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Maritime Insurance: A Case Study Law Report

Introduction

Operations in most sectors of the economy are regulated by a wide range of legal and other forms of provisions. For example, operators in the banking sector have to adhere to various legislations touching on the industry. Disputes arising in the industry are resolved with the help of these legal frameworks. The maritime is such one sector that exists within the confines of the laws of the land (Parsons 2010). Business operations in the global maritime industry are affected by a number of factors. One of these involves the risks that vessels are exposed to. To deal with this issue, maritime companies insure their vessels to mitigate losses (Page 2002).

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A number of insurance companies are dedicated to the provision of cover specifically meant for this industry. However, disputes are likely to arise between the insurers and maritime companies with regards to compensations in case of accidents. Such disputes are resolved by laws specifically formulated for these purposes (Page 2002).

The current report is prepared against the backdrop of the importance of insurance within the maritime industry. Parsons (2010, p. 15) argues that there is a need to evaluate the legal aspects related to insurance and claims within the maritime industry. To this end, the report illustrates the differences between actual and constructive losses. The analysis of these variations is made in relation to Kastor Navigation Company Limited and Another v. AGT M.A.T and Others. The author of the paper reviews a number of elements related to the concept of proximate cause. The report also outlines the relevance of English law in international trade. The significance of the notice of abandonment is also highlighted.

The report is aimed at resolving some of the contentious issues related to maritime insurance. For instance, the inability to differentiate between an actual and a constructive loss has brought about disputes with regards to the payment of insurance claims. Parsons (2010, p. 5) suggests that the insurance industry is characterised by several lawsuits owing to technical flaws involved in the entire process. The case involving Kastor v. AGT is an example of a lawsuit where a claim was not paid due to technical shortcomings. The report relies on the facts and details of this legal battle to point out the need for a detailed framework for maritime law and insurance in general. English law should be made part of international trade practices. The proposal is justified in this report. The law can be used to address the problems resulting from the technical issues affecting maritime insurance.

Actual and Constructive Loss: A Comparative Analysis

Overview

Insuring property is meant to cover such aspects as damages that may lead to losses for the organisation. The case involving Kastor Navigation Company Limited and Another v. AGT M.A.T. and Others is an illustration of this scenario (LexisNexis 2013, para. 2). The claimant in the suit was seeking compensation for the damage that they incurred owing to the sinking of the ship. The major issue in this legal battle was the determination of the actual cause of the accident that led to the loss of the vessel. Initially, the owners of the vessel had lodged a claim for constructive total loss. They later changed it to actual total loss. The claimant was expected to prove that the loss was actual and not constructive. It was ruled that the actual loss claim could not be verified. The ship did not sink because of the fire and the resulting explosions.

Actual Loss

Actual loss is a term commonly used in maritime law and insurance. According to Rose (2012, p. 54), the concept is used in reference to an asset that has been destroyed. Property is only regarded as an actual loss when it is irretrievable. In certain cases, the term may also be referred to as total loss. In both instances, the meaning remains the same. The British Maritime Act Section 51[1] (as cited in Bennet 2007, p. 63) introduces the notion of a ‘notice of abandonment’. With regards to a total loss, British Maritime Act Section 51[1] (as cited in Bennet 2007, p. 63) provides that no such notice should be given.

Whenever an insured property suffers damage to the extent that the loss may be regarded as actual, one is not required to give the insurer a notice of abandonment. Details touching on the issue of such a notice will be highlighted in subsequent sections of the paper. However, it is important to point out at this juncture that the notification is an official statement that an insured party makes to the insurance firm. It involves relinquishing ownership of a property that has been damaged (Rose 2012, p. 60). Kastor v. AGT is an example of an actual loss since the vessel caught fire and sunk. The destruction meant that the ship was irretrievable. In essence, the claimants (Kastor) were not required to file a notice of abandonment. The realisation makes the lawsuit in reference an attempt by the insurer to delay payments.

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Constructive Loss

Constructive loss is used to refer to an insured asset that has been abandoned. Soyer (2014, p. 45) holds that a desertion of such a nature results from an unavoidable actual loss. Under such circumstances, the property is abandoned since the costs incurred in its repair may surpass its original value. Blairmore (as cited in Soyer 2014, p. 76) outlines a constructive loss in the context of maritime law with reference to the cost of salvaging a ship. Blairmore is of the opinion that it is better for the insurer to acquire a new vessel than to release funds for the recovery.

