Module III: Marine Insurance

Introduction
Marine insurance is the oldest form of Insurance. In India till 1963, marine insurance was
governed by the provisions of the British Act, the contract Act and certain provisions of the
Insurance Act. The law relating to marine insurance has been codified by the marine insurance
Act, 1963 which came into force on 1st august 1963. The Act contains 92 sections and a
schedule containing a form of marine insurance policy and the rules of construction.

Meanings and Definitions:

Section-3: Contract of “marine insurance” means a contract of marine insurance.
A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the
assured, in the manner and to the extent agreed, against losses incidental to marine adventure.
There is a marine adventure when any insurable property is exposed to marine perils i.e. perils
consequent to navigation of the sea.

 Perils of the Sea: The term ‘perils of the sea’ refers only to accidents or casualties of the sea,
and does not include the ordinary action of the winds and waves. Besides, marine perils
include, fire, war perils, pirates, seizures and jettison etc.

 Freight: “Freight” includes the profit derivable by a ship-owner from the employment of his
ship to carry his own goods or other movables, as well as freight payable by a third party, but
does not include passage money.

 Insurable Property: “Insurable property” means any ship, goods or other movable property
which are exposed to maritime perils.

 Marine Adventure: “Marine adventure” includes any adventure where:

- Any insurable property is exposed to maritime perils;
- The earning or acquisition of any freight, passage money, commission, profit or other
pecuniary benefit, or the security for any other advances, loans or disbursements is
endangered by exposure of insurable property to maritime perils,
- Any liability to a third party may be incurred by the owner of, or other person interested
in or responsible for, insurable property by a reason of maritime perils.
 Maritime Perils: “Maritime Perils” means the perils consequent on, or incidental to, the
navigation of the sea, that is to say, perils of the sea, fire, war perils, pirates, rowers, thieves,
captures, seizures, restraints, and detainments of princes and peoples, jettisons, barratry and
any other perils which are either of the like kind or may be designed by the policy.

 Movables: “Movables” Means any movable tangible property other than the ship, and
includes money, valuable securities and other documents.

 Ship: “Ship” includes every description of vessel used in navigation “Suit” Includes counter-
claim and set-off

 Policy: “Policy” means a marine policy. An instrument containing the contract of marine
insurance. It contains terms and conditions on which contract are entered between the two
parties. Section 24 of the act provides for the same. It is concluded when proposal is
accepted by the insurer; it is deemed to be accepted when ship or covering note of the
instrument of contract is issued through undersigned section 23.

Nature of Marine Insurance:

The nature of marine insurance is characterized by its unique risks and perils associated with
maritime activities. It operates based on principles such as utmost good faith, indemnity,
subrogation, contribution, and proximate cause. Marine insurance plays a crucial role in
facilitating international trade by providing financial protection against the uncertainties
inherent in maritime transportation.

Scope of Marine Insurance:

The scope of marine insurance covers various risks associated with maritime activities,
including but not limited to:
1. Loss or damage to the ship or vessel: This includes damage caused by perils of the sea, such
as storms, collisions, or sinking.

2. Loss or damage to cargo: Marine insurance provides coverage for goods being transported
by sea, protecting against risks such as theft, damage, or loss during transit.

3. Liability insurance for shipowners: This covers liabilities arising from collisions, pollution,
or other maritime incidents for which the shipowner may be legally responsible.

4. Freight insurance: Insuring the freight charges payable to the carrier in the event of loss or
damage to the cargo.
5. Protection and indemnity (P&I) insurance: This covers liabilities not typically covered by
traditional marine insurance policies, such as personal injury or pollution claims.

Essentials of a Valid Marine Insurance Policy:

• It must fulfill all the essentials of a valid contract
• It must be in writing and duly stamped under the stamp act
• Insured must have insurable interest in the subject matter at the time of loss
• Time period of insurance must not be more than one year
• Good faith must be observed between the parties

A Contract of marine insurance shall not be admitted in evidence unless it is embodied in a

marine policy in accordance with this act. The policy may be executed and issued either at
the time when the contract is concluded or afterwards.

