A Supreme Court decision dated February 23 2001 (Case 98Da59309) interpreted the meaning of "costs of repairing the damage" under Article 60(2)(ii) of the British Marine Insurance Act 1906 in determining whether a vessel was constructive total loss.

According to Article 60(2)(ii) of the British Marine Insurance Act 1906 a constructive total loss exists when "the ship.. is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired". The court held that the 'cost of repairing the damage' means the costs to be incurred in restoring the damaged vessel to its original condition, including:

  • the costs of survey to ascertain the damaged parts and the extent thereof;
  • the costs of towing the stranded vessel to the repair port;
  • the survey fee of the vessel surveyor;
  • the stamp fee for issuance of the towage certificate;
  • the supervising fee of the repair supervisor; and
  • other miscellaneous costs incidental to the repair.

The court reversed and remanded the lower court judgment, which upheld a constructive total loss decision that was based on an incorrect assessment by an incompetent surveyor. It held that (i) the assessment of the repair costs in the case lacked reasonableness in terms of the procedure and method of assessment, and (ii) the basis of the calculation of the repair costs and the outcome of the damage adjustment was unclear.

The court also held that where it is agreed under a mortgage contract that the compensation or indemnity sums to be payable by the third party to the mortgagor by reason of extinction of the insurance contract (or loss or damage of the mortgaged vessel) can be appropriated by the mortgagee as the repayment of the debt secured by the mortgage for which the mortgagor may not raise an objection, the proceeds of the salvage sale of the damaged vessel as scrap must be paid to the mortgagee, as well as the insurance proceeds due to the vessel's total damage as a result of the stranding and sinking.

Further, where it is agreed that if the mortgagor requests deletion of the mortgage in order to sell or scrap the vessel then the mortgagee shall comply with the request without demanding provision of a substitute security, the mortgagor's obligation to maintain a security will be excused and cannot be deemed to incorporate a special agreement to the effect that even the sale proceeds of the damaged vessel will also be paid to the mortgagor.

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