Valuation of Insurable Interest

1. Basis of Valuation

Valuation is important to know the quantum of indemnity that the assured is rightfully entitled to in the event of loss.

Indemnity is the position or situation that the assured will be in if no loss had occurred to him.

In an unvalued policy, the object sought is to put the assured in the same position as he would be in at the beginning of the risk.

2. Nature Of The Assured’s Claim For Non-Payment

Where an insurer has failed to pay the assured under the contract of insurance, the assured’s claim is for damages (The Fanti). This remedy is limited to the indemnity for which the contract of insurance provides (Hadley v Baxendale).

Sections 67 and 68 MIA provides as follows:-

67. Extent of liability of insurer for loss.

(1) The sum which the assured can recover in respect of a loss on a policy by which he is insured, in the case of an unvalued policy to the full extent of the insurable value, or, in the case of a valued policy to the full extent of the value fixed by the policy is called the measure of indemnity.

(2) Where there is a loss recoverable under the policy, the insurer, or each insurer if there be more than one, is liable for such proportion of the measure of indemnity as the amount of his subscription bears to the value fixed by the policy in the case of a valued policy, or to the insurable value in the case of an unvalued policy.

68. Total loss.

Subject to the provisions of this Act and to any express provision in the policy, where there is a total loss of the subject-matter insured,—

(1) If the policy be a valued policy, the measure of indemnity is the sum fixed by the policy:

(2) If the policy be an unvalued policy, the measure of indemnity is the insurable value of the subject-matter insured.

This is consistent with the rule that there is no cause of action of damages for the late payment of damages (President of India v Lips Maritime Corporation (The Lips).

This is also consistent with the principle that a contract of insurance on goods does not cover against consequential losses, and with the principle of valuation as at the commencement of risk.

A marine insurance cover also does not allow for claims of hardship, inconvenience or mental distress arising from an underwriter’s defence of the claim (The Italia Express No.2).

3. Interest On The Assured’s Claim

Courts allow interest by virtue of Section 35A of the Senior Courts Act 1981 in proceedings of a debt or damages from the date the cause of action arose.

In the case of Quorum AS v Schramm (No.2) it was held that in complicated insurance cases the court usually exercises its discretion on the basis it is proper to allow insurers some time to consider the claim. The time varies according to the nature of the loss, the way in which the claim is presented and the circumstances that require investigation.

4. Valued And Unvalued Policies

Section 27 MIA:-

(1) A policy may be either valued or unvalued.

(2) A valued policy is a policy which specifies the agreed value of the subject-matter insured.

(3) Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.

(4) Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss.

Section 28 MIA:-

An unvalued policy is a policy which does not specify the value of the subject-matter insured, but, subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained, in the manner herein-before specified.

Valued Policy

The difference between a valued and unvalued insurance is that under an unvalued policy the assured must prove the actual value of the subject of insurance in case of loss. Under a valued policy he needs not do so, the valuation in the policy being conclusive between parties (Barker v Janson and Woodside vGlobe Marine Insurance Co).

This rule is also applicable to underwriters (North of England Insurance Association v Armstrong and The SS Balmoral Co v Marten).

Section 27(3) MIA is applicable consistently whether the loss is complete or otherwise.

Under the Institute Time Clauses (Hull), it is provided that where a vessel sails with the intention that she should be scrapped or sold for scrap, the amount recoverable in the event of her loss should be her market value as scrap at that time unless prior notice has been given to insurers and any amendments to the terms of cover, value and premium have been agreed. Under an unvalued policy this term displaces the measure of indemnity as section 16 of the MIA provides that it is subject to any express provision in the policy.

5. The Value In The Policy Is Always Conclusive In Cases Of Total Loss

In total loss cases the value in the policy has been held to be conclusive measure of indemnity (Shawe v Felton).

The exception to this is provided in Section 27(4) MIA.

6. The Value In The Policy Is Conclusive In Cases Of Partial Loss

Any claim for depreciation in the ship’s market value is calculated by deduction of her unrepaired market value at the termination of the risk from her sound market value at termination of the risk (not exceeding the sum insured).

This is to be read with Section 69(2) and (3) MIA. This section as a whole provides as follows:-

69 Partial loss of ship.

Where a ship is damaged, but is not totally lost, the measure of indemnity, subject to any express provision in the policy, is as follows:-

(1) Where the ship has been repaired, the assured is entitled to the reasonable cost of the repairs, less the customary deductions, but not exceeding the sum insured in respect of any one casualty:

(2) Where the ship has been only partially repaired, the assured is entitled to the reasonable cost of such repairs, computed as above, and also to be indemnified for the reasonable depreciation, if any, arising from the unrepaired damage, provided that the aggregate amount shall not exceed the cost of repairing the whole damage, computed as above:

(3) Where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repairing such damage, computed as above.

