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What is General Average in Maritime Insurance and how to Calculate General Average?

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Home Insight What is General Average in Maritime Insurance and how to Calculate General Average?
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The principle of General Average has a rich history and is interlinked with the development of maritime trade itself. Its origins can be traced back to the Rhodian Sea Law, a codified body of commercial regulations credited to the ancient Greek island of Rhodes (flourished 1100โ€“c. 750 BCE). This law established the foundational concept: when a ship’s captain deliberately sacrifices a portion of the cargo (jettison) to save the vessel and remaining cargo during a perilous situation, the loss is shared proportionally by all stakeholders in the sea voyage.

The Rhodian Law’s influence extended throughout the Mediterranean, forming the basis for maritime codes adopted by subsequent civilizations like Rome. As international maritime trade flourished during the Middle Ages, general average practices continued to evolve through custom and precedent, documented in various regional maritime codes. These codes addressed situations beyond jettison, encompassing other voluntary sacrifices made for the common good, such as cutting away masts or incurring extraordinary expenses to refloat a grounded vessel.

The second half of the 19th century saw a challenge with the general average. While the concept of shared sacrifice for the common good on sea voyages (mutual benefit and common security) existed, how losses, expenses, and contribution calculations were handled differed greatly by country. This lack of standardization created confusion and potential unfairness. To address this, the York-Antwerp Rules (YAR) emerged in 1877, aiming to unify calculations and procedures across the board.

What is the General Average in Simple Words?

General Average (GA) is a well-established principle in maritime law that comes into play during emergencies at sea. It applies when a voluntary sacrifice of part of the ship or cargo becomes necessary to preserve the safety of the entire venture โ€“ the ship, remaining cargo, and freight.

The term “General Average” encompasses both the act of sacrifice and the financial consequences it generates. These consequences are shared proportionally among all stakeholders with a financial interest in the voyage, including the shipowner and all cargo owners. Notably, the distribution occurs regardless of whose cargo was sacrificed.

Losses, expenses, and contributions arising from a GA situation are typically covered by marine cargo insurance, adhering to internationally recognized insurance rules. This highlights the critical importance of securing cargo insurance with GA coverage for maritime shipments. By doing so, cargo owners can mitigate the financial impact of unforeseen emergencies.

Essential Features of General Average

The York-Antwerp Rules (YAR) with amendments of 1890, 1924, 1949, 1974, 1994, 2004, and 2016 play a vital role in defining and regulating the GA in maritime law. Rule A establishes the foundation for a general average act:

โ€œThere is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.โ€

It outlines four essential characteristics. Letโ€™s have a look at them.

Essential Features of General Average

The York-Antwerp Rules (YAR)ย with amendments of 1890, 1924, 1949, 1974, 1994, 2004, and 2016 play a vital role in defining and regulating the GA in maritime law. Rule A establishes the foundation for a general average act:

โ€œThere is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.โ€

It outlines four essential characteristics. Letโ€™s have a look at them.

Extraordinary Sacrifice or Expenditure

This action must be exceptional and go beyond the normal duties of operating the vessel. Everyday maintenance or damage sustained during regular operation wouldnโ€™t qualify.

For instance, Rule VII exemplifies this by differentiating between engine damage caused when the ship is grounded and in danger, versus damage at sea while afloat. Only the first qualifies as extraordinary due to the perilous situation.

Intentional and Reasonable

The act must be deliberate and undertaken with sound judgment to preserve the entire maritime venture (ship and cargo) from a threat. Property cannot be considered โ€œsacrificedโ€ if it was already lost before the action.

Rule IV mentions that If a shipโ€™s parts are cut away in an emergency to save the vessel, but those parts were already damaged or lost at sea, any resulting damage from the cutting wonโ€™t be shared as a GA expense.

Building on the first two elements of a GA act established in Rule A of the York-Antwerp Rules (YAR), we now explore the remaining aspects.

Perilous Situation

There must be a genuine and substantial threat to the ship and cargo, not just a precautionary measure. While the danger doesnโ€™t have to be imminent, it canโ€™t be entirely speculative. The distinction between acting in peril and taking reasonable precautions can be subtle.

