What Is General Average and Do I Need Insurance To Cover It?

Today we bring to you one of the shipping world's lesser known oddities - General Average. Although it's highly unlikely that any of our customers will encounter this term or need to understand it, we thought we'd share it as it is pretty interesting.

A lot of importers think marine insurance is an unnecessary expenditure. When we explain the risks and the things that insurance covers, one thing that always leaves our customers with baffled faces is the mention of General Average. In fact, even when we explain it, people generally roll their eyes and see it as a far-fetched and unlikely scenario – and, even on the off chance that it does happen, they assume that it won’t cost much to fix. Why bother with worrying about whether you have general average insurance when general average is an archaic, unlikely situation?

We understand why people think this; we would too! Unfortunately, they’re wrong.

 

  • What Is General Average?

    The General Average maritime law is the amount you will have to pay in a situation wherein a necessary sacrifice of cargo was made to save a ship. (Rather depressing but fortunate: you don’t have to pay anything if the ship sinks) Yes, it all sounds very dramatic and Hollywood-esque – but it’s much more common than you’d think.

    Story-time! Well, it all started back in the day . . . In 800 BC. The Lex Rhodia, the Rhodes Maritime Code, was written – and general average was included. At this point in time, sea travel was one of few modes of transportation; this means that all your modern-day travel accidents (car crashes, plane accidents, motorbike collisions etc.) are all rolled up into one mode of transport. Sea accidents. Now, because these were more common place, a system was developed to make these inevitable accidents as simply resolved as possible.

    As you’ve probably seen in every movie featuring a boat ever, when the ship starts to sink the first thing the crew does is attempt to lighten the load. Cargo is tossed overboard. As ships have always been a way for multiple parties to move their goods overseas, there was always the issue of “who’s cargo do we get rid of?”. To avoid time wasting and squabbling over this, when cargo has to be tossed overboard everyone that has something on the ship pays an equal amount up to cover the loss.

    You may be wondering why we’ve told you this and thinking “wow, 800BC is a little bit outdated” – and you’d be right. However, the law itself has pretty outdated practices and it will help for you to understand the time in which the practices were developed for. General average in marine insurance is still incredibly relevant.

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  • How Much Will General Average Cost Me?

    Now, from our description, General Average sounds like an annoyance – but not a major cost. On your typical container ship, there are over 10,000 containers – so, even if one £100,000 container gets tossed you’ll only be paying out £10, right?

    Wrong.

    Back to the history lesson – although ship owners back in the day were rich, they weren’t owned by large corporations as they are now. This meant that an individual was losing money, rather than a faceless company with deep pockets. General Average was considered a noble thing to do; a way to help the shipowner cover all his costs. The shipping industry has changed, but the rule hasn’t.

    What does this mean?

    This means that rather than paying out £10 to cover the lost shipping container (and, in all likelihood, throwing overboard one shipping container is probably not going to be enough to save the entire ship anyway – so it may be even more) you have to pay an equal share on all of the damages.

    In actual fact, general average loss in marine insurance is such a large loss that insurers have to dedicate a large fraction of their reserves for reimbursing it.

    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.” – Source: F-P Marine Risks, Do You Really Understand General Average?

    So what you would assume is only a £10 charge turns into $125,000. Oh, wait, did we not share that example with you yet? Well, here it is:

    In 2008, the M/V MSC Sabrina got stuck in two feet of clay and for a month and had to be refloated by unloading some of its cargo. (As we all know this far down into the post, this is General Average) One uninsured company with cargo aboard the M/V MSC Sabrina was required to post a US$125,000 Average Bond to receive its cargo valued at US$110,000.

     

  • How Can I Protect Myself From General Average Charges?

    You can protect yourself from general average charges by taking out an adequate insurance plan that covers General Average.


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    If you want more information, give us a call and we’d be happy to tell you all about this and why marine insurance should top your priority list. If you liked this post, don’t forget to share and follow us!


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