Abandonment Clause

Abandonment clause is a provision in a property insurance contract that entitles the property owner to abandon the damaged or lost property and at the same time collects a full settlement amount. When the property of the insured party is so damaged and the cost of repair is greater than the property’s original value or if the property is deemed irrecoverable, the policyholder can claim a full settlement amount.

This abandonment clause is typically used in marine property insurance such as insurances for yachts or ships. However, like other insurance policy contracts, there are certain restrictions which the abandonment clause is subject to such as valid losses. There are two types of losses which are deemed valid losses in the abandonment clause. The first one is the actual total loss and the other one is the constructive total loss.

The actual loss refers to unrecoverable loss or irreparable damage of property due to mysterious disappearance, windstorm damage, sinking or fire. An insurance company is obliged to pay the owner of the ship which mysteriously disappeared or was badly damage due to fire. If for example, the property owner’s yacht is sunk or got lost at sea due to a hurricane, the abandonment clause gives the owner the right not to keep on looking for the yacht or recover his or her property and he or she can still claim a settlement. The abandonment clause contained in the insurance policy legally binds the insurance company to provide full settlement amount to the property owner without finding the lost property.

The other type of loss is the constructive total loss. In this type of loss, if a cargo is severely damaged and the cost of its repair is greater than its value when restored, the property owner can abandon the property with the consent of the insurance company and is entitled for indemnification of the total amount of loss. This typically happens when a ship or cargo is badly damaged due to fire and restoration would cost more. If in case, salvaging a ship is not economic, the property owner’s is guaranteed a payment for the entire value of loss and the insurance company is given the right to possess to salvage goods and property. The insurer shall then have the right to make use of the salvaged goods without the consent of the property owner after indemnification.

The abandonment clause is also used for building property insurance. If a building is terribly damaged due to fire or earthquake and restoring it to its original condition requires an amount which is substantially bigger than the value of the building, the property owner can make use of the abandonment clause included in the property insurance contract. For instance a building collapses due to an earthquake, cleaning up the debris and rebuilding the structure can cost more than the value of a building which was constructed 10 years back. So a property owner may resort to abandonment and claim the full settlement amount guaranteed in the abandonment clause of the policy contract.