Types of Marine Losses

The maritime sector faces several risks due to the unpredictable nature of the seas, human error etc, which can lead to a loss of cargo, property, lives of crew members and environmental losses. The different types of marine losses can be managed by marine insurance policies which help in covering for the particular marine loss. Marine insurance helps to manage the risks by covering cargo, vessels, terminals, and any transportation or storage that is used to ship cargo from the starting point to the final destination.

It is vital for all maritime professionals and industry stakeholders to understand the different marine losses so they know how to proceed with claim settlement if such a situation arises. Knowledge of these can help mitigate risks, ensure the safety of ships, cargo, and crew, and maintain compliance with shipping regulations.

This article will discuss the different types of marine losses with examples.

Types of Marine Losses

Marine Losses are of two types: Total Loss and Partial Loss.

1. Total Losses

The first type of marine loss is Total Losses. As the name suggests, a total loss is when the insured cargo or property loses a hundred or near hundred per cent of its value or when the insured is irretrievably deprived of the cargo.

Total Losses are subdivided into two categories: Actual Total Loss and Constructive Total Loss.

Actual Total Loss

ATL is a marine loss wherein a vessel or its cargo has been totally destroyed or lost. A situation can also be classified as an ATL when the ship or cargo has been severely damaged and repair or salvage is not economically feasible. For instance, a tropical storm or fire sinks a vessel or water spoils a cargo of perishable items.

Another case of ATL is when the insured cargo is in a position where it cannot be accessed by the insured business. For instance, when pirates capture a vessel or thieves steal the shipment of valuable items.

Thirdly, when the ship carrying cargo goes missing for days and there are no or very few chances of recovery, then such a situation also comes under actual total loss.

Once the loss is determined to be an Actual Total Loss, the insured business is entitled to the entire value of the insured goods, according to the policy. The insurance company has to pay the claim and take over the ownership of the cargo or the remains. If the cargo is found or recovered in future, the insurance company can rightfully claim it.

For instance, You export electronic items from India to Australia and pay 2 Crores as their market value. However, the ship loaded with the cargo collides with another ship and sinks. You lose the entire cargo of electronic items and so the policy entitles you to a compensation of 2 Crores. If salvageable parts of the cargo are ever retrieved, then the insurance company can also claim for their ownership.

Constructive Total Loss

A Constructive Total Loss is when an insured can claim a total loss if the cost of saving or repairing the cargo is more than its value after the loss.

It occurs when one or more of the below-mentioned conditions are met.

The insured cargo is not entirely damaged but it is in such a condition that it cannot be restored to its original state without spending money which exceeds its value.

For instance, an explosion or fire damages a vessel but it can still remain afloat.

Secondly, one can access the shipment or cargo by incurring expenses exceeding their value. For instance, a vessel stranded on a remote island or on a reef can be towed or salvaged.

You deliberately abandon the cargo insured for your business since it is not worth saving or repairing. For example, when your vessel is in a piracy-prone area or war zone it can still escape.

In this type of marine loss, you can abandon the entire insured cargo and claim the full policy value or you can keep them and claim a partial loss, based on their condition. The insurance company will decide on the acceptance of the claim and the payment.

For Example, you import furniture from Spain to India and pay INR 50 Lakhs as their market value and also take an insurance policy to cover the cargo for loss or damage during the voyage. Unfortunately, the ship carrying your cargo catches fire and most furniture is damaged or burnt. Though you can salvage the furniture, it will cost you at least INR 40 lakhs. As your furniture is worth just INR 10 lakhs after the fire, you decide to abandon it to the insurance company and claim its total value, per the policy.

2. Partial Losses

A partial loss occurs when only a part of the insured cargo is destroyed or damaged, which decreases their value but does not entirely destroy them. As per the insurer, a partial loss can be either a particular average loss or a general average loss.

Particular Average Losses

This type of partial loss impacts only one party involved in the marine venture. It occurs when the loss is caused by a peril insured against and is not shared among other parties. For instance, a cargo of cotton is damaged by water due to leakage in a ship’s hull or a mechanical failure damages the ship’s engine.

In this loss, the insurer compensates based on the difference in the cargo’s value before and after the loss. You can retain the ownership and possession of the insured cargo.

For example, if you export spices from India to Japan and pay INR 30 Lakhs as their market value and take a marine insurance policy to cover the goods for loss during transit. Some spices suffer damage due to seawater during a storm and their quality is compromised. They sell for 15 Lakhs in Japan instead of 20 Lakhs and since you suffer a partial loss of 5 lakhs, the insurance company will pay this amount to you and you can keep the remaining spices.

General Average Losses

This happens when the loss is caused by a deliberate sacrifice or expenditure made for the vessel or cargo’s safety. For instance, when the ship’s crew throws a few containers or cargo to lighten the vessel and prevent it from sinking or when a tugboat is hired to tow the vessel to port due to mechanical issues.

