Marine Insurance: Law and Practice




22.1 In ascertaining the measure of indemnity, the court is performing at least two, hopefully complementary, functions. The first is to fulfil the general objective of indemnifying the assured in accordance with the agreement of the parties as expressed in the policy. The second, more specifically, is assessment of the extent of the assured’s loss in precise financial terms, so far as it is capable of doing so in accordance with established rules. 22.2 In his dissenting judgment in Pitman v Universal Mar Ins Co,1 Brett LJ observed that, in the separate cases of goods and ships, there have traditionally been commonly understood objectives for the contract, the universality of which, in his view (and subject, of course, to express contrary agreement), has made them rules which are part of the contract. On his view, the object of an assured on “marketable goods” is the arrival of the goods undamaged at a place at which they may be sold at a profit. The identity of such goods is immaterial to him and they are exactly represented by money. In the case of damaged goods, the indemnity is measured, therefore, by reference to their diminution in value, as it is also in the case of a ship. In the case of a total loss, this is their insured value. 22.3 However, a shipowner does not (it should be added, normally) treat his vessel commercially “as a subject of purchase and sale in either one market or another. It is used in commerce … by its owner as a machine for carrying cargo backwards and forwards for prices determined by successive contracts of affreightment”. The consequence of a partial loss is normally, therefore, immediate business inconvenience from not having the use, or the full use, of the vessel as a profit-earning chattel; it is not a loss from a resulting reduced ability, or inability, to effect its sale. “That inconvenience is not to be cured by buying another ship, or by selling the damaged ship … the loss he desires to recover, and which the underwriter knows he desires to cover, is therefore the cost of repairs, not the diminution in value of the ship to sell.”2 In other words, it is the cost of cure.


22.4 Subject to the restriction of his liability by an express or implied term of the policy or by a rule of law, the underwriter’s liability is unaffected by a partial loss which is partly unrepaired at the commencement of the risk. Thus, in Lidgett v Secretan,3 an underwriter was fully liable under a valued policy for a total loss by fire during the currency of that policy, though he was also liable for an unrepaired partial loss under a policy immediately preceding the policy in question. 22.5 An assured who suffers a partial loss from an insured peril is not bound to effect repairs and prima facie retains his right to claim for the loss until the termination of the risk, at which time his rights against the insurer are crystallised.4 Thus, as just noted, in Lidgett v Secretan 5 the assured could recover for a partial loss remaining partly unrepaired at the expiry of the policy, regardless of the fact that the vessel suffered a total loss for which the (same) underwriter was liable under a second policy, the risk under which commenced immediately on the expiry of the first policy. 22.6 The Marine Insurance Act 1906, section 77(1) states as a general rule that, “Unless the policy otherwise provides, and subject to the provisions of this Act,6 the insurer is liable for successive losses, even though the total amount of such losses may exceed the sum insured”. However, the sub-section must be confined to repaired partial losses; and unrepaired partial losses at the expiry of the insurance will be aggregated and capped by the vessel’s insured value.7


22.7 As a general rule, if, during the currency of the policy, there occur one or more partial losses and they are followed by a total loss, the assured cannot recover for the unrepaired partial losses. His accrued right to do so merges in whatever right he may have to claim for the total loss.8 If the insurer of the unrepaired partial losses is not liable for the total loss, he will be under no liability to the assured for any of the losses.9 22.8 In a case where the underwriter was liable for the total loss, the rationale for the doctrine of merger was stated to be that the full extent of the underwriter’s undertaking is to indemnify for a total loss (and not to benefit the assured beyond that sum) and that, in paying for a total loss, the underwriter in fact discharges partial losses.10 22.9 Unless different explanations are required for different situations, however, this reasoning cannot explain why the underwriter escapes liability in cases where he is not liable for the total loss. A better, more comprehensive, explanation therefore appears to be that, unless otherwise provided, the underwriter’s liability during the currency of the policy is for the full extent of a loss caused by insured perils but that his liability is negatived by a total loss caused by an uninsured loss. 22.10 The doctrine of merger does not affect the underwriter’s accrued liability for insured expenses incurred before the supervening total loss. This is so whether the assured claims for them as suing and labouring expenses11 or as the cost of repairs. Moreover, if the assured suffers an insured constructive total loss and, before he can give notice of abandonment, he suffers an uninsured actual total loss, the doctrine of merger does not apply to deprive him of his entitlement to claim for the constructive total loss.12 However, the costs of unrealised repairs of a series of partial losses will be aggregated and capped by the vessel’s insured value.13


Damage to ship

22.11 Where a ship is damaged, but is not totally lost, the measure of indemnity, subject to any express provision in the policy, is to be determined in accordance with the Marine Insurance Act 1906, section 69. In respect of any one casualty, the indemnity recoverable cannot exceed either the sum insured or the reasonable cost of repairs for the whole damage.