A marine policy must specify:

• The name of the assured, or of some person who effects the insurance on his behalf,
• The subject matter insured and the risk insured against
• The voyage, or period of time, or both, as the case may be, covered by the insurance,
• The sum or sums insured
• The name or names of the insurer or insurers

Principles of Marine Insurance

Marine insurance operates on a few guiding principles that help maintain consistency in the
delivery of insurance services. Basic principles of marine insurance include utmost good faith,
indemnity, insurable interest, proximate cause, contribution and subrogation.
Here is a list of the principles of marine insurance:
1) Principle of Utmost Good Faith
Every insurance product is based on utmost good faith on the part of the insurer and the insured.
Marine insurance policy is no exception. The principle of utmost good faith assumes an
organisation or individual purchasing marine insurance will furnish accurate details without
withholding crucial information.
An insurance provider has every right to reject the application or claim if it believes the entity
buying the policy has concealed important information. Hence, the insured must disclose all
related risks that may impact the underwriter’s judgement and should act in good faith towards
the insurer throughout the policy duration.
The breaches under the principle of utmost good faith are classified under four headings -
concealment, non-disclosure, fraudulent misrepresentation and innocent misrepresentation.
Hence, providing accurate and complete information when buying marine cargo insurance is
essential.

2) Principle of Indemnity
Cargo insurance aims to put the insured in the same financial position after the loss where he
would have been if no loss had occurred. While an insurance company cannot replace the goods
in the event of loss or damage, it can pay a reasonable compensation.
The principle of indemnity ensures that the policy covers losses of the damaged goods only. By
compensating only to the extent of the loss incurred, the insurer makes sure you do not buy the
policy to make profits.
For example, you have a marine insurance policy of ₹35 lakh. You incur a loss of ₹15 lakh
during a collision. In this case, you are eligible to receive ₹15 lakh as compensation, even if
policy coverage is ₹35 lakh.

3) Principle of Insurable Interest

The Marine Insurance Act of 1963 clearly defines insurable interest. As per the principle, a
tangible commodity must be exposed to marine risks, and the insured entity should have a legal
relationship with it.
In other words, marine insurance is applicable only when you have an insurable interest in the
insurable property at the time of loss. This means you must stand at benefit if the goods reach
their destination safely and on time.
On the other hand, you must stand at a loss if the goods are not delivered on time and in
condition as expected. So, according to the principle of insurable interest in marine insurance,
you must be interested in goods reaching safely to their destination.

4) Principle of Proximate Cause

The principle of proximate cause is another one of the marine insurance principles. It is a key to
determining the reason for the loss or damage to the goods or vessel. It refers to the most direct
or proximate cause, which helps analyse the genuine cause if a series of events led to the
damage.
As per the principle, the insurance provider is liable to pay you if the policy covers the
proximate cause of your loss. If the proximate cause is not covered by your marine insurance
policy, the insurer is not liable to pay you.
For example, pirates attack and steal your cargo on its way to Australia. Your policy covers
losses incurred due to natural forces only. In the absence of the principle of proximate cause,
you could have stated fog as the cause of the theft, as it did not allow you to see the pirates and
take action on time. However, piracy will be considered the proximate cause of your loss in a
marine insurance policy.

5) Principle of Contribution
Often, the same perils or risks the goods are prone to are covered by one or more insurance
providers. In cases where multiple insurers cover the same cargo, the principle of contribution
comes in. The principle states that each insurance provider splits the payment proportionately in
the event of a claim.
This helps ensure that you do not receive more than an indemnity and that any loss is fairly
distributed between the insurers.
For example, you insure goods worth ₹50 lakh with two insurance companies. In case of loss of
goods in a marine event, the amount of loss will be paid to you proportionately by both
companies. Here is a list of factors needed to exist before the loss is shared between the
insurers:
- A minimum of two policies should exist
- Every policy must be a policy of indemnity
- The policies should cover the same peril, subject matter and interest

6) Principle of Subrogation
The principle of subrogation in marine insurance follows the indemnity principle. It ensures that
the insured party does not receive more than the loss incurred. Based on this principle, you
cannot use the damaged goods after you have received a payout from the insurance provider.
Hence, the principle of subrogation limits the scope of any profit from the marine insurance
contract. In case of disposal of the damaged goods, you must return the excess amount to the
insurance provider post the claim.
For example, the sum insured on your cargo is ₹5 lakh. The entire cargo gets damaged due to
an accident, and the insurer settles your claim. However, by selling the damaged goods, you
earn ₹20,000. The total cash you receive now exceeds the loss incurred by ₹20,000. As per the
subrogation principle, you must return the extra amount to the insurance provider as you are
already compensated for the loss.
 Classification of Marine Insurance
Broadly, the classification of marine insurance in India depends on two factors
• the coverage area of the insurance policy, and
• the structure of the insurance contract.
Each of the two categories is further sub-categorized, based on the different needs and
suitability of the person entering into the insurance contract.

