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General Average: What is it? And what does it mean to your business?

Sea Freight General Average 

 

The maritime principle of General Average is defined in the York Antwerp Rules and is one of the most established and widely recognised laws in relation to shipping - unsurprisingly as it was initially introduced way back in 1890! (Although the principle has been modified and updated several times since its introduction).

Despite the length of time for which the legal responsibilities of General Average have been applicable, very few cargo owners are actually aware of their liabilities and when a General Average case is declared, the costs involved can come as a shock!

Therefore, when arranging to transport your goods via sea, it is important to ensure that you have adequate insurance for your goods. Not only will this cover your goods, but it will also offer you protection should a case of General Average be declared as it will cover any charges that you will be liable to pay towards the cost of any loss or damage to the vessel and its cargo as well as any additional expenses incurred.

 

Why does General Average exist?

When attempting to ensure the safety of the crew and vessel during an emergency situation, there is limited time for the crew to determine the origin of the cargo being sacrificed. To make things fair for all, General Average is designed to spread risk, by dividing up any costs incurred proportionately.

General Average may be declared in a number of scenarios including vessel fire, collisions, jettison of goods due to having run aground, the employment of tugs to take a vessel to port due to vessel failure and the payment of piracy ransoms.

In any such instances, there are four essential features that need to be present in order for General Average to be declared.

  • The sacrifice or expenditure must be extraordinary
  • The act must be voluntary and not inevitable
  • There must be peril and
  • The action must be for the common safety and not merely for the safety of part of the property involved.

 

What is the process of General Average?

The settlement of a General Average case is a lengthy process. It can take years to settle the final claim and the increase in the size of container vessels has given rise to this process taking longer. There is now the potential of an excess of 21,000 TEU being affected in any such incident; that’s a lot of clients to contact!

When a case of General Average is declared, average adjusters are appointed. Operating independently in the interest of all parties, the adjustor will look after the claim and establish the cost of the General Average bond for each shipper.

For shippers whose cargo is not lost or destroyed, there can be lengthy delays in the retrieval of their goods. In the most recent incident where general average was declared, a major fire on board the Maersk Honam in March 2018, cargo discharge operations did not get underway until nearly three months after.

Asides from the time taken to salvage the vessel and cargo, and assess damages, to insure that all shippers pay their contribution, the ship owner is able to withhold the release of the goods (known as lien) until the payment of General Average bonds and guarantees has been made.  And this is where it becomes how apparent it is to insure that you have relevant insurance cover in place for your goods!

Where shippers have marine insurance for their cargo which incorporates General Average, the insurers will pay the guarantee.  Without such cover in place, the shipper will be liable for the General Average guarantee and will be required to submit a cash deposit or bank guarantee to enable release of cargo. This can be a costly outlay, as we can see from the following example from the Maersk Honam case:

The vessel salvor Richard Hogg Lindley (RHL) fixed the salvage security at 42.5% of the cargo value, as well as requiring a further 11.5% as a general average deposit.

This means a shipper with goods worth $100,000 in a container faced a combined general average and salvage security bond bill of $54,000 to have the cargo released.

Although rarely applied, thanks largely in part due to the improvements in technology within the marine industry, there are still occasions where general average is declared as is highlighted from the incident in March.  

Even if you are not unfortunate enough for your goods to be involved in a General Average case, marine insurance offers peace of mind that your goods are covered against theft, loss or damage. Explore the benefits of marine insurance further in our blog – Freight transportation - For extra insurance, there's insurance