ABANDONMENT

Section 140. Abandonment, in marine insurance, is the act of the insured by which, after a constructive total
loss, he declares the relinquishment to the insurer of his interest in the thing insured.

WHEN ABANDONMENT IS ALLOWED

Section 141. A person insured by a contract of marine insurance may abandon the thing insured, or any particular
portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss
thereof, when the cause of the loss is a peril insured against:

(a) If more than three-fourths (¾) thereof in value is actually lost, or would have to be expended to recover it
from the peril;

(b) If it is injured to such an extent as to reduce its value more than three-fourths (¾);

Comparison: (a) vs (b)

(a)
There is an ACTUAL LOSS of more than ¾ of the value or
it is not lost but the expense to RECOVER it is more than
¾ of the value
Example: Pirates took 80% of A’s cargo (thing insured)
which is valued at 100,000. Here, more than ¾ of the
cargo’s value is actually lost. If the pirates are willing to
return the cargo in exchange of 80,000 pesos, here the
expense to recover the cargo is more than ¾ of its value.
(b)
The thing insured has been INJURED and the
REDUCTION in its value is more than ¾. The thing insured
is still existing but its value has been reduced.
Example: A vessel (thing insured) valued at 4M was
caught on fire. After the fire has been put out and the
vessel was assessed, the value of the vessel has been
reduced to 800,000. Here, there has been a reduction in
value of more than ¾.

(c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring
either an expense to the insured of more than three-fourths (¾) the value of the thing abandoned or a risk which
a prudent man would not take under the circumstances; or

First part: Vessel is INJURED and REPAIR EXPENSE is more than ¾ of its value
The thing insured is a ship and it is on a voyage. However, the voyage cannot be continued because of
the injury or the damage unless spent ¾ of its value. There is the possibility that the cost of trying to repair
the injury is more than ¾ of its value because of lack of accessibility of repair in case the vessel is out in
the sea. Example: The vessel is valued at 1.2M and the cost of repair is 800,000. The standard of “¾ the
value” may seem exorbitant but the reality is that when a Philippine vessel is out in international waters,
the cost of having it repaired will be exponentially higher.

Second part: Vessel is INTACT but if it continues on the intended voyage it will be lost
Example: There is a fixed course of sailing and a war erupts along the fixed course of sailing. Will the
vessel continue? No, the vessel will not continue simply because if it continues and sails in the war zone
it may be lost or the probability that it will be lost is much higher. That’s why it is now going to be exposed
to a risk which an ordinary prudent man would not undertake, at that point the vessel can stop can stop
and the owner of the vessel can abandon and claim a constructive total loss.

(d) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by
the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like
expense or risk mentioned in the preceding subparagraph. But freightage cannot in any case be abandoned unless
the ship is also abandoned.

The situation is, the cargo can no longer be carried to its destination. In other words, if it is going from point A
to point B, midway it can no longer be carried. Despite efforts on the part of the master or the captain of the
vessel on which the cargo is being carried, he cannot procure another vessel to carry the cargo all the way to
point B without incurring an expense of more than ¾ the value of the cargo or an expense of freightage that is
equivalent to more than ¾ the expected freightage. Example: Freightage for carrying cargo is 50,000 while the
 cargo is worth 250,000. If the vessel cannot continue on to the port of destination, the solution to carry the cargo
to the point of destination is to get another vessel to transport the cargo to the port of destination. If the cost to
transport the cargo is 200,000, the result is that the cost of carrying it is greater than the original freightage and
is more than ¾ the value of the cargo. Therefore, the cargo can now be abandoned. However, when freightage
is to be abandoned, it can never be abandoned unless the ship is also abandoned. In other words, abandonment
of freightage can only follow an abandonment of the ship.