Types of Marine Insurance: Based on Coverage Area

The coverage area of an insurance policy is the geographical area or the protected area in which
the benefits of an insurance policy apply.
The following types of marine insurance are classified, based on the coverage area of the
insurance policy-
(1) Hull & machinery insurance: Hull is the most noticeable part of any ship. It is the
watertight body of a ship or a boat that protects the cargo inside the ship from being
damaged. Hull and Machinery Insurance, therefore, covers the loss or the damage caused to
the body of the ship or any machinery or equipment in it, used for the functioning of the
ship. It mostly covers accidents caused due to collisions, or the damages caused by
earthquakes and explosions. This type of insurance is generally taken by the owners of the
ship.
(2) Marine cargo insurance: Marine cargo insurance is a type of property insurance that covers
the cargo owners against any loss or damage caused to their cargo during its transit. It has
extensive coverage, but also has certain limitations, for instance, the cargo owners lose their
claims if the packaging of the cargo was defective. It also comes with a third-party liability,
which covers the damages caused to the port, or a ship, or a railway track due to the presence
of defective cargo.

(3) Liability insurance: Liability insurance covers the financial liability of the person who is
insured. It covers primarily the liabilities which arise due to the damages or injuries caused
to the third party, for instance, the death or personal injury caused to any third party traveling
in the ship.

(4) Freight insurance: Freight insurance covers the liability of the shipping company or the
logistics provider for the damage or loss caused to the shipment during transit due to events
outside the control of the company.
Types of Marine Insurance Policies: Based on The Structure of The Contract
A ‘policy is a document that embodies the terms and conditions of the contract of insurance. It
essentially is a written form of agreement between the insurance company and the person
insured. It generally contains the provisions regarding the coverage area, the limitations of
insurance policies, etc.
Thus the different types of policies available under marine insurance are-
(1) Open policy: An open policy, also called a floating policy, provides coverage for an
indefinite number of transit journeys during the subsistence of the policy. This is especially
beneficial for the companies which are involved in high-volume trade, as they are saved
from taking an insurance policy on each transit journey. It covers all the transit journeys of
the insured until the policy is canceled or until the last of the payment is realized, whichever
is earlier.

(2) Voyage policy: A voyage policy works on the same lines as the marine cargo insurance.
Under this policy, the insurance company agrees to cover the losses or damages caused to
the cargo during a specific voyage. It expires when the vessel reaches its destination,
irrespective of the time it takes to reach there. Usually, it is bought by small exporters who
ship their goods by sea only on some occasions.

(3) Time policy: A time policy, as the name suggests, is issued for a fixed period of time. The
vessel may make any number of voyages during this period. Generally, the insurance
company issues this policy for one year, however, the period may vary depending on the
agreement between both parties.

(4) Mixed policy: A mixed policy is a combination or a mix of voyage and time policies. The
insurance company, while issuing this policy, agrees to cover the loss or damage to the ship
for a particular voyage till a particular period of time.

(5) Single vessel policy: A single vessel policy insures only a single ship of the insured.

(6) Fleet policy: The person insured has an option of either insuring a single ship by a policy, or
of insuring several ships under one policy. If he chooses the latter option, he undertakes a
‘Fleet Policy’, under which a fleet of ships is insured under a single policy.

(7) Unvalued policy: Every insurance policy is either an unvalued or a valued policy. Under an
unvalued policy, the insurance company does not assign a value to the thing insured (the
vessel or the cargo), at the time of underwriting the policy. The valuation of the property is
done only after the claim of insurance has been filed. However, for a successful claim, the
 true value of the property has to be proved by the insured by way of invoices or estimates,
before the valuation.

(8) Valued policy: In a valued policy, the insured property is given a specific value when the
policy is issued, and before any claims are made. When the claim is made by the insured, a
pre-estimated or the specified amount is given, which does not depend on the amount of loss
incurred by the insured. The depreciation of the property also does not affect the amount of
claim, under a valued policy.

(9) Block policy: A block policy is an all risks policy. Unless a contrary intention is expressed
by the insurer, it essentially covers all the risks to which the goods are exposed when they
are in transit, bailment, and on the premises of the third party. There are two popular types of
block policy – furrier’s block policy, and jeweler’s block policy since fur and jewelry are
two high-value commodities that are exposed to a greater threat of theft.

(10) Port-risk policy: A port-risk policy covers ships that are either docked or are undergoing
repair works at the port. It is an all-risk policy that covers all the risks unless otherwise
agreed between the parties. It provides coverage for physical damages to the vessel as well
as protection and indemnity but excludes any liability arising on account of the crew and
cargo.

(11) Named policy: A named policy is one in which the name or names of the ships is
mentioned in the contract of insurance.

(12) Wager policy: A wager policy protects from loss of the property of which the insured
does not have legal proof of possession. This means, when the insured is not able to prove an
insurable interest in the property, the insurance company may issue a wager policy to him.
Under it, the whole claim of the insured is subject to the discretion of the insurer and the
merits of the claim made. It is not a written policy as it is issued in contravention of the law.