Repaired damage

22.12 Subject to any express provision in the policy, where a ship is damaged, but not totally lost, and the ship has been repaired, the assured is entitled to the reasonable cost of the repairs,14 less the customary deductions, but not exceeding the sum insured in respect of any one casualty.15

Unrepaired damage

22.13 Where a ship is damaged and has not been repaired, the general principle16 is that the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage.17 However, the Marine Insurance Act 1906 does not indicate precisely what measure of depreciation is to be employed. Three possibilities have been canvassed in the cases. 22.14 The first, which Lindley J adopted prior to the Act in Pitman v Universal Mar Ins Co 18 and which Devlin J considered to be a possibility in Irvin v Hine,19 is the measure of depreciation utilised by the Marine Insurance Act 1906, section 71(3) in the case of damaged goods,20 namely the difference between the gross21 sound and damaged values at the termination of the risk (the risk in the time policy in Pitman terminating on the vessel’s sale at a port of distress). The ratio of the measure of depreciation to the insured value thus formed the proportion of loss. 22.15 A second possibility is the difference between the true value and the damaged value of the vessel. This possibility was inevitably rejected in Irvin v Hine 22 because the policy in that case was a valued policy, the valuation in which is generally conclusive.23 In the case of an unvalued policy, however, it remains a possibility, particularly as part of the wider interpretation of the third possibility. 22.16 The third possibility, allowed by Devlin J in Irvin v Hine,24 is, in its narrow sense, in the case of a valued policy, the difference between the agreed value and the damaged value—in broader terms, applicable to valued and unvalued policies, the difference between the insured value and the damaged value. 22.17 The correctness of these possibilities has not so far been sufficiently tested because, where the issue has arisen, a choice has been obviated. First, the cases are on valued policies, so the second possibility in its pure form has not been tested. Secondly, the potential recovery under the first and second routes has exceeded, and therefore been in fact limited by, the estimated cost of repairs. In practice, this ceiling will frequently prevail. Thirdly, the contract may make express provision.25 22.18 The statute is equivocal. On the one hand, it is arguable that the failure to confirm the first possibility, by applying the rule for goods in the Marine Insurance Act 1906, section 71(3), implicitly rejects it (particularly as Lindley J’s approach in Pitman 26 was present for codification) and that the rationale for section 71(3)—the avoidance of market fluctuations27—has less force here.28 This argument would appear to be consistent with the rule making the agreed value conclusive in a valued policy on goods.29 However, Lindley J’s approach could have been, but was not, clearly overridden by the Act and this may be one of the not uncommon cases where Chalmers’ codification of the law embodied the principal features of the common law without being exhaustive. 22.19 In The Catariba 30 Colman J held that, where the value of the vessel had been fixed by the policy, depreciation had clearly to be calculated by reference not to the sound value but to the insured value, since by the contract the parties had agreed to treat the insured value as the yardstick for all loss measurements for which the value of the vessel was a relevant factor. 22.20 Standard form hull cover31 provides that:
  • “1. The measure of indemnity in respect of claims for unrepaired damage shall be the reasonable depreciation in the market value of the vessel at the time this insurance terminates arising from such unrepaired damage, but not exceeding the reasonable cost of repairs.
  • 2. In no case shall the Underwriters be liable for unrepaired damage in the event of a subsequent total loss of the vessel (whether by perils insured under this insurance or otherwise) sustained during the period of this insurance or any extension thereof.
  • 3. The Underwriters shall not be liable in respect of unrepaired damage for more than the insured value of the vessel at the time this insurance terminates.”

Sale with unrepaired damage during risk

22.21 The Marine Insurance Act 1906 excludes from its rule for measuring the indemnity in the case of an unrepaired damaged vessel the case where the vessel has been sold in her damaged state during the risk,32 though without specifying what the measure should be in such a case. In Pitman v Universal Mar Ins Co,33 Lindley J held, in the case of a vessel sold at a port of distress during the currency of a time policy, that the proportion of loss was, in principle, the difference, at that place and time, between her sound value and her damaged value as ascertained by her price on sale.


Customary deductions

22.22 Where a damaged ship has been repaired, the assured can recover the reasonable cost of repairs less the customary deductions.34 Not surprisingly, the Marine Insurance Act 1906 makes no attempt to specify what these deductions might be, allowing custom itself to determine their survival and development. In practice, significant universal “customs” are contained in the form, as amended from time to time, of the Rules of Practice of the Association of Average Adjusters35 (and, in the case of general average, the York-Antwerp Rules36).

Deduction new for old

22.23 The best-known customary deduction is that of “one-third new for old” in the case of wooden ships. A rule was established in the time of, and therefore in relation to, wooden ships that the assured should only be able to recover two-thirds of the cost of repairs. A repaired ship is likely to be in a better condition than she was prior to the loss and the underwriter’s obligation is simply to indemnify the assured, not to enrich him. For the avoidance of dispute and the expense of an enquiry in each case to ascertain the extent to which the repairs provided, on the one hand, an indemnity and, on the other, an additional benefit, the deduction was conveniently standardised at a customary one-third new for old.37 As Brett LJ put it in Lohre v Aitchison:38

“The amount, therefore, of the partial loss arising in respect of the expense of repairing a damaged wooden ship, is the reasonable cost of so repairing her as to make her as nearly as possible equal to what she was before the damage caused to her by the perils insured against, less one-third new for old; that is to say, less one-third of the expense of the labour and materials used in making the repairs.”

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