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Kastor Navigation Co Ltd and Atlantic Bank of New York -v- AGF M.A.T. and others.

The "Kastor Too"

March 2004

On 9th March 2000 fire broke out in the engine room of the bulk carrier Kastor Too when she was off the coast of South Yemen laden with a cargo of rock phosphate destined for Vizagapatnam. About 15 hours later the vessel sank. A total loss claim was subsequently presented to the underwriters who had insured the vessel for an agreed value of US$3 million. However, the underwriters were suspicious and declined liability.

In such circumstances, the owners and the mortgagees of the vessel ("the owners") commenced proceedings against the underwriters in which they claimed for an actual total loss of the vessel by fire, explosion(s) and/or "the fortuitous ingress of seawater". Some nine months later, however, the owners amended their case and introduced an alternative claim for a constructive total loss ("CTL"). This was founded on the assertion that, prior to her sinking, she was so damaged by fire that the cost of repairing her (estimated at more than twice the insured value) would have exceeded her value when repaired.

This proved to be a wise move because, as reported on this website in December 2002, the Commercial Court subsequently found that the sinking of the vessel was not caused by the fire but was due to an independent entry of seawater from an unexplained cause not shown to have been fortuitous. The owners' actual total loss claim was, therefore, dismissed. However, the owners' alternative CTL claim succeeded. The judge was satisfied that the vessel had been so severely damaged by fire that she had become a CTL before sinking. Since a loss by fire was covered by the policy, the underwriters had to pay the CTL claim.

The underwriters appealed. The Court of Appeal's judgment, given by Lord Justice Rix, has now become available.

Partial loss?

Underwriters sought to persuade the Court of Appeal that the loss by fire ought properly to be regarded as a partial loss, rather than a CTL. (Had they succeeded the underwriters would then have had the benefit of section 77(2) of the Marine Insurance Act 1906 ("the Act") and clause 18.2 of the Institute Hull Clauses. These provide that there is no entitlement to recover in respect of an unrepaired partial loss if there has been a subsequent total loss.)

The obligations of a shipowner regarding the abandonment of an insured vessel to underwriters in the case of a CTL were important considerations in this context. Normally, a claim for a CTL has to be notified to underwriters in the form of a notice of abandonment. Section 62(1) of the Act states that, if no such notice is given, the loss can only be treated as a partial loss. In this instance no such notice had been given to underwriters. However, in the course of the proceedings it became common ground that, since there could have been no possibility of benefit to underwriters had the notice been given, section 62(7) of the Act relieved the owners of the need to tender notice of abandonment.

Nevertheless, underwriters sought to gain assistance from section 61 of the Act. This states:

"Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss."

Underwriters argued that the owners' failure to select the abandonment option before the vessel sank meant that the loss by fire could only be treated as a partial loss. The Court was not, however, prepared to accept underwriters' submission. In the Court's view section 61 does not require an election; rather, it is concerned with eliminating from the range of total losses a case where the assured elects to treat a CTL as a partial loss only. Because a notice of abandonment was not required, the owners did not have to declare promptly that they were willing to abandon the vessel to underwriters. However, by presenting a claim for actual total loss, they demonstrated that they were willing to do so. The Court concluded that the reality of the matter was that the owners never treated the loss of their vessel as a partial loss, nor did they ever have the opportunity to do so.

The Court also rejected the argument that it is never possible to make a CTL claim after an actual total loss has occurred. Vessels may be subject to successive losses, but the assured's essential cause of action arises at the time of the casualty. If there was then a right to claim for a CTL the Court could see no reason why that cause of action should have been lost just because the vessel subsequently becomes an actual total loss.

One Casualty or two?

In a series of related submissions underwriters sought to challenge the judge's finding that the loss by fire and the loss by sinking were separate casualties. The approach adopted by the judge was, they said, unrealistic since, in truth, the owners' loss resulted from the sinking and not from the fire. However, the Court held that the judge had been entitled to conclude that the fire was an independent cause of loss from the ingress of water. He had also been entitled to find on the evidence that the fire had caused damage well in excess of the value of the vessel; that the fire was not causative of the sinking; and that the vessel was not an actual total loss, or bound to become one by sinking, before she became a CTL by fire. It had not been necessary for the judge to confine himself to considering the position only at the moment of time immediately prior to the sinking.

Clause 18.2 of the ITC

This clause, which formed part of the policy terms, reads:

"In no case shall the Underwriters be liable for unrepaired damage in the event of a subsequent total loss (whether or not covered under this insurance) sustained during the period covered by this insurance".

Underwriters submitted that this exception was wide enough to exclude underwriters from liability for the CTL claim made by the owners. However, the Court thought it "plain" that the clause dealt only with partial loss and not a CTL. The clause was, therefore, of no assistance to the underwriters.

Merger

Underwriters submitted that a CTL which is overtaken by an actual total loss should be treated like any other unrepaired damage - with the result that it became merged and swallowed up in the subsequent total loss. While acknowledging the existence of a merger rule that prevents an assured from recovering for unrepaired damage as well as for a subsequent total loss (and thereby obtaining more than an indemnity), the Court took the view that there was no special reason why a CTL by fire should have to be treated as unrepaired partial loss for the purpose of this rule. Indeed, once a vessel has been totally lost the Court could not see why or how any subsequent loss was relevant: once a total loss has been established, it exhausts the insurance. If the first total loss falls outside the cover, the assured cannot recover; but, if it falls within the cover, he can. There was no possibility of these owners recovering more than an indemnity and the Court could not, therefore, accept that the loss by fire had to be treated as unrepaired partial loss that merged with the actual total loss.

Election and Estoppel

Finally, the Court rejected underwriters' submission that, by presenting their claim initially as a claim for the actual total loss of the vessel, the owners were prevented from subsequently claiming a CTL by fire. The Court could not agree that the owners' initial decision to treat the loss as an actual total loss amounted to an irrevocable election; nor, in the absence of any reliance by underwriters, could there be any estoppel.

Underwriters' appeal therefore failed and the Commercial Court's judgment on the merits of the CTL claim was upheld, essentially for the same reasons as had been given by Mr Justice Tomlinson.

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