Assignment of Marine Insurance Policy

This is mentioned under Section 52 and 53 of The Marine Insurance Act, 1963
Section-52: When and how policy is assignable.
(1) A marine policy may be transferred by assignment unless it contains terms expressly
prohibiting assignment. It may be assigned either before or after loss.

(2) Where a marine policy has been assigned so as to pass the beneficial interest in such policy,
the assignee of the policy is entitled to sue thereon in his own name; and the defendant is
entitled to make any defence arising out of the contract which he would have been entitled to
 make if the suit had been brought in the name of the person by or on behalf of whom the
policy was effected.

(3) A marine policy may be assigned by endorsement thereon or in other customary manner.
Section-53: Assured who has no interest cannot assign.
Where the assured has parted with or lost his interest in the subject-matter insured, and has not,
before or at the time of so doing expressly or impliedly agreed to assign the policy, any
subsequent assignment of the policy is inoperative.
Provided that nothing in this section affects the assignment of a policy after loss.

The Voyage
A voyage refers to the journey undertaken by the insured vessel from one location (such as a
port of departure) to another (such as a port of destination). The voyage is a central element in
determining the scope of coverage and the applicable terms and conditions of a marine
insurance policy.
Here are some key points regarding "the voyage" under the Marine Insurance Act:
Definition: The Act defines a voyage as "the period from the time when the subject-matter
insured leaves its port of departure until it arrives at its port of destination."
Scope of Coverage: Marine insurance policies typically provide coverage for specific voyages
or journeys undertaken by the insured vessel. The policy may specify the route, duration, and
destinations of the voyage, as well as any conditions or limitations applicable to coverage
during transit.
Commencement and Termination: The voyage begins when the insured vessel departs from its
port of departure and ends upon its arrival at the designated port of destination. Coverage under
the marine insurance policy is typically in force during this entire period, subject to the terms
and conditions of the policy.
Duration and Perils: Throughout the voyage, the insured vessel and its cargo are exposed to
various risks and perils of the sea, including but not limited to storms, collisions, piracy, and
natural disasters. Marine insurance policies provide coverage against these risks, subject to the
terms, exclusions, and limitations outlined in the policy.
Deviation: Any departure from the agreed-upon route or deviation from the usual course of the
voyage may affect coverage under the marine insurance policy. Deviation without the insurer's
consent may lead to the policy becoming void or the insurer being discharged from liability,
unless the deviation is justified by necessity or allowed under the terms of the policy.
[Read from Section- 44 to 51 from the Act- https://www.indiacode.nic.in/bitstream/123456789/1520/1/196311.pdf ]
 Peril of The Sea
A peril of the sea refers to various dangers or hazards that are inherent to maritime navigation
and can result in damage or loss to the insured vessel, cargo, or other maritime property.
Here are some key points regarding perils of the sea under the Marine Insurance Act:
 Perils of the sea may include, but are not limited to, storms, tempests, hurricanes, cyclones,
heavy seas, tidal waves, collisions with other vessels or objects, stranding, grounding, and
damage caused by icebergs or floating debris. Essentially, any adverse conditions or events
arising from the natural elements or the unpredictable nature of the sea can be considered
perils of the sea.

 Coverage: Marine insurance policies typically provide coverage against perils of the sea,
unless specifically excluded or limited by the terms of the policy. Insurers indemnify insured
parties for losses or damage resulting from these perils, subject to the policy's terms,
conditions, and exclusions.

 Proximate Cause: In determining coverage for a loss or damage under a marine insurance
policy, the concept of proximate cause is applied. If the proximate cause of the loss is a peril
of the sea, the insurer is generally liable to indemnify the insured, provided other policy
conditions are met. However, if the loss is caused by an excluded peril or an insured peril
operating concurrently with an excluded peril, coverage may be denied or limited
accordingly.

 Good Faith: Both insurers and insured parties are expected to act in utmost good faith in the
context of marine insurance. This includes disclosing all material information relevant to the
risk and adhering to the principles of fair dealing and honesty in the insurance transaction.

Loss & Abandonment

Sections 55 to 66 of the Marine Insurance Act, 1963 enshrine the principles related to loss and
abandonment as applicable to marine insurances.

