Particular Average and Insurance Laws

Introduction

Arnould defined “particular average” as ‘ a loss arising from damage accidentally and proximately caused by the perils insured against, to some particular interest, as the ship alone or the cargo alone.’ The Marine Insurance Act, 1906 defines Particular Average as “ a partial loss (any loss other than a total loss) caused by a peril insured against, and which is not a general average loss.”

Particular average, instead of being contributed for by the general body of those who are interested in the adventure, falls entirely upon the particular owner of the property, which has suffered by the damage. Such owner has a claim against the insurer in proportion to :

1. 1. Degree by which the damage sustained may have diminished the value that the property has to him, and
   2. To the sum that the insurer has agreed to insure.

In order to illustrate this situation better, let us consider an example. Suppose the goods have been insured for a sum of Rs. 5000. If sold in the market they would have realised for the owner Rs. 15,000. But due to the occurrence of a particular average loss, they can only be sold for a sum of Rs.12,000. Therefore, the loss in value is Rs.3,000, which is 1/5 of the value o the objects that would have been realised if there was no loss. The insurer is bound to pay to the assured, in such a case, the same proportion of the sum insured, as the damage may have been deducted from the value they would have realised, but for the loss. Therefore, in this case, the insurer is liable for a sum of Rs.1000.

The damage which has brought about a claim against the insurer has to be proximately caused by the perils insured against and it must not have arisen either from the ordinary wear and tear of the voyage, or from the inherent vice and defect of the object insured or of the willful misconduct of the assured.

Research Methodology

The aim of this project is to examine the concept of particular average, which is an important part of the law relating to the claims made in the field of marine insurance. In this regard an attempt has been to define and thereby understand the basic concept and thereafter examine related aspects to the concept of particular average, and also the calculation of the same in various situations. The various issues examined in this project are as follows:

Adjustment of particular average on goods

The nature of the markets at the port of arrival

Extent of depreciation

Adjustment on a Total loss of Part

Adjustment of Particular Average on Ship

Extra Cost of Repairs at port of Distress

Costs to be included in the Repairs

Successive Losses

Recovery of partial loss of Freight

This project suffers from quite a few limitations. The principle being the fact that the focus of this project being on English law and very little emphasis has been placed on Indian law. The main reason for this has been the fact that the material on the topic in Indian law is very hard to come by, despite the best and diligent efforts of the student. The scope of the topic was also very narrow and the law on the subject has been stagnant for a long time and therefore, the scope for analysis and originality has been rather restricted.

The chapterisation is rather non-existent, in the sense that the project has only one chapter and this chapter has sub-headings that have discussed various issues related to the topic.

A descriptive style of writing has been used, with analysis wherever possible and probable.A uniform style of foot-noting has been followed.

Particular Average

Adjustment Of Particular Average On Goods

The method of ascertaining the amount, which the insurer has to pay in order to indemnify the assured for a particular average loss on goods arriving damaged, based upon the amount of premium paid by the assured to the insurer. Basically, the insurer has to pay for the loss for which he has received premium. If there are 5 insurers have each got a liability of Rs.2,000 for a total cover of Rs.10.000 and the loss is one-fourth of the value of the goods, then each insurer is liable one- fourth of the sum that they are laible for, i.e., Rs.500. in other words ech of the insurers have to contribute together such that a sum equal to ¼ of the damage is collected. Therefore, in this case, each member has to contribute a sum of Rs. 500, towards a sum of Rs.2,500, which has to be paid to the assured.

The basis for the adjustment of the particular average loss on goods fully insured, is either the prime cost or the value expressed in the policy. The valuation of the policy is only conclusive of the value of the interest to which it was intended to apply; the assured cannot recover on the basis of the full valuation, where only part of the cargo to which it was to apply was on board at the time of the loss.

The Nature Of The Markets At The Port Of Arrival

The amount that the insurer has to pay doesn’t depend on the higher or lower market price, which the goods might fetch at their port of destination or arrival. This is so because the market price at the port of destination is a very different thing from their prime cost on board at the port of loading or from their value in the policy, being t what cost the merchant can afford to sell them after paying freight costs and other such costs, and either realising a loss or profit; this price is therefore composed of :

1. Prime cost on board;
2. freight duty; and
3. Profit in a rising or loss in a falling market.

The insurer is only concerned with the first of the three factors mentioned above, as he has not insured the assured against the freight duty and thing like that. The insurer does not undretake to put the assured the merchant in the same position he would have been had his goods arrived safely in the port of destination, but to solely put him, in regard to such goods in the situation in which he was at the beginning of the risk. When the goods arrive, two points have to be ascertained,

1) the extent in depreciation in value which the goods have suffered, and

2) the amount which the insurer has to pay the assured.