70 Partial loss of freight.

Subject to any express provision in the policy, where there is a partial loss of freight, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the proportion of freight lost by the assured bears to the whole freight at the risk of the assured under the policy.

71 Partial loss of goods, merchandise, &c.

Where there is a partial loss of goods, merchandise, or other moveables, the measure of indemnity, subject to any express provision in the policy, is as follows:—

(1) Where part of the goods, merchandise or other moveables insured by a valued policy is totally lost, the measure of indemnity is such proportion of the sum fixed by the policy as the insurable value of the part lost bears to the insurable value of the whole, ascertained as in the case of an unvalued policy:

(2) Where part of the goods, merchandise, or other moveables insured by an unvalued policy is totally lost, the measure of indemnity is the insurable value of the part lost, ascertained as in case of total loss:

(3) Where the whole or any part of the goods or merchandise insured has been delivered damaged at its destination, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value:

(4) “Gross value” means the wholesale price, or, if there be no such price, the estimated value, with, in either case, freight, landing charges, and duty paid beforehand; provided that, in the case of goods or merchandise customarily sold in bond, the bonded price is deemed to be the gross value. “Gross proceeds” means the actual price obtained at a sale where all charges on sale are paid by the sellers.

7. Effect of Overvaluation In Certain Cases

In many texts and judgments, it has been stated that an agreed valuation may be set aside. This is also indicated by Section 27(3) MIA (“Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured…”).

There are 3 cases in which irregularities in the valuation may have the effect of avoiding the policy: (1) where the subject of the insurance has been fraudulently overvalued with the object of cheating the underwriters; (2) where the circumstances show that the object was not to effect a bona fide insurance but to gamble; and (3) where apart from fraud in the assured, there is such an overvaluation of the interest of the assured in the adventure as alters the nature of the risk, making it one of speculative and not of an ordinary business nature, and it is found that this was a material fact which ought to have been, but was not, disclosed to the insurer. (The authorities for vitiating the policy are Haigh v De la Cour, Lewis v Rucker and Ionides v Pender)

8. Excessive Valuation Of A Ship And Goods

It is not always the case where the insurance transaction will be tainted with fraud in the case of an overvaluation of the policy value.

As mentioned in various case laws, excessive overvaluation is allowed, among others, due to business reasons and as long as the insurers have knowledge of the same.

9. The Valuation In The Policy Does Not Preclude The Inquiry, Whether Or Not The Whole Of The Interest To Which Such Valuation Refers Has In Fact Been At Risk

Section 75 MIA provides as follows:-

75 General provisions as to measure of indemnity.

(1) Where there has been a loss in respect of any subject-matter not expressly provided for in the foregoing provisions of this Act, the measure of indemnity shall be ascertained, as nearly as may be, in accordance with those provisions, in so far as applicable to the particular case.

(2) Nothing in the provisions of this Act relating to the measure of indemnity shall affect the rules relating to double insurance, or prohibit the insurer from disproving interest wholly or in part, or from showing that at the time of the loss the whole or any part of the subject-matter insured was not at risk under the policy.

If something has formed a constituent in the estimate of value in which the assured had no insurable interest, it is clear that the underwriter would not be liable to the estimate of the said value and this can be investigated without infringing the valuation in the policy (Williams v North China Insurance Co).

The difficulty in applying this rule is usually to the quantity that was shipped and whether it corresponds to the value on the policy.

10. Valued Policies On Earnings Or Freight

This is very rare in modern times. Most policies to protect earnings of a vessel are placed in the form of valued time policies on earnings or hire. The distinction between the two was dealt with in The Wondrous. A valued time policy on loss of earnings provides a fixed sum to be paid by reference to a period of time. A freight policy on the other hand is concerned with that part of the value of a vessel or voyage or adventure represented by the freight to be earned under a particular contract.

Under a valued policy on earnings, it the vessel is prevented from earning by an insured peril, the agreed value of her earning over the period during which she is prevented from earning, will be become payable (Cepheus Shipping Corp v Guardian Royal Assurance Plc (The Capricorn)).

For freight policies the usual practice nowadays is to take a valued policy to cover the value of the vessel whether the vessel be full or partly loaded or in ballast, chartered or unchartered.

