The Measure Of Indemnity: Partial Loss 

1. The principle of indemnity

By a contract of indemnity insurance, the insurer undertakes to hold the assured harmless against loss caused by an insured peril (that is, the insurer will be responsible to compensate the assured for a specified type of loss caused by a specified insured peril).

This means that the assured is entitled only to compensation for his or her loss. He or she is not entitled to receive or retain any benefits which result in the assured being more than indemnified (i.e. receiving more money than the value of the loss suffered). This is often referred to as the principle of indemnity (Castellain v Preston).

The principle of indemnity should be kept uppermost in mind when considering the measure of indemnity in two different but related respects:

a)In assessing the amount which is required to repair or recover the subject-matter insured.

b)In assessing the impact of any sums received by the assured or which the assured is entitled to receive from third parties in respect of the loss.

2. The measure of indemnity

The measure of indemnity is concerned with the quantification of the assured’s loss under the marine insurance policy. The amount which the assured is entitled to recover is called the ‘measure of indemnity’ (section 67(1) MIA).

In the case of an unvalued policy, the assured is entitled to recover up to the insurable value of the subject-matter of the insurance (the insurable value is set out in section 16 MIA). In the case of a valued policy, the assured is entitled to recover up to the insured value.

The MIA contains a number of provisions as to the measure of indemnity with respect to the vessel, cargo, freight and liability. As to an insurance on ship, see section 69; as to freight, see section 70; as to cargo, see section 71; as to liability, see section 74. (British Credit Trust Holdings v UK Insurance Ltd , Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd, Suez Fortune Investments Ltd v Talbot Underwriting Ltd, Ridgecrest NZ Ltd v IAG New Zealand Ltd).

Institute Clauses:

• Institute Time Clauses – Hulls (1/11/1995), clauses 14, 18.
• International Hull Clauses 2003, clauses 16, 20.

Where there has been an indemnifiable loss under a marine insurance policy in respect of a subject-matter not provided for in the MIA, the measure of indemnity shall be ascertained, as nearly as may be, in accordance with the provisions of the MIA (section 75(1)).

3. The types of loss

There are two types of loss contemplated by the MIA (section 56):

a) A total loss (sections 56 to 63 MIA).

b) A partial loss. Any loss other than a total loss is a partial loss (sections 64–77MIA). A partial loss is also referred to as a ‘particular average loss’ (section 64(1) MIA). A partial loss should be distinguished from general average losses (sections 66, 73), salvage charges (sections 65, 73) and particular charges (section 64(2)). The assured may claim for a total loss. If, however, the evidence is that there has been no total loss, the assured is still entitled to claim for a partial loss (section 56(4)). Similarly, even if a loss might amount to a ‘constructive total loss’, the assured may elect to claim only for a partial loss (section 61 MIA).

It may be that the measure of indemnity is not quantifiable immediately on the occurrence of the loss, but only afterwards. That does not, however, prevent the cause of action accruing beforehand in respect of the claim for an indemnity. The cause of action under an indemnity insurance contract normally accrues upon the occurrence of the loss. However, the terms of the insurance contract may be such that the cause of action will only arise once the loss is quantified.

4. Partial loss of ship

i) The measure of indemnity

Section 69 MIA sets out the measure of indemnity in the event that there has been a partial loss of ship.

If the vessel has been repaired, the assured is entitled to the reasonable cost of repairs, less customary deductions, but not exceeding the sum insured (section 69(1) MIA). This is so, even if the repaired vessel is worth more than it was prior to the partial loss. The ‘cost of repairs’ includes not only the cost of permanent repairs, but also any other cost (such as of temporary repairs, towage, docking fees, surveyors’ costs) which has to be incurred in order to ‘put the ship right’ (The Medina Princess). (clause 14 of the Institute Time Clauses – Hulls (1/11/1995) provides that no deductions will be made from the cost of repairs; see also clause 16 of the International Hull Clauses 2003).

If the vessel has not been repaired at all and has not been sold in her damaged state during the risk, the assured is entitled to the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repair (section 69(3) MIA). (see clause 18 of the Institute Time Clauses – Hulls (1/11/1995); clause 20 of the International Hull Clauses 2003). 

In order to calculate the reasonable depreciation, one has regard to the agreed value (if there is one) rather than the actual value. 