Example 1

A vessel adrift without motive power in mid-ocean would be considered in peril, even in calm seas, because of the potential for future problems.

Example 2

On the other hand, if a captain decides to seek shelter for a sound vessel in an anchorage due to reports of an approaching storm, this wouldnโ€™t typically qualify as GA because itโ€™s a precaution, not an immediate threat.

Common Safety, Not Partial

The action must be taken to safeguard the entire maritime adventure (ship and all cargo), not just a specific portion. For instance, if refrigerated cargo requires a port call due to machinery failure, but the ship and remaining cargo could safely continue, the deviation wouldnโ€™t trigger the GA.

What Happens When General Average is Declared?

Usually, the process looks like this:

Captain's Decision

The captain, with the advice of the ship’s officers, makes the tough call to declare GA.

Security for Expenses

The shipowner may require security (financial guarantee) from cargo owners before releasing their cargo, ensuring they contribute to GA costs later.

Appointing an Adjuster

A neutral third-party adjuster, with expertise in maritime law and GA, is appointed to assess the situation and calculate the total GA expenditure.

Assessing Losses

The adjuster examines the situation, including the value of sacrificed cargo or damaged ship parts, salvage costs, and any other relevant expenses.

Contribution Shares

The adjuster calculates each party’s share of the GA expense based on the agreed-upon value of their stake in the voyage (ship value, cargo value, and freight charges).

Guarantees and Payment

Cargo owners with GA contributions may have their insurance companies guarantee payment. Once all contributions are secured, the GA expenses are settled.

This is a simplified overview. The actual GA process can be complex and involve legal aspects. If you’re involved in a situation involving GA, consulting with a specialist is recommended.

How Does a General Average Declaration Impact the Involved Parties?

A GA declaration can have significant consequences for everyone involved in a maritime voyage. Here's a breakdown of how it impacts the different parties.

Ship Owner

  • Financial Burden: The ship owner contributes to the GA pool based on the ship’s value. This could be a significant financial hit, especially if the sacrifice involved damage to the ship itself.
  • Increased Scrutiny: The decision to declare the GA and the actions taken will be rigorously reviewed. If deemed unreasonable, the ship owner might face legal challenges from cargo owners.

Cargo Owner

  • Financial Contribution: Cargo owners are obligated to contribute to the GA pool based on the value of lost or damaged cargo. This can be a major financial setback, particularly for those without proper marine insurance.
  • Delayed Delivery: Depending on the situation, retrieving cargo or repairing the ship might cause delays in delivery. This can impact the cargo owner’s business operations and potentially lead to additional costs.

Other Stakeholders

  • Passengers: While less common, passengers may also be required to contribute to the GA, especially if they are carrying valuables.
  • Insurers: Marine insurance policies typically cover GA contributions. However, the specific terms and coverage limits will vary depending on the individual policy.

Overall Impact

General Average can be a financially stressful situation for everyone involved. The sudden and potentially large contributions can strain budgets and disrupt financial plans. The process of calculating contributions, appointing adjusters, and settling claims can be complex and time-consuming. Disagreements may arise between parties regarding the legitimacy of the GA declaration, the value of lost cargo, or the fairness of the contributions.

What Risks Do Cargo Owners Without Insurance Face When the General Average is Declared?

  1. The biggest risk is the potential for a hefty financial blow. GA contributions are based on the value of cargo. If some of the cargo is jettisoned (thrown overboard) or damaged during the sacrifice, you’ll be responsible for its value, plus a portion of the overall expenses. This can be a significant financial burden, especially for valuable cargo.
  2. Retrieving your cargo can be delayed while the GA situation is resolved. This can disrupt business operations, lead to lost sales, and potentially even additional storage fees. Without insurance, the financial burden of these delays falls solely on you.
  3. Disagreements about the validity of the GA declaration, the value of lost cargo, or the fairness of contributions can arise. Without insurance, you’ll be left to navigate these legal battles on your own, which can be expensive and time-consuming.
  4. Even if you win a legal battle regarding a disputed contribution, collecting the money from other parties can be a challenge. Insurance companies can provide legal assistance and act as a buffer between you and other parties involved.