Now even anticipated freight is insured by the vessel owner.

11. Valued Policy On Goods

When cargo consisted of different kinds of produce, goods were previously valued and insured separately when shipped. This was done so that the memorandum clauses were not applied in such a way so as to prevent the assured from claiming if the damage did not exceed the required percentage of the whole cargo.

12. Increase value policies

They fall into three classes – (1) cargo insurance to cover the case of a merchant importing goods from abroad who might well be ignorant of their value at the time of taking out his original cover, or the goods might have increased in value in the course of the voyage; (2) hull insurance where the purpose if to enable the assured in certain circumstances to recover on the basis of a higher valuation of the ship than that contained in the principal hull policy; (3) used to cover interests now generally protected by a policy on disbursements.

These are usually covered in the Institute Cargo clauses. In the absence of such a clause, the existence of the increased value policy is ignored.

13. Goods “To Be Hereafter Declared And Valued”

This policy is taken out when the assured expects goods from abroad but does not know the kind or the amount. Such declaration before loss is not a condition precedent to the right of the assured to recover “but unless the policy otherwise provides, where a declaration of value is not made until after notice of loss or arrival, the policy must be treated as an unvalued policy as regards the subject matter of that declaration” (Section 29 (3) MIA)

14. Apportionment Where Different Properties In One Valuation

Section 72 MIA provides as follows:-

(1) Where different species of property are insured under a single valuation, the valuation must be apportioned over the different species in proportion to their respective insurable values, as in the case of an unvalued policy. The insured value of any part of a species is such proportion of the total insured value of the same as the insurable value of the part bears to the insurable value of the whole, ascertained in both cases as provided by this Act.

(2) Where a valuation has to be apportioned, and particulars of the prime cost of each separate species, quality, or description of goods cannot be ascertained, the division of the valuation may be made over the net arrived sound values of the different species, qualities, or descriptions of goods.

Unvalued Policies

15. Measure Of Insurable Value In An Unvalued Policy

Section 16 MIA sets out the rules followed in estimating the value of subject matter insured in an unvalued policy

Subject to any express provision or valuation in the policy, the insurable value of the subject-matter insured must be ascertained as follows:—

(1) In insurance on ship, the insurable value is the value, at the commencement of the risk, of the ship, including her outfit, provisions and stores for the officers and crew, money advanced for seamen’s wages, and other disbursements (if any) incurred to make the ship fit for the voyage or adventure contemplated by the policy, plus the charges of insurance upon the whole: The insurable value, in the case of a steamship, includes also the machinery, boilers, and coals and engine stores if owned by the assured, and, in the case of a ship engaged in a special trade, the ordinary fittings requisite for that trade:

(2) In insurance on freight, whether paid in advance or otherwise, the insurable value is the gross amount of the freight at the risk of the assured, plus the charges of insurance:

(3) In insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole:

(4) In insurance on any other subject-matter, the insurable value is the amount at the risk of the assured when the policy attaches, plus the charges of insurance.

Unvalued policies of a ship is seen in the cases of The Captain Panagos DP and the case of The Thor II.

The insurable value of freight is the gross amount of freight at risk of the assured plus the charges of insurance and is decided in the case of Forbes v Aspinall.

The word prime cost in Section16(3) means the cost to the assured at the time of shipment or at some time when the prime cost can reasonably be deemed to represent their value to their owner at the date of shipment (Williams v Atlantic Assurance Co).

16. Invoice Price In Foreign Money

If such a dispute arises, the court will apply Miliangos v Frank and also apply the date of commencement of risk or the date of loss as a guide to the date of exchange rate to be utilized.

17. Policies To Cover Fluctuating Interest

In an unvalued policy where the provisions show that it is intended to cover any interest of the assured that may be at risk within the limits of the time or voyage for which the policy is effected, the amount of insurable interest fluctuates at different periods of the risk and the loss must be apportioned between the parties in the proportion which the sum insured bears to the amount of insurable interest on board at the time of loss.

This was seen in Crowley v Cohen where the court held that the insurable interest in such a policy is the amount at risk at the time of the loss.

18. Measure Of Indemnity In Insurance Against Liabilities To Third Parties

Section 74 MIA provides as follows:-

Where the assured has effected an insurance in express terms against any liability to a third party, the measure of indemnity, subject to any express provision in the policy, is the amount paid or payable by him to such third party in respect of such liability.

This was seen in Cunard SS Co v Marten.

19. General Provisions As To Measures Of Indemnity

Section 75 MIA provides as follows:-

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