In this situation, your insurer will compensate you based on the contribution rate which is determined by an average adjuster. The rate is calculated by dividing your interest’s value by the total value of all parties involved in the venture and you can own and possess the goods insured.

Here is an example which will help you understand this marine loss.

Suppose a ship loaded with cargo from India to France is caught in a storm and some cargo has to be thrown overboard to save the ship from sinking.

Value of the ship: 100 Lakhs
Value of the cargo: 200 Lakhs
Value of the freight: 50 Lakhs

The total value of all the parties’ interests (100+200+50)=350 Lakhs

The contribution rate for each party:

Shipowner: ₹100 lakhs / ₹350 lakhs = 28.57%

Cargo owner: ₹200 lakhs / ₹350 lakhs = 57.14%

Freight owner: ₹50 lakhs / ₹350 lakhs = 14.29%

The average adjuster determines that the amount of loss is 40 lakhs, which is the value of the cargo thrown overboard.

So, in this case, the share of each party is:

Shipowner: ₹40 lakhs x 28.57% = ₹11.43 lakhs

Cargo owner: ₹40 lakhs x 57.14% = ₹22.86 lakhs

Freight owner: ₹40 lakhs x 14.29% = ₹5.71 lakhs

The shipowner and the freight owner have to pay their share of the loss to the cargo owner, who has suffered the most loss.

Apart from these two losses, there are a few other kinds of marine losses which are discussed below.

Hull and Machinery Loss

This loss happens when the physical structure of the vessel, including its engine and mechanical parts suffers from failure during the voyage. This is covered under the Hull and Machinery Insurance policies.

Cargo Loss & Damage during Transit

Cargo loss can be defined as the damage or destruction of cargo being transported by sea, due to many factors like poor handling and stowage, piracy, accidents or poor weather.

Cargo can also be damaged, for example, perishable goods like vegetables, fruits and pharmaceuticals may suffer damage due to delays or failure of refrigeration systems.

Loss Due to Theft or Piracy

Piracy poses a threat in some parts of the world including the Gulf of Guinea and the Strait of Malacca. Ships carrying goods like electronics, oil and containers can be attacked by pirates.
Death or Injury to Crew Members

The safety of the crew is important however in the maritime industry, crew members can lose their lives in accidents, due to illness, kidnappings by pirates or natural disasters. They can also suffer serious injuries. These losses can lead to financial claims, and also legal complications.

Abandonment of Crew

Abandoning the crew can be a loss, where the crew members are left stranded onboard without support or provisions due to insolvency or other issues related to the shipowner.

Environmental Losses

This marine loss threatens the marine ecosystem and can happen due to several reasons, like marine pollution, oil spills etc which can lead to legal liabilities for the company.

One of the most well-known and studied cases of environmental loss is the Exxon Valdez Oil Spill in 1989. The oil tanker spilled millions of gallons of crude oil into the waters off Alaska, causing significant environmental damage and loss of marine life.

Exxon had to pay millions of dollars in private claims and more than a billion dollars to settle government suits under environmental laws like the Clean Water Act.

Another reason for environmental loss is when invasive species are introduced into foreign marine ecosystems due to ballast water discharge which can have a catastrophic impact on local species. An example of this is the 2007 MV Cosco Busan Collision which resulted in ballast water discharge that caused considerable damage to marine life in the San Francisco Bay.

General Operational Losses

Operational losses include the several types of damage that occur during the routine operations of a ship which are not related to accidents or natural disasters. This includes losses from equipment failure, maintenance issues and human errors.

Liability Losses

In this type of marine loss, shipowners or operators are held financially accountable for the damage done by their ships. These losses arise from claims of negligence, violations of maritime law and breach of contract.

An example of this loss is when ships collide which damages both ships involved in the accident, their cargo and the surrounding marine environment.

Pollution Liability

If a ship releases pollutants into the sea, the owner might face liability claims under international conventions like the International Convention on Civil Liability for Oil Pollution Damage.

Conclusion

Marine losses are complex and encompass a range of accidents or situations that can have significant operational, financial and environmental consequences. Maritime industry professionals should have an understanding of marine losses so they can devise measures for minimising risks, improve safety protocols and comply with legal frameworks. As the sea is unpredictable, it is vital to adopt risk management strategies to reduce exposure to these marine losses and safeguard the interests of all parties involved in shipping operations.

You might also like to read-

• What is Marine Insurance?
• Different Types of Marine Insurance & Marine Insurance Policies
• Marine Insurance for Piracy Attacks: Necessities and Benefits
• The Importance of Marine Insurance Brokers
• What is Marine Cargo Insurance and How to Get One?

About Author

Zahra is an alumna of Miranda House, University of Delhi. She is an avid writer, possessing immaculate research and editing skills. Author of several academic papers, she has also worked as a freelance writer, producing many technical, creative and marketing pieces. A true aesthete at heart, she loves books a little more than anything else.

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