There are two possible formulas for calculating the depreciation: 

i) the actual damaged value is subtracted from the agreed value to calculate the depreciation; or (ii) the proportion of the difference between the actual damaged value and the actual pre-damage value to the actual pre-damage value is applied to the agreed value (e.g. if the agreed value is $12,000, the actual pre-damage value is $6,000 and the actual damaged value is $2,000, the depreciation is $8,000, being two-thirds – or 4,000/6,000 – of the agreed value). There has been no authoritative determination as to which formula is correct, but the latter has been preferred. Note clause 18 of ITC Hulls (1/11/1995) and clause 20 of the International Hull Clauses 2003. 

ii) These provisions restrict the indemnity for unrepaired damage to the actual market depreciation: Kusel v Atkin; Suez Fortune Investments Ltd v Talbot Underwriting Ltd.

a) The depreciation is to be calculated at the date of expiry of the policy, not at the date of the damage.

b) Diminution in value may be measured by the cost of repair.

c) If the vessel has been partially repaired, the assured is entitled to the reasonable cost of such repairs (section 69(1) MIA) and to an indemnity for the reasonable depreciation arising from the unrepaired damage, provided that the total amount does not exceed the reasonable cost of repairing the whole damage (section 69(2)).

If the vessel has not been repaired but has been sold prior to the expiry of the policy, there is conflicting authority as to whether the assured is entitled to: (a) the reasonable cost of repairs of the vessel provided that it does not exceed the amount of depreciation of the vessel; or (b) depreciation provided that it does not exceed the reasonable cost of repairs (Pitman v Universal Marine Insurance Co). 

The difference between this approach and the approach where the vessel has not been sold may be that the depreciation is calculated not at the expiry of the policy but as at the date of sale. The sale proceeds are not taken into account; however, they will be evidence of the actual damaged value.

ii) Successive losses

Where there are two successive losses, the assured is entitled to claim up to the measure of indemnity in respect of each, even though that total amount may exceed the sum insured (section 77(1) MIA).

There are at least two exceptions to this rule:

a) If a partial loss which has not been repaired is followed by a total loss, the assured cannot recover for the partial loss, even if the total loss is not covered by the policy (this is referred to as the doctrine of merger). If the total loss is covered by the policy, the assured is entitled to recover only for the total loss (section 77(2) MIA; see also clause 18.2 of the Institute Time Clauses – Hulls (1/11/1995); clause 20.2 of the International Hull Clauses 2003). If an unrepaired constructive total loss occurs and is followed by an actual total loss, the assured is entitled to recover for the constructive total loss (i.e. the doctrine of merger does not apply), unless the assured has elected to treat the constructive total loss as a partial loss (Kastor Navigation Co Ltd v Axa Global Risks (UK) Ltd). It appears that there is no doctrine of merger applicable to at least some types of non-marine insurance: Ridgecrest NZ Ltd v IAG New Zealand Ltd; see also Crystal Imports Ltd v Underwriters at Lloyd’s. 

b) If a partial loss which has not been repaired is followed by another partial loss which also has not been repaired, the assured is only entitled to recover for the depreciation of the vessel at the time of expiry of the policy, provided that that sum does not exceed the reasonable cost of repairs as provided for in section 69(3) MIA (Kusel v Atkin).

5.Partial loss of cargo

Where there is a partial loss of cargo, the measure of indemnity is as follows:

a) Where part of the cargo has been totally lost (e.g. 1,000 tons of a cargo of 5,000 tons is destroyed), the measure of indemnity is: 

(i) in the case of a valued policy, the proportion of the agreed value as is reflected by the proportion of the insurable value of the part lost to the insurable value of the whole (section 71(1) MIA); 

(ii) in the case of an unvalued policy, the insurable value of the part lost (section 71(2) MIA). 

b) Where the whole or part of the cargo is delivered in a damaged state, the measure of indemnity is the proportion of the insured value (in the case of a valued policy) or the insurable value (in the case of an unvalued policy) which the difference between the gross sound value and the damaged value bears to the gross sound value (section 71(3) MIA). ‘Gross value’ generally means wholesale price plus freight, landing charges and duty (section 71(4) MIA).

Where the cargo reaches its destination but cannot be identified (e.g. by reason of obliteration of its marks), there is no total loss, but only a partial loss (if in fact there is any loss at all). (Section 56(5) MIA).

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