Total loss is divided into two categories: 1. Actual Total Loss and 2. Constructive Total Loss.
1. Actual Total Loss
Actual total loss occurs under these following situations:
- The subject-matter is completely destroyed.
- The goods are so damaged that they cease to be a thing of the kind which were insured.
- The insured is deprived of the subject-matter.
When a ship is sunk or is completely destroyed by fire, it will be a case of actual total loss. There may be a case when the goods are so damaged that they do not look like goods which were insured e.g. if crockery is reduced to pieces, it is a case of actual total loss. In another case if the insured is not able to get the things back i.e., if the ship is missing and there is no trace of it, it is also a case of actual total loss. In case of actual total loss the insured is entitled to recover full amount of loss. When the insured ahs been compensated the title of goods passes on to the insurer. If some amount is received from the sale of damaged goods, the amount will go to the insurer and not to the insured.
2. Constructive Total Loss
This occurs when the ship is abandoned for certain reasons. It is not commercial viable to retrieve the ship or cargo. The ship or the cargo is not wholly destroyed but it is not practicable to get it repaired and restore to its original position. When a ship is badly damaged, and the cost of repairs is expected to be more than the value of 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 constructive total loss, the insured gives a notice of abandonment and surrenders its interest in the subject-matter to the insurer. The insured can claim damage for total loss.