NOTICE OF ABANDONMENT

If insured intends to abandon, the abandonment must be total and absolute. An abandonment must be neither partial
nor conditional. (Section 142)

In case of abandonment, the insured must give notice of abandonment to the insurer and it must state the ground(s)
for abandonment. An abandonment must be made within a reasonable time after receipt of reliable information of the
loss, but where the information is of a doubtful character, the insured is entitled to a reasonable time to make inquiry.
(Section 143.) The insured may conduct an investigation to determine whether or not really a ground for abandonment
has occurred.

As to form, notice of abandonment can be oral or written. However, if you avail of an oral notice of abandonment, it
must be followed within 7 days of a written notice of abandonment. Abandonment is made by giving notice thereof to
the insurer, which may be done orally, or in writing: Provided, That if the notice be done orally, a written notice of such
abandonment shall be submitted within seven (7) days from such oral notice. (Section 145)

IF INSURER DENIES THE NOTICE OF ABANDONMENT:

Insurer: “I am denying your notice of abandonment because I do not believe that you really have ground to abandon.”-
Does that mean that the insurer is no longer liable? No. The insurer is still liable, except that the liability of the insurer
is now going to be based on a PARTIAL LOSS. Because constructive total loss is really a partial loss except that the
extent is SUBSTANTIAL. The liability now is upon partial loss.

The notice of abandonment can also be denied despite the validity. In other words, the insured is correct in abandoning
but the insurer nevertheless denies the notice of abandonment. The rule is if the insurer denies a valid abandonment,
then it is liable upon actual total loss.

IF INSURER ACCEPTS THE NOTICE OF ABANDONMENT:

If insurer accepts, there is now constructive total loss and the payment now is as if it is an actual total loss.

Rules in Acceptance:

1. The acceptance of an abandonment, whether express or implied, is conclusive upon the parties, and admits
the loss and the sufficiency of the abandonment. (Section 153)

Once the Notice of Abandonment is accepted, it is conclusive as to loss and validity; conclusive that loss has occurred
and conclusive that there is valid ground to abandon. The insurer cannot show that there was no loss and that the
ground for abandonment is invalid because when he accepted it is conclusive as to loss and validity.

2. An abandonment once made and accepted is irrevocable, unless the ground upon which it was made proves
to be unfounded. (Section 154)

General rule: Acceptance is irrevocable

Exception: If the ground is unfounded, the acceptance is revocable.

Unfounded means that the ground stated in the notice is incorrect. The law says: “An abandonment can be sustained
only upon the cause specified in the notice thereof.” (Section 147) It is incumbent upon the insured to make sure that
when he sends the notice, he writes down the correct ground. Otherwise, if he states a different ground, the notice of
abandonment is unfounded. If it is unfounded, the acceptance is revocable.
The effect of the revocability of the acceptance is that the insured can only recover partial loss. What insured is
attempting to do is to recover completely constructive total loss, constructive because it is not really a total loss. Except
that the extent of the partial loss is SUSBTANTIAL, that’s why he would now like to claim a total loss. When it is
subsequently denied, the liability is partial loss.

The discussion presupposes that there is no fraud being employed. If there is fraud, the insurer has no liability.

*Pa-flowchart ng echosera

Circumstances that
allow ABANDONMENT
(Sec. 141)

Give NOTICE OF
ABANDONMENT (Secs.
142, 143, 145)

Insurer ACCEPTS Notice

Insurer DENIES Notice
of Abandonment (Secs.
of Abandonment
153 and 154)

INVALID DENIAL:
VALID DENIAL:
ACCEPTANCE IS There is a real ground
ACCEPTANCE IS Insurer believes that
REVOCABLE: Ground is for abandonment but
IRREVOCABLE there is no ground for
unfounded the insurer nevertheless
abandonment
denies the NOA

Insurer’s liability is Insurer’s liability is

Insurer’s liability is Insurer’s liability is
based on ACTUAL based on ACTUAL
based on PARTIAL LOSS based on PARTIAL LOSS
TOTAL LOSS TOTAL LOSS

EFFECTS OF ACCEPTANCE OF ABANDONMENT

Abandonment, once accepted, has the following effects:

1. An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of
recovery and indemnity. (Section 148)

Example: A vessel has been abandoned. On accepted abandonment, it is considered a transfer of all rights together
of all chances of recovery and indemnity held by the insured in the vessel to the vessel. Who owns the vessel after
accepted abandonment? It is the insurer. If the vessel can be salvaged and the vessel’s value increases, the one who
benefits from the increase in value is the insurer. If the vessel is repaired and it continues to the port of destination
and is eventually able to unload the cargo belonging to the owners, there is an obligation to pay freightage. Who owns
the freightage? It is the insurer.
In Transportation Law, there are three kinds of Marine Collision namely: Fortuitous, Inscrutable, and Culpable. For
purpose of our discussion we will only be discussing culpable. Culpable means you are able to identify the party at
fault. Example: A vessel was damaged because it collided with another vessel and the other vessel is at fault. The
damages that the insured can be recovered from the vessel that caused the damaged. If the insurer accepts the
abandonment, who can now recover from the offending vessel? It is the insurer because the acceptance includes all
rights of indemnity.

2. Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the
thing insured, subsequent to the loss, are at the risk of the insurer, and for his benefit. (Section 150)

All acts done by agents of the insurer are now at the risk or for the benefit of the insurer. Once there is accepted
abandonment, acceptance retroacts to the day the event that caused loss or damaged happened. Example: Vessel
of the insured capsized on October 1 which caused him to abandon the vessel. Insurer accepted the abandonment
of a vessel on October 30. Upon acceptance of abandonment, all acts of the agents of the insured from the time the
event happened are now at the risk or benefit of the insurer. If the agents of the insured did something that caused
the vessel to sink further, the one who bears the burden of the vessel sinking further is the insurer. If the agents of the
insured did something that caused the vessel to straighten out which lessens the cost for salvage, the one who benefits
from the reduced cost of salvage is the insurer.

3. On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insurer of said
freightage; but freightage subsequently earned belongs to the insurer of the ship. (Section 155)

Illustration:

Part of the cargo on board the ship is that belongs to Juan. Juan is supposed to pay 50,000 by way of freightage for
his cargo to be carried from point A to point B. Unfortunately, the cargo was only carried up to Point X (half-way).
The vessel can no longer continue so it was abandoned. Note that abandonment of freightage can only be done if
the vessel is also abandoned. The owner of the vessel can claim the amount of 50,000 from the insurer of the
freightage because the abandonment of the vessel means abandonment of the freightage. When the vessel was
abandoned, the insurer took over the vessel. The insurer was able to restore the vessel and eventually it was able to
sail to point B and deliver Juan’s cargo. That means, Juan must pay the freightage cost of 50,000 as a consequence
of carrying his cargo. However, the 50,000 must be divided between the insurer of the freightage and the insurer of
the vessel. From point A to point X, the freightage of 25,000 belongs to the insurer of the freightage. On the other
hand, from point X to point B, the other 25,000 shall pertain to the insurer of the vessel.
Para madali i-gets, chos
Scenario: Juan’s cargo must be carried from Point A to Point C, the cost of freightage is 50,000

Point X:
Point A: Point B:
Point of
Point of Shipment Point of Destination
Abandonment
Chronology of events:

Juan's cargo was carried from Point A

to Point X

At Point X, an event occured that

allowed ABANDONMENT (Sec. 141)

Notiice of Abandonment was given to

Insurer (Secs. 143, 144, 145, and
146)

Insurer ACCEPTED abandonment

Insurer is liable to the insured for

50,000 (Actual Total Loss) *The
abandonment of the vessel means
abandonment of the freightage.

At Point X, Insurer acquires all the

rights of the Insured (Sec. 148)

Insurer was able to repair the vessel

and deliver the cargo of Juan at Point
B. Insurer will now collect freightage
of 50,000 from Juan.

50,000 shall be divided between the

INSURER OF THE FREIGHTAGE from
Point A to Point X and INSURER OF THE
VESSEL from Point X to Point B
(Sec.155)