Abandonment Clause (Insurance) - Explained
What is an Abandonment Clause?
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What is an Abandonment Clause?
An abandonment clause is a clause in an insurance contract which permits the insured party or the property owner the right to abandon a damaged or lost property and still get the full payment from the insurance. This is possible when the damaged property cannot be repaired or if the cost to repair is higher than the value of the property. In this case the insurance company takes the full ownership of the damaged property.
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How does an Abandonment Clause Work?
The abandonment clause is usually used by insurance companies when dealing with marine properties like ship or boats. A ship may sink or get lost at the sea if after a tremendous effort to find the ship or recover it becomes futile, the clause gives the owner the right to full insurance settlement. The damaged property is henceforth owned by the insurance company. There are two circumstances which must occur for the property to be abandoned. First, the property owner must do something that shows that he or she has given up the rights to the asset. Secondly, there must be the intention by the owner that they have surrendered the control over the property. This means that the property owner must make a conclusive decision that he no longer needs the property. Any act is enough as long as the asset is left free for anyone who may need to claim it. Inaction or a situation in which the property is not in any use and there is no intention to release the property to the insurance company means the property owner has not given up the rights to the property. This also applies even in cases where the property is not used for several years. For example, a farmer may decide not to cultivate his land for years or a quarry owner may not extract stones from a quarry, this does not mean legal abandonment to the property. The intention of a person to abandon a property may be expressed by the words of mouth he/ she denounces the property or from the way the owner treats that particular property. The treatment could be leaving the property recklessly unguarded in an unsafe environment. Also, leaving property unattended for a long time may show the intention of abandoning a property.
The insurance policy that covers the ship damage cost is called Hull insurance. Hull refers to the body of the ship. Hull insurance includes all the other fittings attached to the body of the ship as an essential part. This insurance is one of the parts of marine insurance and is popularly known as Marine hull insurance. It covers the destruction of the ship body or hull, machinery damage, fitting and fright losses, ship-breaking losses and disbursement losses. It also includes damages caused by your ship to other ships and also injuries caused by the ship to the workers.
Actual loss vs Constructive loss
In scenarios where the expected expense for the repair of a damaged ship is more than the total value of the ship, this is referred to as constructive total loss. Sometimes recovering a vessel from the place it's damaged or lost is not economically viable resulting in the vessel being abandoned. In other cases, the damage would be to an extent that the expected expenses for repair are more than the value of the ship, abandonment is the best solution. If the requirement for a constructive total loss of an insured vessel is met, the policyholder is allowed to claim for full payment of the vessel. A loss that arises when the insured vessel is completely wrecked or damaged in a way that it cannot be repaired for any further use is referred to as actual loss. This could be due to several circumstances such as theft, natural disaster or an accident. This should not be confused with a constructive loss which means the property is technically damaged partly but the cost of repair is too high hence the property to be rendered unusable. When an actual loss arises, the policyholder will receive a disbursement from the insurance company which is equivalent to the insured value of the property. This insurance company also pays the total value insured in case of constructive loss though the property is not completely damaged but is beyond repair and also rendered unusable.
There are other types of property that can be abandoned?
These include personal and household properties, agreements, copyrights, patents, and inventions. There are certain rights especially in real property such as easements and leases that can also be abandoned. For instance, a ranch owner who gives a sheep farmer an easement to use a path on his land for the sheep to use when is accessing the watering hole. The sheep owner later sells all his sheep and relocates never intending to return. This scenario demonstrates that the sheep has abandoned the easement since the sheep owner stopped using the path with no intention to use it again.
Abandonment of Contract
The abandonment of contract occurs when the parties to a binding contract behave in a way that makes the original contract invalid. This occurs when both parties violate the terms of the contracts. In this case, both parties must come up with a mutual agreement to abandon the contract. If the two parties cannot agree to abandon the contract, they might need to have a court case. If one party abandons the contract, the other one has a strong case to violate the contract. In construction contract abandonment, it is where the contractor is completely unable to complete the work he or she was contracted for. This could be due to various reasons such as the contact fails to start the work in a reasonable period of time or the contractor may also fail to finish the project within the stipulated time frame. The project owner may force the contractor to reimburse the funds and abandon the contract.
Abandonment and Salvage
This where one party or person abandons a property and another party claims that property later. It is a common clause in insurance contracts. An insurance holder can abandon a property that has been insured and the insurance company claims the right to salvage the property. For instance, a homeowner may decide to abandon a home perhaps due to heavy floods, he is supposed to show his intention through a written notice to abandon the house to the insurance company. Consequently, the insurance company will sell this property to salvagers.
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