When a company suffers a constructive loss, the management team is required to issue a notice of abandonment. Soyer (2014, p. 76) suggests that the issuance of the notice will allow thorough investigations to be conducted to ascertain that there was no foul play in the damage referred to in a given claim. Kastor v. AGT presents a scenario where the loss can be regarded as constructive in nature. The claimant issued a notice of desertion after the calamity befell their property. Consequently, the wreckage was deemed as abandoned.

Differences between Constructive and Actual Losses

As illustrated by the separate definitions provided above, there are differences between the two forms of losses. Bennet (2007, p. 63) is of the view that there are cases where a claim may arise due to a combination of both losses. The observation explains the fine line that separates the two terms. Regardless of the situation, it is important to acknowledge the existence of these variations, however minor they may seem. An actual loss only results when the insured property cannot be retrieved (Bennet 2007, p. 63). However, constructive loss requires an assessment to be conducted to determine the cost of retrieving and repairing the asset in reference.

The case between Kastor and AGF is an illustration of the differences between the two losses. An actual loss occurred since the vessel caught fire and sank. Considering the size of the vessel, a retrieval and subsequent repair would cost more than its actual value. In such cases, the insurers can only determine the extent of the loss once an assessment of the damage is carried out. The issuance of a notice of abandonment is another point of departure between the two phenomena. In relation to actual loss, a claimant is not required to file the said notice. However, a constructive loss can only be acknowledged fully once the notice is issued.

The Significance of Proximate Cause in Relation to Kastor v. AGF Mat

Dobbyn (2007, p. 19) argues that a proximate cause is necessary to establish the actual party that should be held responsible. Similar sentiments are advanced by Lowry and Rawlings (2004, p. 88). Lowry and Rawlings (2004) observe that a proximate cause is used to determine the cause of an injury or loss. It is conceptualised as an occurrence that is adequately established by law to be linked to an injury that leads to a loss. Steenson (2009) cites Osborne v. Twin Town Bowl, Inc. and Christianson v. Chicago, St. P.M. & O. Ry. as examples of cases involving the issue of proximate cause.

There are instances where a deliberate action is executed specifically to cause loss of an asset. Richard, Masters, and Stanley (2011, p. 76) suggest that such actions usually lead to frivolous insurance claims. If not properly investigated, such claims may lead to losses for the insurance company. The case pitting Kastor against AGF is a clear illustration of a proximate cause.

Considering that the company had insured the vessel, Kastor Navigation has a right to claim for compensation. The ship caught fire and capsized, which led to a constructive total loss for the company (LexisNexis 2013, para. 3). However, standard procedures in the insurance industry call for the need to make sure that the loss in reference is not a fictitious claim. It is also important to establish that the claimant is justified in seeking compensation. AGF claimed that the cause of the fire was unknown. The insurer was arguing that the cause of this catastrophe should first be established. Merkin and Steele (2013, p. 56) argue that such a move is important since it sets the pace for a precedent.

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The proximate cause illustrated in the case is beneficial to both parties. However, Lowry, Rawlings, and Merkin (2011, p. 143) are of the opinion that under such circumstances, the insurer benefits more than the insured party. The lawsuit presents a legitimate claim by Kastor Navigation since their loss is defined by law. However, AGF would lose money if it pays for the claim without conducting sufficient investigations. Edelman and Burns (2013, p. 87) adds that a proximate cause benefits an insurer if the source of the loss is unidentified. In light of this, the proximate cause presented in the case mentioned above stands to benefit AGF at the expense of Kastor.

English Law in International Trade: An Analysis of the Queen’s Bench Division

Judicial processes can be universally applied, especially if the cases are interrelated. The English judicial system is not an exception. There are instances where a presiding judge refers to a matter outside their geographical jurisdiction (Page 2002, p. 13). According to Jeffrey and Susan (2012, p. 71), such scenarios suggest the relevance of the country in relation to international law. The Queen’s Division referred to the case from the perspective of a Cyprus registered vessel in what appears to be the country’s acknowledgement of international law.

