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Understanding General Average in Marine Insurance
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Get Started ->When it comes to marine insurance, one term you may encounter is "General Average." At first glance, it might sound complex, but understanding it is important for anyone involved in shipping goods.
Simply put, the General Average is a principle that applies when a ship or its cargo faces a situation where a sacrifice is made to save the entire voyage. If a ship encounters trouble and part of the cargo is lost to protect the rest, all parties involved share the costs.
In this blog, you'll learn what the General Average means and how it could affect your shipping operations.
What is General Average in Shipping?
The Marine Insurance Act 1963, under Section 66, defines General Average as - “There is a general average act where any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperilled in the common adventure.”
General Average is a long-established principle in maritime law that makes sure everyone involved in a shipping voyage shares the losses if sacrifices are made during an emergency.
For example, if part of the cargo is thrown overboard to save the ship from sinking, the cost of that loss is divided among all the parties involved—like the shipowner, cargo owners, and insurers.
The main goal of General Average is to make sure that the financial burden doesn’t fall only on one party when the action taken benefits everyone.
Historical Context of General Average
Believe it or not, General Average dates back to ancient times. It first appeared in a maritime code called Lex Rhodia, which was created around 800 BC. That's nearly 3,000 years ago! This code came from the island of Rhodes, a major seafaring centre in the ancient world.
Julius Paulus, a well-known Roman jurist, later quoted the concept. It was included in the Digest of Justinian, a collection of Roman laws compiled in the 6th century AD.
As shipping became more complex over the centuries, so did the rules around General Average. In 1890, experts came together to create the York-Antwerp Rules. These rules aimed to standardise how General Average works across different countries.
The York-Antwerp rules have been updated several times, with major revisions in 1994 and the most recent update in 2016, to ensure they continue to meet the needs of the shipping industry today. This long history shows how essential General Average has been in keeping maritime operations fair and balanced across centuries.
Essential Conditions for Declaring General Average
While the concept of General Average in marine insurance has a long history, it wasn't until 1890 that it was formally codified in the York Antwerp Rules. These rules were later accepted by American companies in 1949.
However, not every loss or expense in a maritime voyage qualifies for General Average. There are three essential conditions that must be met, as clearly stated by Justice Grier in the case of Barnard v. Adams:
- Common Peril: All parties involved must face a shared risk. This means that the ship, cargo, and possibly even the fuel must all be in danger together. The peril has to be significant enough to threaten the success of the entire voyage.
- Voluntary Sacrifice: The ship’s management must take deliberate and reasonable action to save the voyage, which results in some form of loss or expense. This could mean jettisoning cargo, using expensive emergency services, or diverting to a port for repairs. The key here is that the decision is voluntary and intentional, not accidental.
- Successful Outcome: For General Average to apply, the measures taken must have a positive result. The vessel, fuel, or cargo - or any combination of these - must be saved, either completely or partially, as a result of the voluntary sacrifice.
Only when all these three conditions are met can a General Average be declared. This ensures that the principle is applied fairly and only in situations where it's truly necessary and beneficial to all parties involved.
How Are the Proportions Determined in General Average?
When General Average is declared, the cost of losses and expenses is shared among all the stakeholders involved in the shipping venture. But how is each party's contribution determined? The process is based on a few principles, mainly outlined in the York-Antwerp Rules.
Contribution Based on Value
Each party involved, whether they are the shipowner, cargo owners, or insurers, contributes an amount based on the value of their interest in the voyage. For example, if a cargo owner has goods worth $1 million, their contribution will be proportionately higher than another owner with goods worth $500,000.
Role of the General Average Adjuster
When a vessel owner declares General Average, a neutral third party called the General Average adjuster steps in. This adjuster calculates the total costs incurred due to the sacrifice made and determines the proportion each party must contribute. The adjuster’s job is to ensure fair distribution and accuracy.
