What is General Average?
Imagine yourself on board a vessel which suddenly caught on fire. Your first instincts would initially be to jump into a lifeboat as fast as possible however, ten other people enter the lifeboat with you, along with each of their own hand luggage.
You’ve just found out the lifeboat can only hold ten people plus additional luggage. As it begins to take in water, everyone must come to terms with the fact that they are going to need to make sacrifices in order to avoid a disaster. By good fortune, only four people need to offload their hand luggage’s, therefore reducing the weight of the lifeboat and water intake, saving the voyage.
This sacrifice means that the lifeboat doesn’t sink, people survive and a majority still get to keep their possessions. (i.e. a ‘’Total Loss’’ was avoided). However, before everyone is allowed to get to shore, the six people who did not need to sacrifice their luggage have to pay their share of compensation to those who did, or agree to have their hand luggage withheld until their share is paid.
Applied to shipping, General Average (GA) is used in order to share the overall costs of saving a vessel and its cargo equally amongst all parties involved even if the incident does not affect them equally.
The moment your cargo is placed aboard a vessel you have an interest in the whole venture.
GA is only declared when a vessel encounters an issue that threatens the completion of the voyage. The journey itself is classed as a “common venture” between all parties, which also includes the cargo and ship owners. If a journey is threatened in any way for example, by the vessel running aground or containers catching on fire, this in turn will result in each party having to provide their own share of security to cover the cost necessary to save the “common venture’’. The cost share is divided equally, based on the total value of the cargo (not weight or volume) and all parties must add their own share regardless of whether their cargo was damaged or not.
Why is Marine insurance so important?
Marine insurance guarantees adequate security to all parties that have an appropriate marine insurance. It allows cargo to be realised relatively quickly in times of unforeseen problems. However, without adequate Marine insurance, the cargo will be held until the GA Adjuster calculates the necessary share owed by each party, and the relevant money is paid by the cargo owner or until a full cash guarantee is provided. The calculation is tough and can lead to cargo being held for many months or years.
But how does GA affect me?
Well, If your cargo so happens to be on board a vessel when the ship owner declares General Average, you will need to find adequate security to guarantee its release (on average 20% of the value of your cargo). However, if you are unable to raise this security, your cargo will be held indefinitely.
“This case is rare, I’ve never heard of it”
Unfortunately, these types of predicament are more common than most people care to realize and amounts to approximately 10% of the loss expenses of marine insurers due to the size and frequency of GA claims.