Australia: Constructive Total Loss and Notice of Abandonment - when is it too late?

Last Updated: 5 September 2018
Article by Michelle Taylor

In brief - Unyielding approach in assessing casualty proves risky for insurers

Marine insurers should carefully consider the implications of entering into a "battle of the experts" when a casualty occurs. In a recent UK Court of Appeal decision in The "Renos" [2018] EWCA Civ 230, the Owners were allowed more than five months after the casualty to abandon the vessel and claim a constructive total loss (CTL). This was because experts could not agree on the scope and cost of repairs to a vessel.

Critically, information provided by the Insurers' experts was able to be treated as unreliable by the Owners on the basis the Insurers' experts provided conflicting repair specifications and estimates that were, at first, unrealistically low.

Courts historically favour insurers but tide is changing in favour of insureds

For more than a century courts have held that the insured is not entitled to delay a decision to abandon for the purpose of judging whether it is in the insured's best commercial interests to elect to treat a loss as a CTL or a partial loss.

Rix LJ plainly said in The Kastor Too, the requirement of a notice of abandonment comes, "from a consensually recognised need in the international and uncertain context of a marine adventure to protect underwriters from an assured's attempt to play the market."

As far back as 1878, courts used expressions such as "immediately" or "speedily" when considering the timing of a notice of abandonment, and there have been a number of recent cases in which delays of only a few days or weeks were held to be fatal to the insured.

However, balanced against this is the "reliable information" threshold question. Under the Marine Insurance Act 1909 (Cth) (MIA) (which is in identical terms to the MIA of the UK), section 68(3) provides:

Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry.

Insurers reject Owners' notice of abandonment for being too late

In The "Renos", the UK Court of Appeal considered the insured's right to abandon and whether it was too late.

The facts of the case are worth recounting.

  • The MV "Renos" (Vessel) had an insured value of US$12 million. There were four insurers and the Swedish Club was the lead insurer (Insurers).
  • On 23 August 2012, a fire broke out in the Vessel's engine room, while the Vessel was in the Red Sea on route from Egypt to the Philippines. The Owners appointed salvors under a Lloyds Open Form 2011 and the salvors immediately invoked the Special Compensation Protection and Indemnity Clause.
  • On 28 August, the Vessel was towed to the Suez Canal Anchorage and surveyed for the first time.
  • During August 2012 to January 2013, the Vessel was surveyed multiple times by numerous surveyors for various (and disparate) interests. The Owners, the classification society and the Insurers all surveyed the Vessel detailing repairs required. Each estimate differed and quotations were repeatedly updated.
  • In late December 2012, the Owners suggested imposing a deadline for receipt of quotations but the Insurers responded this would be unwise as it would likely result in mark-ups for contingencies.
  • By late January 2013, the Insurers had still not agreed to the repairs, which had been estimated to be in excess of US$8 million.
  • On 1 February 2013, the Owners served a notice of abandonment under the MIA of the UK. This was rejected by the Insurers on the basis it was "given far too late".

Court decides whether Owners lost right to abandon Vessel and claim constructive total loss

The key questions for the Court were:

  1. Did the Owners receive reliable information of the loss?
  2. If so, was the notice of abandonment given with reasonable diligence thereafter?
  3. If not, and the information was of doubtful character, did the Owners exceed the "reasonable time" allowed to make inquiry?

It was held that all of these issues turned on questions of fact.

Did the Owners receive reliable information of the loss?

In support of the argument that there was ample reliable information, the Insurers stressed that the Owners' surveyors investigated the damage for more than three months, had a detailed repair specification of 117 pages, had the benefit of the classification society's report, expert advice from naval architects, electrical engineers and engine manufacturers, and shipyard quotations.

Reliable information was needed to determine extent of damage, scope and cost of repairs. Unsurprisingly, the Owners and the Insurers' experts had conflicting estimates for all these things. However, the Court was troubled by the extent of the conflict. It meant the information about the loss was doubtful and therefore was not reliable in the hands of the Owners.

Hamblen LJ criticised the Insurers (at [58]) who, "...chose at the time to carry out their own detailed surveys so as to produce their own repair specification and quotations for repair costs, which they relied upon to demonstrate that the Vessel was not a CTL. They shared that information with the Owners, insisted on its correctness, and can hardly complain if it is taken into account in considering whether there was reliable information of the loss. Nor does this mean that the time for electing whether to give a NOA is postponed indefinitely...the Owners are only allowed a reasonable time for making inquiry before being required to make their election."

Was notice of abandonment given with reasonable diligence?

There are no surprises here. The Court found that what "reasonable" requires in any particular case will depend upon the factual context and circumstances. This was not a case involving urgency, danger to the vessel or where there was a need for immediate decisions to be made. As a result, the Owners acted with reasonable diligence.

Did Owners exceed reasonable time allowed to make inquiry?

The nature of the casualty meant that achieving reliable information would be a complex task and take time. Faced with conflicting repair specifications provided by the Insurers' experts, numerous meetings were sought by the Owners which delayed the process.

It was found that the "task was made more complex and slower because of the approach taken on behalf of the Insurers, putting forward figures that would not support a CTL, creating a competing specification and making it harder to get a reliable picture of true costs of repair." (At [66].)

Although it took more than five months for a notice of abandonment to be given, the Court held in the circumstances of the case that no more than a reasonable time was taken.

Practical tips for insurers when considering a notice of abandonment

  1. A notice of abandonment does not have to be in a particular form.
  2. It must be clear and unequivocal in its terms (for example, there cannot be a conflicting intention such as the potential sale of the vessel).
  3. Acceptance of a notice of abandonment can be express or implied (but not from silence).
  4. An acceptance of a notice of abandonment conclusively establishes the validity of the notice and the insurer's liability to indemnify the loss.
  5. Importantly, acceptance of a notice of abandonment does not, of itself, transfer the insured's rights in the damaged goods or vessel to the insurer. Those rights only arise on payment of the full indemnity for the loss under the policy.
Michelle Taylor
Marine insurance
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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