Extent Of Depreciation

The extent of depreciation in value ascertained by simply comparing the price for which the goods would have sold in the market had they arrived there sound with the price for which they actually do sell arriving there damaged. The difference between the market price of the sound and market price of the damaged goods gives the direct amount of the merchant’s loss. But, this is not the liability of the insurer, as it would make the market price at the destination port, the basis of the insurer’s liability, when the extent of their liability is actually the prime cost of the goods at the port of loading. Also it would make the insurer dependant on the fluctuation of the market, with which he is not concerned in the least bit, as in for the same amount of damage, he has to pay more when the goods come when the prices are rising and less when the prices are falling.

The desired object is to ensure that some uniform value or a standard of value is obtained, so that the liability in respect of a particular loss on damaged goods, shall be always the same when the proportional extent of damage is the same.

The object is not to ascertain the direct amount of the merchant’s loss, but it’s relative amount, i.e., the proportion, which it bears to the price at which the goods would have sold, if sound. The question is whether the commodity is ¼ or ½ or 1/8 the worse for the damage. When this is ascertained, the liability of the underwriter is ascertained also, for he pays the same proportional part of the value of the prime cost in the policy. Therefore, the sum which the insurer has to pay is dependant on the relative extent of the loss and will be the same whether the gods arrive at a rising or a falling market.

The insurer has to pay the percentage of the prime cost of the value in the policy, which has to be ascertained by comparing the gross produce of the sound sales with the gross produce of the damaged sales. This is the best way to calculate the measure of depreciation, as involving the net proceeds in the calculation would subject the insurer to the fluctuations of the market.

Another consequence of taking the net proceeds would be that the insurer would be made liable for a loss not arising from the deterioration of the commodity, but from having to pay equal freight duties and charges on commodities of unequal value, i.e. on both the sound and damaged goods.

Adjustment On A Total Loss Of Part

When an integral pat of the goods is totally lost, the underwriters will have to pay the same proportion of the insurable or agreed value, which the goods bear to the whole goods of the same description covered by the insurance; in other words, the exact amount lost must be paid for at its loss, whether insurable or agreed. When such total loss of part and also damage to the remainder occur at the same interest, the practice is to adjust them separately, but this is not absolutely necessary, as, whether they are resolved together or separated the result is the same.

But, where several articles are insured together in the same policy, and each suffers a particular average loss, the loss must be adjusted separately for each, even though the clause to pay average on each species as if “separately insured” be not inserted in the policy: for otherwise the understanding would be involved in the rise and fall of the markets, except in the likely case, when the state of the markets at the port of arrival is alike, so that all the articles would have realised in the port of arrival exactly in the same percentage of profit and loss upon their first cost, or valuation in the policy.

It must be fully borne in mind that in adjusting the average on such a sale the diminished value at which the sound part of the package may sell, owing to the assortment being broken, or owing to the suspicion of damage, is not a loss for which the underwriter is liable. The insurer is not liable in such a case, as the insurer is not liable for loss of reputation. It should here be noticed that through the charges for ascertaining the damage to goods fall upon the party who is liable to hear the damage thereon, i.e., upon the underwriter when he is liable under the policy yet the underwriter cannot be made liable for the cost of examining such goods as prove to be undamaged.

In the case of a distress sale, the insurer pays the difference between the prime cost, or insured value of the goods, and the net proceeds of the damaged sales, i.e., their market price after deducing all expenses, including freight, where any is due. If the assured, in order to take the benefit of a favourable market, or for other reasons, chooses to put an end to the risk by voluntarily receiving his goods at any port short of their destination. The loss due to the goods may have incurred by damage should be adjusted upon the same principles as at the port of destination.

In the case of Crawley v. Cohen, an insurance was effective for 12 months “on goods” on board 30 barges, plying backwards and forwards between London and Birmingham, for £12,000, “as interest might appear thereafter.” A particular average loss was sustained by the sinking of one of these barges full of goods within the year. It was held that the policy continued, throughout the year, to protect all the goods afloat at any one time, up to the amount insured, and accordingly that the insurers were bound to pay that proportion of the loss which £12,000 bore to the whole value of goods at risk on board all the barges at the time of loss, and not that the proportion which £ 12,000 might bear to the whole amount carried during the year.