Section-55: Included and excluded losses:

Section 55 makes it clear at the offset that only those losses that have a reasonable proximate
relation with the perils the insurer(s) has insured against could the assured person claim
indemnification. Thus, Section 55, by making a demarcation between the losses that could be
indemnified and those that cannot, effectively excludes certain losses from the ambit of
insurance. Further, it also places, unless they are specifically included in any insurance policy,
a general exclusion on the following losses-
(1) Any loss that takes place owing to negligence or any intentional mis-conduct on the part of
the assured. However, as an exception, the aforementioned would not be excluded, except if
the policy so mandates, from the ambit of insurance when such negligent loss has been
caused owing to a peril the assured was insured against.

(2) Any loss, except if the policy so mandates, that is caused to the assured due to any delay
even if the same has been caused by a maritime peril.

(3) The general rule is that the assured does not have the right to seek indemnification from the
insured if any damage to the ship or the cargo that has taken place does not have a proximate
relationship with the peril the assured was insured against. Similarly, damage caused due to
gradual wear and tear of the ship or any other insured object, or its ordinary leaking and
breaking, or owing to its innate flaw, or by rodents is not qualified for insurance, except if
the policy so mandates.
Case: The aforementioned raises questions about the scope of the term “proximate cause” as it
is fundamental to the inclusion or exclusions of the losses from the purview of insurance. The
High Court of Calcutta relied upon a series of judgments to elucidate its understanding of the
said term in the 1972 case of A. Akooji Jadwat Pvt. Ltd. vs Oriental Fire & General Insurance
Co Ltd.
Facts of the case
The ship of the assured that was insured against the peril of detention, capture, arrest, etc.
during wartime was captured by Pakistan during the 1965 Indo-Pak skirmish. The insurer
refused to indemnify the assured stating that Pakistan had not declared any war on India and,
therefore, the said clash was an informal war and such wars were not covered under their
insurance policy.
The ruling of the Court
The HC ruled that the insurers could not take the aforementioned excuse to free themselves of
their liability. Any hostility on the part of an enemy state will be covered under the policy of the
defendant insurers.
The HC reflected upon the extent of the term “proximate cause” and held that any loss which
occurs to which the peril insured against was the direct cause or that the peril had a
predominating and efficient effect on it could be said to be proximately caused by the said peril.
Case: In the case of Canada Rice Mills Ltd. V/s Union Marine & General Insurance Co Ltd, a
ship was transporting rice and owing to the severe weather, the assured shut down all the
ventilators of the room where the cargo was stored to prevent water from coming inside and
damaging the rice. However, this led to the overheating of the cargo and they were damaged.
The judicial court held the said loss to be a loss owing to the peril of the sea. The Judges opined
that the rough weather, being a peril of the sea, served as a proximate cause for the shutting
down of the ventilators as the same would not have been done except for the former and
therefore both the factors must be viewed together and not separately.

Now, all those losses, which have not been excluded from insurance indemnification under
Section 55, have been divided into two categories-
I. Total loss
II. Partial loss

I. Total loss:
In cases of marine insurances, the total loss has been categorised into two divisions, namely,
- actual total loss, and
- constructive total loss.

i. Actual Total Loss

As per section 57 of the MIA, an actual total loss could occur in three situations-
a) Destruction of the insured object.
b) When extensive damage is caused to the insured object which changes its very inherent
nature and quality.
c) Irretrievable deprivation of the insured object to the assured.
While the first two cases make the ascertainment of a loss as actual or constructive relatively
easier, it is the third scenario where determination becomes difficult or a little dubious to
fathom.
Case: In the case of George Cohen Sons and Co v/s Standard Marine Insurance Co Ltd, an
insured ship had been taken to the port but it somehow went shore. The British Court observed
that the assured had not been irretrievably deprived of the ship. The process of retrieval, the
Court opined, would be difficult and also expensive to a large extent but would not be
impossible. Therefore, the Court held the aforementioned loss to not be in the nature of an
actual total loss. Further, in the case of Loyal Marines v/s National Insurance Co Ltd, it was
found that the insured ship had got submerged in the sand up to its deck and it was therefore not
possible to retrieve it for the use of the assured. The Court declared the said loss to be an actual
total loss and asked the insurers to indemnify the assured for the same.
Apart from the foretasted three scenarios, a missing ship that is insured, of which nothing has
been heard about even after the passage of a significant time period, would also be deemed to
have been actually totally lost and the assured would be eligible for claiming indemnity.

