Tagged: broker, FP Marine Risks, General Average, insurance broker, Lloyd's, marine insurance

Publication: Voice of the Independent

Issue: August 2014

The concept of General Average has been around in some form since the Phoenician times but for the purpose of insurance this has been common practice since the 19th century. FP Marine Risks claims expert Richard Kamppari-Baker explains why both cargo owners and freight forwarders need protection from General Average claims.

A General Average (GA) act is any extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperiled in the common adventure.

GA is only applicable if the sacrifice was successful so if the vessel or cargo could not be saved, then there is no further contribution on the party suffering the loss. However, if one suffered a partial loss, then the party would still need to contribute on the good or depreciated cargo.

After explaining General Average to someone, they responded that it was like going on holiday and being asked to pay to fix the plane. After a brief pause in thought, I realised this is probably not too far off and it dawned on me how strange it really is.

Imagine going on holiday and having the flight divert to another airport because of a fault or a rowdy passenger. Rather than expecting to receive compensation for your inconvenience, you are asked to pay for a number of costs before you allowed to leave the plane. This seems completely absurd but maybe less ridiculous when you picture the maritime industry in days gone by.

Navigating treacherous seas without modern day equipment could result in vessel grounding, calling at a port of refuge during a storm or the vessel listing heavily and the voyage had to be saved through some sacrifice. Ship and cargo owners back then were no doubt rich, but were not dominated by the major corporations you see today, so the thought of contributing to the individual’s loss seemed a noble thing to do. Also, it eliminated wasting valuable time in trying to evaluate what to sacrifice and disputes amongst the parties after. Everyone was in the same position.

Nowadays with detailed charts, computerised vessel stowage planning and weather routing, the concept of GA contributions is rarely appreciated. Unfortunately it still applies and whenever GA is declared, this is one area that still baffles the most hardened seafarer so I will try to explain some frequently asked questions.

Normally the first question people ask is what do when a General Average is declared and what they will need to provide to retrieve their cargo. The answer is a GA Bond issued by the cargo owner and a GA Guarantee issued by the insurance company. If no insurance is in place, they will request a cash deposit. As you can imagine, this places an enormous burden on the uninsured and every major GA case often results in hundreds of abandoned containers sitting at port. This puts an extra burden on freight forwarders because they are liable for these uncleared containers and without adequate cargo insurance, they end up with the bill for storage and disposal charges, potentially amounting to hundreds of thousands of dollars.

This is normally followed by how one can avoid putting up this security especially if it is felt the ship owner was at fault. The answer to this is not much can be done to avoid GA security. Security is always due if you want to retrieve your cargo. GA cases are almost always contested and if they are properly handled by experts, there is a chance the security may be returned or greatly reduced. However, you can’t rely on someone else to do the work on your behalf. Each case is handled on its merits and may take years. Even if the master is found negligent, it may not mean you no longer need to contribute.

Whilst many associate General Average with the dramatic scenes seen on the news with vessels on fire or beached on a reef, I am often asked how the ship owner can declare GA from engine damage. Why am I paying for a fault of the vessel if it wasn’t in any immediate risk while sitting in the middle of the ocean? Whilst this may not be an obvious peril, a vessel without power poses a serious threat to both the vessel and cargo.

The simple rule is there must be a common danger and at least two interests are involved. If the risk only poses a threat to one interest this is Particular Average but when there is a common danger to two or more interests, this becomes General Average.

Other than insurers, few are ever unlucky enough to read an Average Adjusters report, which are often more than 400 pages long. Claimed expenses rarely involve just invoices for tugs or lost containers. The depth of the items claimed may surprise you. Crew overtime, lost freight, bunkers, pilotage, port costs, superintendents, cargo forwarding, storage, repairs, surveys and travel are but some of the expenses, so there is no surprise the final amounts are staggering.

If you have not yet experienced a General Average loss, you have been lucky. Commonly, around 10% of insurers’ reserves are allocated to this loss. Each case is different and each party’s contribution is based on the size of the General Average loss in proportion to the net value of property at the termination of the voyage. This normally works out on average to 20% of the property value so it is by no means a paltry sum.

Cargo insurance is typically highly competitive, and the WCA cargo insurance programme offers one of the lowest rates available on the market. However, one can not guarantee that cargo owners will purchase adequate insurance, so freight forwarders should purchase Freight Services Liability (FSL) insurance to protect their interests in these circumstances.

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