We recently published a guide to the different types of loss in marine insurance. This post will take a closer look at a specific type of loss: Actual total loss (ATL).
What is Actual Total Loss (ATL)?
In marine insurance, the phrase “total loss” refers to a situation where a ship, or its cargo, has been either lost completely during a voyage, or else damaged so severely that it no longer has any value.
ATL means that the ship or cargo no longer exists at all. If the ship or cargo is insured, the policyholder can receive full compensation that is equal to the ship’s or the cargo’s agreed value in the policy wording.
An example of Actual Total Loss
During a voyage, a ship encounters a severe storm. The damages are significant, causing the ship to sink along with its cargo.
The ship owner will make a claim on their policy for the lost ship and cargo. Their insurer will launch an investigation. If they find that the ship is irretrievable – i.e. that a salvage operation would cost too much, or would be too difficult – the incident will meet the criteria for an actual total loss.
The ship owner will then be entitled to the maximum payout for the agreed value of their ship and value as specified in their policy wording.
The likelihood of ATL occurring will determine the price you pay for your marine insurance. Among other things, your insurer will calculate the price of your premium based on how likely you are to experience ATL, and on the amount such a loss would cost you.
Actual Total Loss vs. Constructive Total Loss
There is another form of total loss in the world of marine insurance. Actual total loss refers to situations where ships or cargo are completely destroyed. On the other hand, constructive total loss (CTL) refers to situations where the cost of repair or retrieval would exceed the ship or cargo’s insured value.
A major difference between ATL and CTL is in the way that claims are handled. ATL claims are usually pretty straightforward. As the policy owner, you are entitled to compensation for the full agreed value of your ship or your cargo. CTL claims, though, can be a little more complicated. If your loss meets the criteria for CTL, you have the option to let your insurer take ownership of your insured property – the damaged ship or cargo.
If you let your insurer take ownership of your damaged ship or cargo, they may then sell this property as salvage, before using the proceeds to offset your settlement. But if you prefer, you can retain ownership of your property. However, your insurer may then offer you a smaller settlement as a result.
Read our full guide to CTL, which covers in greater depth how this form of loss differs from ATL.
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