Proponents of universal application of laws argue that international trade is the reason why certain cases will be used as precedents in future suits. Cross and Miller (2011, p. 90) hold that maritime law is relevant to international trade given the rise in global trade. The case in reference involved a Cyprus ship that sank in international waters. In spite of it being registered elsewhere, the case was determined in a London court. The compensation of the constructive loss that emerged was subject to a proximate cause. The case was cited owing to the similarities it has with the dispute involving Kastor v. AGF (Queen’s Bench Division Commercial Court 2003).

London occupies a special position in international maritime law and insurance. Glannon (2010, p. 105) observes that London is the leader when it comes to marine insurance. The development can be attributed to the efficient compensations and adjudication of emergent disputes in this region. In light of this, citing a vessel that is not registered in the United Kingdom is seen as a way of accommodating various legal practices from other jurisdictions. It is important to note that the ship was insured under a slip policy. The policy was structured along the lines of MAR 1991. To this end, such policies are subject to the exclusive jurisdiction of the English courts.

The application of English law in maritime insurance is regarded as an efficient way of settling disputes. Emerson (2009, p. 115) appreciates the significant position held by English legal frameworks in terms of jurisprudence of insurance settlement claims. Over the years, several disputes between parties involved in the payment of insurance claims have been recorded. The elaborate nature of the English law has made it possible to resolve most of these disagreements in an amicable way. The rise in international trade requires a legal framework that will resolve disputes in an agreeable way.

International trade is a reality. According to Emerson (2009, p. 116), global trade has a direct impact on matters touching on insurance and related practices. Specifically, increased international commerce affects activities since the sea is the preferred mode of transport. English law has a long history of adjudicating upon such matters. To this end, the legal structure forms an integral part in the enhancement of international trade. Emerson (2009, p. 117) supports this opinion by citing the presence of various disputes in trade.

As already mentioned in this report, the international law on maritime affairs is inevitable due to increased international trade. Emerson (2009, p. 119) suggests that the situation requires a framework that can be applied uniformly across various jurisdictions. The benefits of the English law are well known. The realisation makes this legislation the suitable reference point for the creation of a universal maritime law. Consequently, the law will provide the perfect template for the development of adjudication processes on the international platform. For instance, the legal structure distinguishes between an actual and a constructive loss. Many jurisdictions fail to highlight the supposed differences. The result is a protracted court case that may have otherwise been avoided. The English law can be used to avoid such flimsy disputes.

The Significance of Notice of Abandonment from the Perspective of Kastor v. Mat

In the insurance world, payment is usually made to the claimant once they relinquish ownership over the lost property. According to Dunt (2013, p. 19), a notice of abandonment is a formal communication indicating that the claimant has surrendered ownership of the insured property to the insurer. Such a move is a requirement made by maritime laws in relation to insurance. Gurges (2010, p. 54) argues that a loss is only considered as complete once the notice is finalised. The significance of this procedure is made apparent in various cases involving compensation in maritime insurance.

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A notice of abandonment helps in ensuring that the claim made to an insurer is legitimate. There are a number of cases where a property is destroyed deliberately so as to get compensation in form of a new asset. In addition, some claims are filed when the asset is not actually damaged. The reality necessitates due diligence from the insurers. Hudson, Madge, and Sturges (2012, p. 87) are of the opinion that once a claimant issues a notice of abandonment, the insurer is required to conduct ‘due diligence’ in relation to the damaged property. Part of this ‘diligence’ requires the insurer to carry out thorough investigations to ascertain the legitimacy of the claim. The notice of desertion issued by Kastor Navigation was in accordance with the laid down provisions of the law. The acceptance of that notice by AGF implies that due diligence was conducted.

Most insurance disputes arise from non-payment of claims. Hudson and Harvey (2010, p. 99) point out that proximate causes can be avoided through proper enforcement of a notice of abandonment. The nature of such a legal filing ensures that once the insurer accepts ownership of the property, then a payment to the claim is inevitable. Hudson and Harvey (2010, p. 103) illustrate that in the absence of such a notice, a claimant is liable to a partial award of their claim. However, many lawsuits pertaining to payment of claims arise when an abandonment notification is disregarded by either of the parties. A proper enforcement of the notice will see a decline in baseless lawsuits by insurers.