ii. Constructive total loss

The term constructive stands for something which is not explicit but derived from conjecture.
Applying the said definition to understand a constructive total loss, it can be said that when an
actual total loss defined under Sections 57 and 58 have not explicitly taken place but the loss
caused is such that the insured object is as useless as it would have had been in case of an actual
total loss.
Section 60(1) of the MIA, giving out a general definition of a constructive total loss, states that
in case an actual total loss of the insured object becomes inevitable, or that prevention from the
same demands the incurring of an expense higher than the value of the insured object, it is said
that a constructive total loss has taken place. In the case of Marstrand Fishing Co Ltd V/s Bear,
it was stated that the inevitability or unavoidability of the actual total loss must be determined
on the basis of the facts and not on the basis of what the assured believed to be true. If what the
assured believed to be true but was not true in fact, it is out of the question to consider such loss
as a constructive total loss.
Further, Section 60 states the following to further explain what particular instances could lead
to a constructive total loss-
a) Where the assured loses the possession of the insured object owing to a peril of the sea they
were insured against and recovery of possession is either a) not possible, or b) can be made
possible but only by incurring such cost that would go beyond the value of the object.
b) The damage caused to the insured object, owing to a peril of the sea the assured was insured
against, is so severe that it could only be repaired by incurring such cost that would exceed
the value of the object.

Effect of a constructive total loss:

In case the loss in the nature of the aforementioned takes place, the assured could either
abandon the object or continue possessing it. In the case of the former, the loss is to be treated
as an actual total loss, whereas if the assured does the latter, they are said to be treating the loss
as a partial loss. Abandonment is thus a necessary prerequisite for a loss to be deemed as an
actual total loss. The concept of abandonment has been discussed in greater detail in the
subsequent chapter.
Defining the said term, Lord Atkin in the case of Moore & Gallop v Evans, (1918), remarked
that it is a form of amalgamation of a total loss and a partial loss. It lies somewhere in between
of the both with its determination dependent upon the doctrine of abandonment (discussed in
the subsequent chapter).
However, the application and exhaustibility of a constructive total loss as defined under Section
60 depend upon the terms and conditions as stipulated in the marine insurance policy on a case
to case basis. The Supreme Court of India, in the case of Peacock Plywood (P) Ltd v/s Oriental
Insurance Co Ltd, ruled that if any provision of a marine insurance policy does not correspond
to what is mentioned in Section 60 of the MIA, the former will prevail over the latter.

This section of the Marine Insurance Act, 1963, deals with constructive total loss in marine
insurance. Here's a simplified explanation:

Constructive Total Loss:

Constructive total loss occurs when the insured object (like a ship or goods) is reasonably
abandoned because it's either impossible to avoid a total loss or the cost of preserving it from
total loss would be more than its value.
For example, if a ship is damaged so severely that repairing it would cost more than the ship is
worth, it would be considered a constructive total loss.
Examples of Constructive Total Loss:
Constructive total loss can occur when the insured loses possession of the ship or goods due to
an insured peril, and it's unlikely they can recover them, or the cost of recovery would be more
than their value.
In the case of damage to a ship, if the cost of repairing the damage would exceed the value of
the ship after repairs, it would be considered a constructive total loss.
Similarly, if the cost of repairing damaged goods and forwarding them to their destination
would exceed their value on arrival, it would be a constructive total loss.
Effect of Constructive Total Loss:
When there is a constructive total loss, the insured has two options:
Treat the loss as a partial loss and claim compensation for the partial damage.
Abandon the insured object to the insurer and treat the loss as if it were an actual total loss. This
means the insured can claim the full value of the insured object from the insurer.
 In essence, this provision allows the insured to claim compensation for a constructive total loss,
where the cost of repair or recovery exceeds the value of the insured object, similar to an actual
total loss.

Difference between an Actual total loss and Constructive total loss

In simple words, the difference between the two aforementioned types of total losses is that
while the former is a factual total loss, the latter is but a legal fiction, created to give those
losses that are akin to an actual total loss equitable protection. Thus constructive total loss is a
total loss in law and spirit.

II. Partial loss

Section 56 of the MIA defines partial loss as any loss other than a total loss. While the exact
definition of Partial loss cannot be found in the MIA,
Sections 64-66 deal with various components of a partial loss, namely,
- average general loss,
- particular average loss, and
- salvage charges.

i. General average loss

Section 66 of the MIA defines general average loss as any loss caused by a general average act,
which is any wilful momentous expense or sacrifice carried out by the assured to prevent the
insured object from being damaged by a peril insured against. The person carrying out such a
general average act has the right to ask for contributions from other persons who have any
interest in the insured object. Then, the assured can claim for indemnification from the insurer
for such part of the money or sacrifice which is attributable to him after contribution. However,
the insurer cannot be compelled to indemnify the assured for a general average loss if the
general average act was not incurred for the purpose of preventing any damage or prospective
damage to the insured object. All the aforementioned provisions, however, are dependent upon
the terms of the marine insurance policy.

ii. Particular average loss

Any loss which is not a general average loss falls under the category of particular average loss.
 iii. Salvage charge
Salvage charges are charges that are incurred to avert any loss flowing from the peril insured
against and can be indemnified to the salvor independently of a contract. The salvor can recover
such charge either as a general average loss or a particular average loss, depending upon the
circumstances in which the salvage charge was sustained.

