what is general average in marine insurance

General Average is a long-established principle of Maritime Law. It is important for all importers and exporters to be aware of the potential financial risks, in the event of General Average being declared. The Marine Insurance Act 1906, defines a 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 requires contribution from all whose goods were saved, to the losses of those whose goods were sacrificed at time of common peril. A declaration of General Average effectively gives the shipping company the right to hold on to the cargo until the procedure has been satisfactorily completed.  If no insurance is in place, then a cash deposit will be needed!

Examples of General Average Sacrifices include :

– Cargo jettisoned to prevent a vessel from becoming a total loss
– Cargo damaged by water used in extinguishing a fire on board ship

However, General Average doesn’t just apply to goods sacrificed.

General Average Expenditure may apply in instances where action is taken to prevent loss or damage to cargo. For example, a vessel may be put into a port of refuge, for protection against adverse weather. The resultant additional costs, such as port charges incurred by the shipowner, would fall under General Average Expenditure.

In accordance with Maritime Law, both Sacrifices Made and Expenditure Incurred for the safety of the ship and cargo are apportioned between ship and cargo. Costs are apportioned on the basis of the respective salved values. Any party which has suffered a loss is entitled to recover a proportion of their loss from the other parties who have benefited.

General Average Deposits

When General Average have been declared, the shipowner will demand security for the cargo’s proportion of the General Average. The security is required to enable cargo to be released to a consignee. In the first instance, the consignee will be required to sign a General Average Bond. This confirms the consignee’s agreement to the drawing up of the General Average Adjustment.

The shipowner usually appoints an ‘Average Adjuster’ to draw up the General Average Adjustment. This is by no means a quick process! It can often take years (or even decades) before the actual General Average contribution due from the cargo consignees can be ascertained. As a result, the shipowner usually requires the consignee to pay a deposit as security for their contribution. The deposit figure is ‘so much per cent’ on the estimated arrived value of the cargo. In exchange, the consignee receives a Deposit Receipt. Adjusters typically include a margin of safety when determining a guarantee deposit, however differences are then refunded.

General Average Guarantees

Instead of actually collecting deposits, it is commonplace for shipowners to accept an Underwriter’s Guarantee. Under the guarantee the Underwriter agrees to pay the General Average Contribution, once the adjustment is completed.

General Average Values

The values used in General Average are the net arrived values. Neither duty or landing charges are included. Furthermore, if the goods arrive damaged, it is the damaged value that is used, not the pre-damage value of goods.

Under-Insurance

In the event that goods are underinsured, an Underwriter will only refund the proportion of the deposit applicable to the insured value. For example, where goods are insured for £900, but have an arrived value of £1,000, the deposit of 10% (£100) will be collected by the shipowner. However, the Underwriter will only refund 10% of the £900 insured value i.e. £90. Any shortfall must then be covered by the consignee.

When importing and exporting goods, it is important to ensure that adequate marine cargo insurance cover is in place to cover potential general average liabilities.

Where insurance cover is operational, then (subject to policy terms and conditions) the insurer will pay the general average security or guarantee to release their cargo. It may then be years or decades before the general average claim adjustment process is complete.

For further marine cargo insurance tips and advice, visit our Frequently Asked Questions section now, or if you would like a no-commitment quote to cover your imports, exports and/or domestic transits, simply complete our quote enquiry form below:

Marine Cargo & Transit Insurance Quote Request

If you’re not sure what your requirements are, we will gladly discuss with you to ensure that your financial interests are best protected. Please Call us on 01384 442 165 (Mon-Fri, 9am-5pm), or Email: marine@insurance2day.co.uk. We can provide same day quotes for most shipments.

Alternatively, if you enjoyed reading this blog, why not take a look at another one: The Ever Given was stuck in the Suez canal for six days and its owner declared a general average, but what does this mean for those with containers on board?