Types of Loss: S-01 Chapter 6
Before a surveyor can value a loss, they have to name it. Five kinds, and the sums behind each.
Before a surveyor can put a number on a loss, they have to say what kind of loss it is. A truck that can be repaired, a truck that is worth less than its repairs, and a truck at the bottom of a river are three different claims, settled three different ways. Chapter 6 of S-01 is that vocabulary.
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The Five Types at a Glance
Actual total loss
What it means
Destroyed, or so damaged it is no longer the kind of thing insured
Typical settlement
Full insured value, subject to the policy terms
Constructive total loss (CTL)
What it means
Repairs plus salvage would cost as much as, or more than, the property is worth
Typical settlement
Treated as a total loss rather than repaired
Partial loss
What it means
Damaged but worth repairing. In marine insurance, called particular average
Typical settlement
Cost of repair or the reduction in value
General average
What it means
A deliberate sacrifice at sea to save the whole voyage
Typical settlement
Shared by ship and cargo in proportion to value at risk
Consequential loss
What it means
Income lost and extra costs after a covered peril stops the business
Typical settlement
Under a loss of profits or business interruption policy
| Type | What it means | Typical settlement |
|---|---|---|
| Actual total loss | Destroyed, or so damaged it is no longer the kind of thing insured | Full insured value, subject to the policy terms |
| Constructive total loss (CTL) | Repairs plus salvage would cost as much as, or more than, the property is worth | Treated as a total loss rather than repaired |
| Partial loss | Damaged but worth repairing. In marine insurance, called particular average | Cost of repair or the reduction in value |
| General average | A deliberate sacrifice at sea to save the whole voyage | Shared by ship and cargo in proportion to value at risk |
| Consequential loss | Income lost and extra costs after a covered peril stops the business | Under a loss of profits or business interruption policy |
Actual Total Loss
- Destroyed
- A godown burned to the ground; a cargo of cement that sinks with the ship.
- No longer the thing insured
- Sugar soaked in seawater until it is syrup: something still exists, but it is not sugar any more.
Worked Example: Is It a Constructive Total Loss?
A delivery truck worth ₹20 lakh before the accident ends up in a ravine.
| Item | Amount |
|---|---|
| Value before the accident | ₹20,00,000 |
| Cost to recover the truck from the ravine (salvage) | ₹5,00,000 |
| Cost of repairs | ₹16,00,000 |
| Repairs + salvage | ₹21,00,000 |
| Test: does ₹21 lakh equal or exceed ₹20 lakh? | Yes, so a constructive total loss |
If the repairs had been ₹12 lakh, repairs plus salvage would be ₹17 lakh, under the ₹20 lakh value, and the claim would be settled as a partial loss: the repair bill, less any depreciation the policy allows. The surveyor's estimate of the repair cost is what tips the claim one way or the other, which is why IRDAI's duty list asks surveyors to estimate the quantum of loss, recommend depreciation and comment on salvage.
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Worked Example: Splitting a General Average Loss
In a storm the master jettisons cargo worth ₹50 lakh to save the ship. Simplified values at risk: ship ₹6 crore, Cargo A ₹3 crore, Cargo B ₹1 crore (total ₹10 crore).
Shipowner
Value at risk
₹6,00,00,000
Share
60%
Contributes
₹30,00,000
Cargo A owner
Value at risk
₹3,00,00,000
Share
30%
Contributes
₹15,00,000
Cargo B owner
Value at risk
₹1,00,00,000
Share
10%
Contributes
₹5,00,000
Total
Value at risk
₹10,00,00,000
Share
100%
Contributes
₹50,00,000
| Party | Value at risk | Share | Contributes |
|---|---|---|---|
| Shipowner | ₹6,00,00,000 | 60% | ₹30,00,000 |
| Cargo A owner | ₹3,00,00,000 | 30% | ₹15,00,000 |
| Cargo B owner | ₹1,00,00,000 | 10% | ₹5,00,000 |
| Total | ₹10,00,00,000 | 100% | ₹50,00,000 |
The Three Conditions for General Average
- check_circleAn event beyond the shipowner's control that puts the whole voyage in danger.
- check_circleA voluntary sacrifice or expense: jettisoning cargo, hiring tugs or salvors, deliberately grounding the ship.
- check_circleSomething actually saved by it.
Partial Loss Has a Marine Name
Particular average means a partial loss of hull or cargo. General average is shared by everyone in the voyage. Do not confuse either with "average" for under-insurance, which reduces a claim when the sum insured is too low.
Consequential Loss
A fire that damages a factory causes two losses: the physical damage, paid under the fire policy, and the profit lost while the factory is shut, plus the extra costs of keeping going. The second is consequential loss. It is covered by a separate loss of profits or business interruption policy, which pays the loss of income and the expenses incurred after a covered peril interrupts the business.
Some policies add an Extended Period of Indemnity, which keeps cover running past the physical repair until revenue recovers. S-01 introduces this in chapter 17, Fire and Loss of Profits (Fire) Insurance; the departmental paper S-08 Loss of Profits goes into it in depth.
The Trap in S-01 Questions
The CTL test adds salvage to repairs. A question that gives you a repair cost below the value but a large salvage cost is testing whether you remember to add them.
FAQs
What is the difference between actual and constructive total loss?expand_more
Actual total loss means the property is destroyed or is no longer the kind of thing insured. Constructive total loss means it still exists but repairs plus salvage would cost as much as or more than it is worth.
What is general average in marine insurance?expand_more
A voluntary sacrifice or expense to save the whole voyage from a common danger, shared by the ship and all cargo owners in proportion to their value at risk.
Is partial loss the same as particular average?expand_more
In marine insurance, yes: particular average is the term for a partial loss of hull or cargo.
What is consequential loss in insurance?expand_more
The income lost and extra costs incurred after an insured peril interrupts a business. It is covered by a loss of profits or business interruption policy, not by the fire policy itself.
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