The world is moving into an era of interconnectivity due to international trade. Disputes are inevitable under such circumstances. The maritime industry should be restructured to ensure that it meets the demands of international trade. Consequently, issues like notice of abandonment should be addressed. Page (2002, p. 88) suggests that the claim process can be simplified if emphasis is placed on this legal requirement. To this end, stakeholders need to examine the details involving the filing of the notice to avoid the legal technicalities that characterise the processing of claims.

Conclusion

The issue of maritime law was addressed in this report. Dunt (2013, p. 71) highlights the importance of this legal framework in international law. The significance of the law is made apparent by the rise in global trade. The report further highlighted the importance of insurance in the maritime industry. Rose (2012, p. 7) argues that business in this sector is associated with a number of risks. Insurance is necessary to ensure that potential losses are covered. A number of pertinent issues were raised in this essay. They include right to claim and the process involved in filing these legal requirements.

Most of the disputes evidenced in maritime cases involve the insurer’s unwillingness to make payment in the event of a loss. Rose (2012, p. 18) suggests that such a delay is essential to avert false claims. However, the time spent resolving these disputes may lead to losses on the part of the claimant. To avoid this, maritime law should be modified to ensure that adjudication of disputes becomes a last resort. The delays associated with settling claims may disrupt the normal operations of international trade.

Disputes can be easily addressed if the loss that led to the claim is clearly defined. To this end, it is noted that the difference between actual and constructive losses can be determined by analysing the value of recovering and repairing the property. The case involving Kastor and AGF is a clear indication of the importance of making such a distinction (Queen’s Bench Division Commercial Court 2003). The distinction improves the chances of timely settlement of claims. In conclusion, it is important to reiterate on the importance of the notice of abandonment. The notice ensures that payments are made without the need to go through a court of law.

References

Bennet , H 2007, Law of marine insurance, Oxford University Press, Oxford.

Cross, F & Miller, R 2011, The legal environment of business: text and cases, ethical, regulatory, global and corporate issues, Cengage Learning, Michigan.

Dobbyn, J 2007, Insurance law in a nutshell, West Publishers, Perth.

Dunt, J 2013, Marine cargo insurance, Routledge, London.

Edelman, C & Burns, A 2013, The law of reinsurance, West Publishers, Perth.

Emerson, R 2009, Business law, Barron’s Educational Series, Boston.

Glannon, J 2010, The law of torts: examples and explanations, Aspen Publishers, Aspen.

Gurges, O 2010, Reinsuring clauses, Routledge, London.

Hudson, G & Harvey, M 2010, The York-Antwerp rules: the principles and practice of general average adjustment, Routledge, London.

Hudson, G, Madge, T & Sturges, K 2012, Marine insurance clauses, Routledge, London.

Jeffrey, B & Susan, S 2012, Introduction to business law, Cengage Learning, Michigan.

LexisNexis, 2013, Kastor Navigation Co. Ltd. and Another v. AGF M.A.T. and Others, Web.

Lowry, J & Rawlings, P 2004, Insurance law; cases and materials, Hart Publishing, Kent.

Lowry, J, Rawlings, P & Merkin, R 2011, Insurance law: doctrines and principles, Hart Publishing, Kent.

Merkin, R & Steele, J 2013, Insurance and the law of obligations, Nabu Press, Philadelphia.

Page, J 2002, Torts: proximate cause, Foundation Press, Chicago.

Parsons, T 2010, A treatise on maritime law including the law of shipping, the law of marine insurance, and the law and practice of admiralty, Nabu Press, Philadelphia.

Queen’s Bench Division Commercial Court, 2003, Kastor navigation co. Ltd. and. Another v. Agf mat and others. EWHC 2601 (Comm). [2002] 1 LLR 296.

Richard, J, Masters, L & Stanley, P 2011, Liability insurance in international arbitration: the Bermuda form, Hart Publishing, Kent.

Rose, F 2012, Marine insurance: law and practice, Routledge, London.

Soyer, B 2014, Marine insurance fraud, Routledge, London.

Steenson, M 2009, Proximate cause in civil damages act cases, Web.

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