Shipowners Chance 'Negative Equity' in Event of CTL

Shipowners have been warned they could face being saddled with ‘negative equity’ in the insurance aftermath of disasters at sea, according to Keith Jones the outgoing chairman of the Association of Average Adjusters (AAA) at its London AGM, reports UK shipping trade association Maritime London.

Jones listed a potential series of pitfalls awaiting shipping companies when a ‘constructive total loss’ (CTL) is declared. He urged owners to be wary from the outset of the costs over which they had control, of the expensive business of maintaining a wreck pending investigation of the cause of the casualty, and cautioned that they may be unable to recover their costs if the sums exceeded the eventual proceeds of sale of the wreck.

“I am afraid there may be more unhappy monetary endings in the future when it comes to proceeds of sale, or rather the negative equity caused due to the lack of them,” remarked Mr Jones.

He said that despite the problems over ‘proceeds of sale’ having been underlined in 2010 by a previous chairman of the association, Sir Stephen Tomlinson, there was no sign of change in the approach by hull underwriters.

Mr Jones said that in a CTL case where the cause of the damage or the costs of repair are in dispute, the owner is in a difficult position as he needs to retain the wreck in order to be able to prove his case – “but then of course the costs of maintaining the wreck continue to mount. In some cases this could mean that once the cause or costs question has been resolved, the costs of maintaining the wreck throughout this period are far in excess of the proceeds realised.

What if ‘reasonable costs’ exceeded the proceeds? “In such circumstances this is unlikely to end well for an owner as he is no doubt under a legal obligation to maintain the wreck in any event,” said Mr Jones.

(A CTL occurs when a ship is so damaged by an insured peril that the cost of repairing the damage would exceed the value of the ship when repaired. Under the Marine Insurance Act 1906 – the linchpin of most law in its field – where there is a CTL the assured may either treat the loss as a partial loss, or abandon what is insured to the insurer by giving notice of abandonment.)

Source: Maritime London