Examples of a total loss is if your vessel burns to the waterline, sinks in very deep water (too deep to safely salvage it) or hits a ledge in a remote area and is not accessible for a safe salvage effort.
How does a commercial ocean marine hull insurance policy handle a total loss? It pays the entire hull amount of insurance listed on the declaration page of the policy with no deductible. Yes, that’s correct. The deductible will not apply in a total loss.
A constructive total loss is different. It occurs when the vessel is recovered but heavily damaged to the point where the cost to repair it would exceed the amount that the vessel is insured for. There’s actually a court ruling that if the cost to repair is more than half the amount insured it will be a constructive total loss. Most ocean marine insurance companies in the U.S., however, don’t follow that rule of thumb.
There have been some drawn-out negotiations between insurers and policyholders over the constructive total loss wording in these policies. For instance, an insurer may find a shipyard that will do the repair for far less than the figure that will make the vessel a constructive total loss. If the client has a shipyard that they trust who says repairs will exceed the value of the vessel, then the battle begins. My suggestion is to get good surveyors involved to help determine the true nature of damage.
Let’s take a look at a clause called “sue and labor.” To put it simply, it’s a payment in excess of the insured hull amount to help the insured/vessel owner secure the vessel while the insurer determines the extent of damage. The important part of sue and labor is that it’s in excess of the hull insurance, and it will usually save the client a lot of money in a constructive total loss case.