Examples of General Average

MSC Daniela

In 2017, a big cargo ship called the MSC Daniela was on its way from Singapore to Egypt (through the Suez Canal) when disaster struck. The ship, built in 2008 and able to carry 14,000 containers, caught fire in the Indian Ocean, not far from Sri Lanka.

The fire started in the back section of the top deck, where some containers were stored. The crew bravely tried to fight the fire, but the smoke was so thick and dangerous they couldn’t get close enough. To save the ship and the rest of the cargo, they decided to change course and head for Colombo, Sri Lanka. They also sent out a call for help.

Unfortunately, some containers burned completely, while others were damaged. Because of this, the ship’s owner declared GA.

Ever Given

In March 2021, the Ever Given, one of the world’s largest container ships, became wedged diagonally in the Suez Canal, a vital global shipping lane. This blockage caused a six-day standstill in maritime traffic, disrupting international trade and causing billions of dollars in losses.

Following the refloating of the Ever Given, the ship’s owner declared a general average. This meant that all parties involved would share the financial burden of the extraordinary expenses incurred due to the grounding incident.

How to Calculate General Average?

Once a general average act is confirmed, the value of each property that benefitted from the sacrifice needs to be determined.

1. Contributory Values

  • Ship’s Value โ€“ the market value of the ship at the end of the voyage (after repairs, if applicable);
  • Cargo Value โ€“ the invoice or shipped value of the cargo under the YAR, unless otherwise specified;
  • Freight โ€“ the income the shipowner would have earned for transporting the cargo.

2. Calculate Allowances for Sacrifices

The York-Antwerp Rules (Rules XV, XVI, XVII) provide specific guidelines for calculating allowances for property sacrificed in a GA act. This could include:

  • Jettisoned Cargo โ€“ the market value of the cargo thrown overboard;
  • Damage to Ship โ€“ repair costs incurred due to the GA act.

3. Determine GA Expenditure

This includes all reasonable expenses incurred as a direct result of the GA act, such as:

  • Port of refuge expenses โ€“ costs associated with seeking a safe harbor due to the peril;
  • Salvage charges โ€“ payments made to a salvor (someone who assists a ship in distress) if applicable.

4. Apply Adjustments

Certain adjustments are made to the contributory values:

  • Subsequent Charges โ€“ expenses incurred after the GA act but before the voyage ends are deducted (except for allowed GA expenses);
  • Loss or Damage โ€“ if the property suffers further loss or damage between the GA act and the voyage’s end, its contributory value may be reduced.

5. Equality Through Contribution

To ensure fairness, the value of a sacrificed property is typically increased by the GA allowance it receives before calculating its contribution.

6. Calculate Individual Contributions

Finally, each stakeholder’s contribution is calculated by multiplying the total general average (sacrifices + expenditures) by the ratio of their contributory value to the total contributory value of all participating interests.

Example of Calculating General Average

A cargo ship carrying various goods runs aground on a reef. To refloat the vessel, the captain orders the jettison of 100 tons of steel beams (part of the cargo) valued at $200,000. The ship is successfully refloated and completes its voyage, incurring the following additional costs:

  • Repairs due to grounding: $300,000
  • Port of refuge expenses: $50,000
    1. Establish Contributory Values
      • Ship Value โ€“ assume the ship’s market value at the end of the voyage (after repairs) is $5,000,000.
      • Cargo Value โ€“ let’s say the total invoice value of all cargo on board (excluding the jettisoned steel
        beams) is $4,000,000.
      • Freight โ€“ for simplicity, assume the total freight for transporting all cargo is $1,000,000.
    2. Allowances for Sacrifices
      Jettisoned Cargo: The allowance for the sacrificed steel beams is their market value, $200,000.
    3. General Average Expenditure
      Total GA Expenditure: $300,000 (repairs) + $50,000 (port refuge) = $350,000
    4. Adjustments (Optional)
      For this example, let’s assume there are no further adjustments needed (no additional charges or losses).
    5. Equality Through Contribution
      The value of the jettisoned cargo is increased by its allowance before calculating its contribution: $200,000 (value) + $200,000 (allowance) = $400,000
    6. Calculate Individual Contributions
      • Total Contributory Value
        $5,000,000 (ship) + $4,000,000 (cargo) + $1,000,000 (freight) = $10,000,000
      • Total GA
        $350,000 (expenditure) + $400,000 (jettison allowance) = $750,000
      • Contribution Ratio
        This ratio is used to determine each stakeholder’s share of the general average cost. It’s calculated for each property type (ship, cargo, freight) by dividing their contributory value by the total contributory value.
        For example, the ship owner’s contribution ratio would be: $5,000,000 (ship value) / $10,000,000 (total contributory value) = 0.5 (or 50%)
        For example, cargo owner has a container with goods valued at $30,000, then his contribution ratio would be: $30,000 (cargo value)/ $10,000,000 (total contributory value) = 0.003 (or 0.3%)According to this, individual contributions would be:
      • Ship Owner: 0.5 (contribution ratio) x $750,000 (total GA) = $375,000
      • Cargo Owner: 0.003 (contribution ratio) x $750,000 (total GA) = $2,250