Adjustment Of Particular Average On Ship

In ordinary cases, when a vessel gets damaged, the owners repair it. A vessel is generally intended to be navigated, and consequently, it can’t be navigated if it is damaged. The usual measure of the damage sustained by the shipowner is the cost is the cost of repairing minus the improvement resulting therefrom. The question arises as to whether there would be any difference between the adjustment of damaged goods and damaged ships. The answer is that a different method of adjustment is to be used is the two cases, because even if the goods are damaged the goods are up for sale and will command a price, whereas in the case of a damaged ship, the ship needs to be reconditioned, and this is generally done by the assured and not by the purchaser. A ship is not usually up for sale because of damages and it is usually assumed that the necessary repairs will be performed by the owner.

The rule for adjusting the particular average on the ship is that in open policies the undertaker pays the same percentage of the sum that he is agreed to insure, as the damage or the expense of repairing it is of the ship’s value at the commencement of the risk; in valued policies, he pays the same proportion of the valuation as in the policy.

If the damage to the ship has not been repaired, the only mode of ascertaining its amount is by the estimate of surveyors. Where however the ship had been repaired, the rule that has developed from the days of the wooden ships is that of estimating its amount by deducting 1/3 from the whole expense both of labour and materials, which the repairs had cost and of assessing the damage at the remaining 2/3. This is done on the principle that except where the ship is quite new, the substitution of the new for the old materials is a benefit for the to the shipowner, who gets the ship better for the repairs by the substitution of new work for old, and would consequently be a gainer if the whole expense of labour and repairs were regarded as so much pure loss to him; to avoid discussion in each particular case, the amount of deduction is fixed at 1/3. The third to be deducted is not from the expense of the materials alone, but from that of the labour and materials conjointly. It is possible to exclude the deduction rule altogether by the following clause: “ average payable…. Without deduction, new for old, whether the average be particular or general.”

This rule applies to iron as well as wooden ships( wooden ships are very few, if any new in this modern era) and to labor as well as material. It doesn’t apply to the expense of straightening of bent ironwork, and to the labour of taking out and replacing it. The reasoning given for the application of the rule as mentioned above fails in the case of a ship’s first voyage.

Extra Cost Of Repairs At Port Of Distress

Where the repairs are necessarily done to a ship in a port of distress, and as will frequently be the case, cost more than if done in the home port, the question arises as to which rate has to apply, the rate at the home port or the rate at the port of distress. The rule is that the rate at the foreign port has to apply as the necessity of repairing the ship at the port of distress, which occasioned the increased expense was an immediate consequence of one of the perils insured against. Even if the insurers refuse to consent to the repairs being done in a particular way, the assured may proceed with such repairs and the insurers will be liable, if the repairs are necessary and done properly.

What happens in case the repairs are deferred and not undertaken immediately, and as a result they cost more than if immediate action was taken? The answer is that the insurer will not be liable to recover increased costs due to the delay in repairing, either on the ground that the indemnity falls to be measured at the termination of the risk.

Costs To Be Included In The Repairs

The Rules of Practice of the Association of Average Adjusters provides that the necessary expense of removal from a port of distress to the port of repair and to the return to the former port, where this takes place immediately, following the repairs, shall be allowed in particular average. The whole rule is subject to the proviso that it does not admit as particular average any ordinary expenses incurred in fulfillment of the contract of affreightment, even if the expenses have been increased by the removal to a port of repair. Also the cost of removing the cargo from the board of a ship at the port of destination in order to enable repairs of damage to the vessel by insured perils to be carried out cannot be, as a general rule, be recovered under a hull policy as part of the cost of repairs allowable in particular average.

The reasoning is the fact that the cargo has to be removed in any case to enable the vessel to be traded. The fact that the shipowner may suffer loss by reason of his being unable to recover freight on cargo which has become worthless, or to compel the cargo interests to take it or pay for its removal, or the fact that the cost of removing the cargo may have increased as a result of the casualty, are matters that don’t concern the hull insurers, as for them the subject matter of the insurance is only the hull and machinery, not financial loss to the shipowner.

