CTL, the insurer becomes entitled to the wreck (abandonment) and pays the full agreed value of 6.0m. The deductible is applied to the claim: net payment is 6.0m - 0.1m = 5.9m. The 0.4m salvage already paid is a separate sue-and-labour/salvage charge under the policy and is not netted against the agreed value; it is recoverable in addition (subject to any single-claim limit). The assured cannot both take the agreed value and retain the wreck; if the assured wishes to keep the vessel, the insurer's consent or a negotiated deduction for the wreck's scrap value is required. The insurer should also consider whether the assured's election was made within the contractual notice period and whether the notice was given 'without delay'.