This is a simplified example, and the actual calculations might involve more complex formulas and adjustments depending on the specific circumstances. The GA should always be handled by professional average adjusters who can ensure accurate calculations and fair distribution of the burden.

Conclusion

The principle of General Average, while rooted in centuries of maritime tradition, remains a complex and sometimes contentious aspect of modern shipping. While it ensures fairness and shared responsibility during emergencies at sea, it also presents potential financial burdens and logistical challenges for all stakeholders involved.

Understanding the key features of the General Average, the process it entails, and the potential impact on various parties is crucial for anyone involved in maritime trade. Cargo owners, especially, should be aware of the risks they face without proper insurance coverage and consider obtaining marine cargo insurance with GA provisions to mitigate potential financial losses.

The calculations and legal aspects associated with the General Average often necessitate expert guidance. Atlantic Project Cargo experts can recommend insurance plans that cover general average situations and assist with choosing the right insurer.

Frequently Asked Questions

It is a principle of Maritime Law, which requires all sea cargo parties (owners, shippers, etc.) whose goods were saved to compensate those whose goods were lost at a time of common peril.

โ€œThere is a GA act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.โ€ (York-Antwerp Rules, 2016 update).

GA is declared when the voyage is preserved from peril.

An event that leads to GA can be any incident in which the ship’s captain is forced to take measures to sacrifice the safety of the ship and everything on it. The examples include but are not limited to:

  1. Goods are thrown overboard to prevent the complete shipโ€™s destruction;
  2. Goods are damaged by water used to extinguish the fire;
  3. The ship enters the port of refuge, and the shipowner incurs additional costs, such as port chargers.

All parties involved, including cargo owners, are responsible for making a proportional contribution to cover the costs suffered during the GA event, including the loss of cargo sacrificed during the accident.

If the cargo owner obtains Marine Cargo Insurance with General Average coverage, the provider will pay their contribution and a cash bond will not be required.

Basically, you will need to sign a GA Bond confirming your consent to draw up the GA Adjustment Act. In most situations, the carrier requires this before agreeing to unload the vessel.

The calculation of the GA contribution takes a long time. So as security, the shipowner usually requires the goods owner to make a deposit in the amount of a certain percentage of the estimated cargoโ€™s value. In return, they receive a Deposit Receipt. The carrier also has the right to take part of the goods as the contribution payment if the deposit is not received.

Here are the examples explaining how much you have to pay in different situations:

  1. If the cargo owner does not have Ocean Marine Insurance and they lose 0% of goods, they have to pay a deposit.
  2. If their Marine Cargo Insurance includes GA and they lose 25% of goods, the insurance provides a financial guarantee.
  3. If their insurance does not include GA and they lose 75% of goods, they also have to pay a deposit.
  4. If the cargo owner does not have insurance and loses 100% of goods, it is all sacrificed in a GA event.

If a customer does not obtain a policy they will be declined any compensation. He also has to pay their share of expenses for the vessel rescue cost before their commodity can be released.

Usually, it can take about 5 years.

 

Atlantic Project Cargo is a freight forwarding company with international shipping experience. We offer not only door-to-door transportation services but also cargo insurance. It protects you from financial losses if your goods are somehow damaged or lost during transportation. Contact us, and we will provide you with all the necessary information about shipping and insurance details

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