The calculation of contributions can be complex and may take a long time, sometimes even years. The adjuster first determines which losses qualify for General Average and then works out the total costs. After that, they calculate how much each party owes based on the commercial value of their goods or interest in the voyage.
Providing Security
Once General Average is declared, the cargo is usually seized until the owners provide financial guarantees. These guarantees usually come in the form of surety bonds or cash deposits. The purpose of these guarantees is to ensure that all parties will fulfil their financial obligations.
During this process, the shipowner holds a lien on the cargo, meaning the goods are not released until the required contribution is paid.
Insurance Notification
After General Average is declared, cargo owners must notify their insurance providers, also known as underwriters, as soon as possible. Marine insurance typically covers General Average claims, so your underwriter will guide you through the process and help with the financial contribution required.
This systematic approach, while complex, ensures that the financial burden of unexpected events is shared proportionally among all voyage beneficiaries, creating a just system in maritime trade.
The Importance of Cargo Insurance in General Average Claims
If your cargo is insured under an "All Risks" cargo insurance policy, the insurance company typically provides the necessary guarantee (bond) and covers the required contribution for the General Average loss. Without insurance, you would be personally responsible for paying your portion of the shared costs, which could lead to substantial financial strain.
Notable General Average Incidents
General Average has been declared in several high-profile shipping incidents, impacting cargo owners and insurers alike. Here are three of those notable cases:
Ever Given: Suez Canal Blockage (March 2021)
One of the most well-known recent cases was the Ever Given, a massive container ship that ran aground in the Suez Canal in March 2021. One of the largest container ships in the world, Ever Given, became stuck due to strong winds and poor visibility caused by a sandstorm and high winds.
The ship became wedged diagonally across the canal, blocking traffic in both directions. Being one of the busiest maritime trade routes in the world, the blockage caused a massive disruption to global supply chains and cost global trade between $6bn to $10bn a week.
Freeing a ship as large as the Ever Given involved significant costs, including the use of tugboats and dredgers and compensation to the Suez Canal Authority and affected shipping companies.
On April 1, the ship's owners declared the accident as general average, which required the involved stakeholders to cover the costs of freeing the vessels plus damages.
Maersk Honam: Fire Incident (2018)
On March 6, 2018, the Maersk Honam, a container ship, suffered a devastating fire while sailing in the Arabian Sea en route from Singapore to the Suez Canal. Five crew members lost their lives, and a large portion of the cargo was destroyed.
After the salvage operation, the ship's owner declared General Average, meaning cargo owners had to help cover the costs of the salvage operation. They were required to pay 54% of their cargo's value, including a security deposit before they could retrieve their goods.
MV Hyundai Fortune: Explosive Fire (2006)
The MV Hyundai Fortune, a large container ship, experienced a catastrophic explosion and fire off the coast of Yemen on March 21, 2006. This below-deck explosion caused about 90 containers to fall into the sea, followed by a fire that spread across the ship. Secondary explosions from containers filled with fireworks caused even more damage.
General Average was declared. At least one-third of the containers on the ship were damaged in the fire, and roughly 10% of the cargo was uninsured. The total loss, including the ship and cargo, was estimated to be over $800 million USD.
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Conclusion
General Average is an essential principle ensuring everyone involved in a maritime voyage shares the cost of any sacrifices to save the vessel or cargo.
Without cargo insurance, you would be left to cover these potentially large expenses, which could be financially challenging.
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Frequently Asked Questions: FAQs
What is the difference between General Average and Particular Average in marine insurance?
The main difference between General Average and Particular Average in marine insurance is how the losses are handled:
- General Average: When a voluntary sacrifice, such as jettisoning cargo, is made to save the voyage, all parties involved share the loss.
- Particular Average: The loss affects only a specific party, which alone bears the cost.
What is the role of the average adjusters in general average?
Average adjusters act as neutral third parties who assess and calculate the losses and expenses incurred during the incident. They determine which losses qualify under General Average, allocate costs among the involved parties, and ensure that contributions are made fairly based on the value of each party's interest in the voyage.