The doctrine of abandonment under MIA

As mentioned before, a constructive total loss cannot be treated as if it were a total loss unless
the subject matter of the same has been abandoned by the assured. If the insured object that has
suffered a constructive total loss is not abandoned, it is presumed that the assured is going to
treat the same as a partial loss.

Notice of Abandonment
Now, after having abandoned the insured object, or after the intention of doing the same has
been formed, owing to the occurrence of a constructive total loss, the assured needs to give a
notice of abandonment to the insurer to express the bequeathing of his interest in the insured
object in the favour of the insurer. Upon the acceptance of such notice by the insurer, the
abandonment cannot be revoked. If, however, the assured fails to give such notice, the
constructive total loss gets converted to a partial loss.
Following are certain rules that the assured needs to abide by with reference to notice of
abandonment-
 The insured needs to give such notice in writing or in oral or in such other form which
clearly expresses his intention of bequeathing his interest in the insured object to the
insurer.

 The assured must exercise reasonable care before giving the notice of abandonment. In
case an enquiry regarding the nature of the loss or the threat of loss is to be carried out, the
assured must give the notice only after such notice when the truth has surfaced.

 If the assured has given proper notice of abandonment, the refusal of the same on the part
of the insurer would not affect the rights of the assured flowing from abandonment. The
acceptance of the insurer does not have to express, it could be implied too. However, his
silence would not imply acceptance.

 The acceptance of the notice by the insurer makes the abandonment of the insured
object/property irrevocable. Before acceptance, the assured is free to revoke his notice of
 abandonment which once final would lead him to bequeath all his interests in the insured
subject matter.
While it is true that without giving the notice of abandonment, the constructive total loss cannot
be treated as an actual total loss but only partial, there are certain circumstances that do not
require sending the notice. These are as follows-
o When the insurer has waived the notice of abandonment

o When by the time the assured received the information about the constructive total loss, it is
too late for any possibility of accrual of any profit to the insurer; the assurer is not bound to
send the latter a notice of abandonment.

o The insurer does not need to give any notice of abandonment to the insurer if the latter has
re-insured his risk.

Effect of Abandonment
The effect of abandonment is that whatever little remains of the insured object/property
becomes the insurer’s. By abandoning and serving notice about the same to the insurer, the
assured gives away his interest in the insured object to the insurer. And if he follows the
procedure properly, the constructive total loss he suffered is indemnified by the insurer as if it
were an actual total loss. This is the benefit of abandonment to the assured, which if he had not
practised would have led to the treatment of the loss as a partial one, leading to indemnification
of a lesser value.

Now, after the insurer indemnifies the assured for the loss being treated as an actual total loss,
the assured the benefits the insured derives from abandonment on the part of the assured as
mentioned under Section 63 of MIA are as follows-
a) The insurer gets hold of all the freight that was in the course of being earned or that is
earned after the loss. (for the latter, however, such amount that was spent in earning the
fright after the loss would be subtracted)

b) If the ship is carrying the cargo of the owner, the insurer would be free to charge him for
their transportation on the ship post abandonment.

Measures of Indemnity
 The amount paid to a third party by the insured party in respect of a liability. This is subject
to any express provisions in the policy. The measure of indemnity is the value fixed by the
 policy for a valued policy, or the insurable value for an unvalued policy. For example, if a
shipment is insured for Rs 50,000 but is lost at sea, the insured party should receive Rs
50,000 to cover the financial loss. However, if the goods were only worth Rs 40,000 at the
time of the loss, they would receive Rs 40,000. This application of indemnity in marine
insurance maintains fairness and prevents overcompensation.

 Indemnity applies where the value of the subject-matter is determined at the time of loss. For
goods whose value has not been fixed in the beginning, the measurement is based on the
insurable value of the goods. However, insurable value is not common in marine insurance
because no profit is allowed in estimating it.

 In case the cargo or object of insurance destroys, the insurer will bear the cost of replacing
the object with another similar model, design, and capacity, subject to the sum insured. In
the case of ships and used goods, reasonable depreciation may apply based on their
functional life.

Importance of the Measure of Indemnity:

The measure of indemnity in marine insurance is a pivotal concept, serving as the cornerstone
of coverage and compensation in the event of loss or damage.
Its importance lies in several key aspects:
 Accuracy of Coverage: The measure of indemnity ensures that the insured party is
adequately compensated for the actual value of the loss or damage suffered. This accuracy is
essential to avoid underinsurance, where the compensation would not fully cover the loss, or
overcompensation, which could lead to moral hazard.

