Stakeholders in the maritime industry must be familiar with a host of terms and concepts related to cargo transportation, one of them being the general average. The concept is a part of the Marine Insurance Act of 1906, so it has been around for a while.
By while, we mean as far back as 800 BC. Back then, it wasn’t exactly known as general average, but the concept was there. A form of what we now call the general average was included in the Lex Rhodia, which was the Rhodes Maritime Code of 800 BC.
But what exactly is the general average? Let’s discuss. Â
What Is the General Average?
General average is a law in maritime commerce where all parties in a sea voyage contribute to losses or expenses incurred for the common good.
It is based on the principle of “general average sacrifice for the common safety,” which means that in a situation of peril, a sacrifice or expenditure made by one party for the benefit of all parties is divided among everyone involved.
General Average Example
Suppose a ship is in danger, and the captain decides to jettison some cargo to lighten the ship and save it from sinking. All parties aboard, including the cargo owners and shippers, must share the financial burden of the lost cargo.
The idea behind the general average is that what the captain did was for the common good of everyone. So, it makes sense for all parties to share the loss incurred.
The loss is shared pro rata, which means in proportion. So, every party is responsible for a percentage of the loss based on the value of their cargo.
Importance of General Average
The law of the general average is important because it prevents quarreling and delayed decision-making.
In the example above, if the captain had to consult with all parties to decide whose cargo should be jettisoned, it would take too long, and the ship might sink.
The law ensures that everyone cooperates for the common good and the financial burden is shared fairly. In 1890, the general average was codified for the first time in the York Antwerp Rules.Â
Later, in 1949, American companies accepted the law. The code is still effective today and has been updated many times since its original version.
Key Elements in General Average
Justice Grier, the judge who ruled on the Barnard v. Adams case of general average contribution, stipulated the following key elements in general average:
- Common Danger: All parties on the vessel should be in imminent and inevitable danger that can only be averted by sacrificing part of the cargo to save the remainder.
- Voluntary Action: The casting away, jactus (Latin for “throwing”), or jettison (from the French noun jeter meaning “to throw”) of part of the cargo must be done voluntarily by the captain or crew.
- Success: The attempt to avoid the common peril should be successful.
What Is the General Average in Maritime Insurance?
Maritime insurance coverages usually have clauses for the general average. In the event of a general average sacrifice or expenditure, the insurance company will cover the expenses incurred by the insured party.
This coverage protects stakeholders from bearing sudden and large financial burdens. Usually, cargo owners have to provide a general average guarantee or bond to the ship owner before their goods can be released.
What Does General Average Insurance Cover in Shipping?
In shipping, general average insurance covers the following:
- Voluntary Sacrifices: These include jettison of cargo, machinery damage, or damage to any other part of the ship to avoid further damage. For example, the captain may have to run the vessel aground to prevent it from sinking.
- Extra Expenses: The insurance also covers expenses like tugboat assistance, port of refuge costs, and salvage operations.
- Â Crew Wages and Fuel Costs: The event of general average may require the ship to deviate from its original course, resulting in extra crew wages and fuel costs. These expenses are also covered by general average insurance.
- Fees: Insurance also covers general average adjustment fees for legal and surveying purposes.
General average insurance does not cover loss resulting from crew negligence, such as failure to maintain the vessel properly or inadequate preparation for sailing. Some perils are also excluded from general average insurance, such as piracy or war risks.
Who Are The Beneficiaries of the General Average?
The beneficiaries of the general average are all parties affected by the event of the general average. They include:
- Ship owners
- Cargo owners
- Charterers
- Crew and passengers (if applicable)
The amount each party contributes towards the general average is calculated based on their respective interests in the voyage. For example, if a cargo owner’s goods make up 30% of the total value of all cargo onboard, they will be responsible for contributing 30% of the general average expenses.
So, if they have insurance coverage for their cargo, the insurance company will cover their portion of the general average expenses. The same principle applies to other parties.
Situations That Can Result in General Average
A number of situations can result in a general average. Here are some of them.
- Bad Weather: If there’s a severe storm, the crew may have to jettison some cargo to stabilize the ship and prevent it from capsizing.
- Fire Aboard: In case of a fire, the ship’s crew floods some of the compartments containing the cargo to extinguish the fire. The flooded compartments and damaged or lost cargo are considered general average sacrifices since losing them results in saving the rest of the cargo.
- Dangerous Waters: If a vessel is at risk of sinking in dangerous waters, the captain may run the ship aground to avoid sinking.
- