What is Constructive Total Loss Marine Cargo Insurance?

A constructive total loss is used in marine cargo insurance when the cost of recovering or repairing a damaged goods or cargo is more than its current value. Under this case, the cargo is declared as a total loss and the insurance provider will compensate the policyholder with the full insured amount.

Accidents, theft and natural disasters can cause these kinds of losses to cargo or goods. The constructive total loss clause in marine insurance is a unique concept that allows the insurance provider to take ownership of damaged cargo after paying the policyholder the insured value.

Also Read: Difference Between Actual Total Loss and Constructive Total Loss

• To qualify as a constructive total loss in marine insurance, the following criteria or situations need to be met. These criteria are:

• If the insured cargo or goods are damaged beyond repair by natural disasters like cyclones, hurricanes or earthquakes, they qualify for constructive total loss.

• Suppose the insured cargo or goods are damaged by man-made disasters. For instance, a vessel colliding with another vessel due to a technical error qualifies for constructive total loss.

• If the cargo or goods-carrying vehicle is stranded in the ocean and cannot be floated again to the shore, the cost of recovering the vessel or cargo is more expensive than its actual value.

• Pirates or thieves hijack the insured cargo or goods and can not be recovered.

There are two scenarios for constructive total loss in marine cargo insurance. Let us discuss them in detail.

Scenario 1: When the covered perils deprive the policyholder of the possession of goods. It is highly unlikely for policyholders to recover the goods.

Let us understand this scenario by example:** ABC company sent a consignment from India to Sri Lanka. While the consignment was sent over via ship, the pirates attacked the ship and seized the consignment. ABC company tries to release the consignment with the help of local authorities and the government.

There is uncertainty about the release of the consignment. ABC company also tries to get back the vessel and consignment in exchange for money. However, there is no success.

After many attempts, ABC approached the insurance provider, as they had purchased the marine cargo insurance policy. The insurance provider assessed the situation carefully. After much thought, they considered it a constructive total loss and settled the claim.

Scenario 2: When the cargo or vessel is severely damaged by an insured peril and the cost of recovering is more than its current value.

The company XYZ ship started its journey on 1st January 2025 from India to Germany, carrying machinery items. During the voyage, thunderstorms occurred, which caused the ship to sink on 5th January 2025. However, other ships floating at the same time managed to rescue the crew members, but the entire cargo was lost along with the ship.

The ship owner sent a senior professional to analyse the situation completely. The company also contacted the Coast Guard to track down the consignment. After a one-month search, the Coast Guard was able to locate the consignment in a damaged state. Fortunately, XYZ company had a marine cargo insurance policy.

They approached the insurance provider for compensation. After carrying out the inspection, the insurance company declared it a constructive total loss as the cost of repairing or recovering was more than the value of the ship or cargo.

Also Read: Difference Between Total Loss and Partial Loss in Marine Insurance

The claim procedure for constructive total loss in marine insurance follows a structured process. A constructive total loss occurs when the damage to the cargo or vessel is so severe that it is not economical to repair or recover, even though the physical property might still be salvageable. Here is a general Step-by-Step procedure for filing a claim in such cases:

Step 1: The first Step is to promptly notify the insurance company about the loss. This is crucial, as delaying this can impact the validity of the claim.

Step 2: The insurance provider will typically appoint a surveyor to assess the situation. The surveyor will inspect the vessel or cargo and determine the extent of damage.

Step 3: The surveyor’s role is to determine whether the property is economically salvageable. If the cost of repair or recovery exceeds the value of the cargo or vessel, it could be declared a constructive total loss.

Step 4: File a claim and submit all the requested documents, such as insurance policy, bill of lading, surveyor report, photos and videos of incidents and more.

Step 5: The insurance company will review the submitted documents and the surveyor’s report. They will assess the overall situation, including whether the loss meets the definition of constructive total loss under the policy.

Step 6: Once the insurance provider confirms that the loss qualifies as a constructive total loss, they will calculate the claim payout. This is typically based on the market value or agreed value minus any applicable deductibles.

Step 7: If the policyholder accepts the claim, the final payout will be made to the policyholder.

However, in some instances, the insurance company may take possession of the damaged goods or vessel if it is salvageable as part of the settlement. If any part of the cargo or vessel can be salvaged, the insurance company will deduct the salvage value from the claim payout.

• Preventive steps and measures can prevent such losses. Below are some of the techniques to prevent constructive total loss in marine insurance.

• Implementing proper packaging and handling practices is crucial to preventing cargo damage or loss. Businesses can minimise risks by using high-quality materials such as shock-absorbing or waterproof.

• Another crucial tip is to conduct a detailed shipment inspection before a departure to avoid potential loss during transit.

• Knowing about the weather conditions in advance and planning shipments accordingly is also helpful. By monitoring weather forecasts, businesses can avoid potential losses caused by weather conditions like storms, etc.

• Another crucial tip is to invest in the right marine insurance policy to prevent financial losses in case of unexpected events. It is important to ensure that the policy should cover both actual total loss and constructive total loss.

Understanding constructive total loss in marine insurance is crucial for businesses as it helps them make informed decisions about whether to repair, salvage or abandon damaged goods.

Being well-versed in constructive total loss in marine insurance policy helps businesses protect their assets, minimise potential financial loss and avoid unnecessary delays in the claims process.

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What if a ship or vessel is not salvageable in constructive total loss?

If a ship or vessel is not salvageable in a constructive total loss, it means the damage is so extensive that repair or recovery is economically unfeasible.

In this case, the insurance company typically compensates the insured based on the vessel’s value, minus any applicable deductibles and the vessel may be considered a total loss.

Can false documentation lead to marine insurance claim rejection?

Yes, false documentation can lead to the rejection of a marine insurance claim. Submitting accurate and correct documentation is crucial to assess the legitimacy of a claim.

What is the general average loss in marine insurance?

It refers to a situation where there is a shared sacrifice of cargo or vessel property to save the remaining goods or the ship from peril during a voyage.