Successive Losses

If the ship has actually been repaired in a port of distress, and is afterwards totally lost before arriving at the port of destination, the cost of such repairs may be recovered cumulatively in addition to the total loss, either as per average, or as money laid out and expended in labouring for the safeguard and recovery of the ship in the manner prescribed in the policy. When no such repairs have been made, no previous partial loss by sea-damage can be recovered from the insurer, as a particular average, in addition to a subsequent total loss; the less is there swallowed up by the larger, till they are both one loss. If the subsequent loss occurs during or be proximately caused by perils operating during the currency of the policy, but not be due to a peril therein insured against, the insurer pays nothing.

But if the average loss unrepaired have occurred during the currency of one policy, and the subsequent total loss occurs as a result of perils opening during the pendency of another policy and after the expiration of the first policy, the assured is entitled to recover from both policies, i.e. for both the average and particular losses, if they are due to perils insured against.

Recovery Of Partial Loss Of Freight

The rule for adjusting a partial loss on freight is where a sum insured is less than the insurable value of the interest at risk, the insurer pays the same proportional part of the loss that the sum insured is of the insurable value of the freight, if the sum insured equals the insurable value of the interest, then he pays the whole of the loss.

Freight is generally insured in valued policies, and when this is so the valuation of the policy is the sole basis on which to calculate the amount of the indemnity the insurer has to pay. Where, however, only part of the full cargo to which the valuation is to apply is on board, the insurer can only be called onto pay such proportion of the amount insured as part of the cargo on board, or contracted for at the time of loss, bears to the full intended cargo.

If an unvalued policy is on freight, only part of the cargo on board or contracted for at the time of loss, and this is totally lost, the insurers can only be called upon to pay the actual amount of the freight on the goods actually lost, together with the premiums and costs of insurance. The insurers whether in a valued or unvalued policy, should adjust as for a total loss of part of the freight, paying the same proportion of the sums for which they have subscribed the policy as the freight of the goods lost bears to the full freight, which would have been earned, had the whole intended cargo been loaded and all arrived.

Conclusion

The method of ascertaining the amount, which the insurer has to pay in order to indemnify the assured for a particular average loss on goods arriving damaged, based upon the amount of premium paid by the assured to the insurer. Basically, the insurer has to pay for the loss for which he has received premium. The basis for the adjustment of the particular average loss on goods fully insured, is either the prime cost or the value expressed in the policy. The valuation of the policy is only conclusive of the value of the interest to which it was intended to apply; the assured cannot recover on the basis of the full valuation, where only part of the cargo to which it was to apply was on board at the time of the loss.

The amount that the insurer has to pay doesn’t depend on the higher or lower market price, which the goods might fetch at their port of destination or arrival. This is so because the market price at the port of destination is a very different thing from their prime cost on board at the port of loading or from their value in the policy. The insurer does not undertake to put the assured the merchant in the same position he would have been had his goods arrived safely in the port of destination, but to solely put him, in regard to such goods in the situation in which he was at the beginning of the risk.

When the goods arrive, two points have to be ascertained,

1) the extent in depreciation in value which the goods have suffered, and

2) the amount which the insurer has to pay the assured.

The extent of depreciation in value ascertained by simply comparing the price for which the goods would have sold in the market had they arrived there sound with the price for which they actually do sell arriving there damaged. When an integral pat of the goods is totally lost, the underwriters will have to pay the same proportion of the insurable or agreed value, which the goods bear to the whole goods of the same description covered by the insurance; in other words, the exact amount lost must be paid for at its loss, whether insurable or agreed. When such total loss of part and also damage to the remainder occur at the same interest, the practice is to adjust them separately, but this is not absolutely necessary, as, whether they are resolved together or separated the result is the same.

In the case of a distress sale, the insurer pays the difference between the prime cost, or insured value of the goods, and the net proceeds of the damaged sales, i.e., their market price after deducing all expenses, including freight, where any is due. a different method of adjustment is to be used is the case of damaged goods and a damaged ship, because even if the goods are damaged the goods are up for sale and will command a price, whereas in the case of a damaged ship, the ship needs to be reconditioned, and this is generally done by the assured and not by the purchaser. A ship is not usually up for sale because of damages and it is usually assumed that the necessary repairs will be performed by the owner.

If the ship has actually been repaired in a port of distress, and is afterwards totally lost before arriving at the port of destination, the cost of such repairs may be recovered cumulatively in addition to the total loss, either as per average, or as money laid out and expended in labouring for the safeguard and recovery of the ship in the manner prescribed in the policy.

Bibliography

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