CONSTRUCTIVE TOTAL LOSS

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Master of Commerce – M.Com First Year Solved Assignments for July 2019 and January 2020 Admission Cycles

M.COM First Year Tutor Marked Solved Assignment

Course Code: IBO – 04
Course Title: Export-Import Procedures & Documentation
Assignment Code: IBO-04/TMA/2019-20
Coverage: All Blocks

IBO – 04 Export-Import Procedures & Documentation Solved Assignment for 2019-20

Q4.) Comment on the following statements:

c.) Constructive total loss is a physical loss.

Ans: The following statement is incorrect i.e., Constructive total loss is not a physical loss as this occurs when the ship is abandoned for certain reasons. It is not commercially viable to retrieve the ship or cargo. Ths ship or the cargo is not wholly destroyed but it is not practicable to get it repaired and restore it to its original position. When a ship is badly damaged, and the cost of repairs is expected to be more than the value of the ship, it will be advisable to abandon the ship.

 In the same way, if the cargo is safe in the abandoned ship but the cost of bringing the cargo to the coast is more than the cost of cargo, then it will be proper to leave the cargo. In the case of a constructive total loss, the insured gives notice of abandonment and surrenders its interest in the subject matter to the insurer. The insured can claim damage to the total loss.

How a Constructive Total Loss Works:

Consider Derrick, who own two new flatbed trailers, trailers A and B, which cost $25,000 and $30,000, respectively. Derrick decided to try to save money on his premium by insuring his two trailers for only $15,000 each – he figured that he'd be able to repair any damage to the trailers himself.

Derrick then had an accident that caused $12,000 in damage to trailer A and $9,500 in damage to the trailer B. He thought that his $15,000 in coverage would cover his costs to repair the trailers. The claim adjuster, however, determined the accident constituted a constructive total loss on the two trailers and paid $30,000 claim to Jeff from the insurance company.

Derrick could have repaired his two trailers for $30,000, but because they were a constructive total loss, he had to surrender the titles of the trailers to the insurance company, meaning that he no longer owned the trailers and could not repair them. The claim adjuster was able to sell the trailers to a salvage buyer for $40,000. He was able to reimburse the insurance company for Derrick’s claim and generate a profit of $10,000, which was given to Derrick.

In the end, Derrick was left with $40,000 to replace $55,000 in equipment. However, if Derrick had used a more accurate stated value, his insurance premium would have been higher, but in the case of an accident, his trailers would have been restored to pre-loss condition, even in the case of a constructive total loss.