 Fairness and Equity: Properly defining the measure of indemnity promotes fairness in the
insurance contract. It ensures that the insured does not suffer financial loss beyond the
agreed terms, nor gains excessively from the loss.

 Risk Management: An accurate measure of indemnity encourages precise risk assessment by

both insurers and insured parties. This, in turn, leads to better risk management practices,
helping to mitigate potential losses.

 Premium Calculation: The measure of indemnity directly affects the premium rates. Insurers
consider the potential payout when setting premiums, making it a critical factor in insurance
pricing.
 Legal Compliance: Adhering to the correct measure of indemnity ensures compliance with
legal requirements and regulations governing marine insurance. It provides a clear
framework for legal disputes and claims settlement.

 Transparency: Defining the measure of indemnity in insurance contracts promotes

transparency. It clearly outlines the extent of coverage, obligations of both parties, and the
terms under which compensation will be provided.

 Business Continuity: Adequate indemnity measures support business continuity for

shipowners, cargo owners, and other stakeholders in the maritime industry. Knowing they
are appropriately covered allows businesses to operate with confidence.

Methods of Calculating Indemnity:

In marine insurance, there are various methods used to calculate the measure of indemnity,
each tailored to specific types of coverage and situations:
o Actual Total Loss (ATL): Under ATL, the insured item is considered completely lost or
destroyed beyond recovery. In such cases, the insured is entitled to the full sum insured
without any deduction.

o Constructive Total Loss (CTL): CTL occurs when the insured item is not completely lost but
the cost of repairs exceeds a certain percentage (usually 75% or 80%) of its insured value. In
this case, the insured can choose between claiming a total loss or asking for reimbursement
for repairs.

o Particular Average: This applies to partial losses that do not qualify as total losses. Average
losses are shared between the insurer and the insured based on the terms of the policy.

o General Average: In cases of emergency where cargo is intentionally sacrificed to save the
ship and other cargo, the general average is invoked. Here, all parties involved in the voyage
contribute a proportionate share to cover the losses incurred for the greater good.

o Salvage: When third parties assist in saving a ship or its cargo, they are entitled to a salvage
award. This is an additional cost that may be covered by the insurance policy.

[You can read for this topic “Measures of Indemnity” from Section-67 to 78.]

Settlement of Marine Insurance Claim

The settlement of a marine insurance claim involves the process by which the insurer
compensates the insured for losses covered under the marine insurance policy. This process
typically follows certain steps and procedures to ensure a fair and timely resolution.
Here's an overview of the settlement of a marine insurance claim:
 Notification of Loss: The insured must promptly notify the insurer of any loss or damage
covered by the marine insurance policy. This notification should include relevant details
such as the nature and extent of the loss, the insured property involved, and the
circumstances surrounding the incident.

 Claim Documentation: The insured is usually required to provide documentation to support

the claim. This may include invoices, bills of lading, cargo manifests, survey reports, repair
estimates, and any other relevant evidence substantiating the loss or damage.

 Claim Investigation: Upon receiving the claim notification and supporting documentation,
the insurer may conduct an investigation to assess the validity and extent of the claim. This
may involve appointing surveyors, adjusters, or other experts to inspect the damaged
property, evaluate the cause of loss, and determine the amount of indemnity payable.

 Coverage Determination: The insurer reviews the terms and conditions of the marine
insurance policy to ascertain coverage for the claimed loss. If the loss falls within the scope
of coverage and is not excluded by any policy provisions, the insurer proceeds with the
settlement process.

 Negotiation and Settlement: Once the insurer completes its investigation and determines the
amount of indemnity payable, negotiations may ensue between the insurer and the insured to
reach a mutually acceptable settlement. This may involve discussions on the valuation of the
loss, the applicability of policy terms, and any other relevant factors affecting the claim.

 Payment of Indemnity: Upon reaching a settlement agreement, the insurer disburses the
indemnity payment to the insured. The payment amount may be based on the agreed value of
the insured property, the cost of repairs or replacement, or other measures of indemnity
specified in the policy.

 Release and Discharge: In exchange for the indemnity payment, the insured typically
provides a release and discharge to the insurer, releasing them from any further liability
arising from the claimed loss. This document formalizes the settlement of the claim and
prevents the insured from pursuing additional compensation for the same loss.
 Claim Closure: After the indemnity payment is made and the release is executed, the claim
is considered closed, and the insurer updates its records accordingly. Any salvage or
recovered property may also be addressed as part of the claim settlement process.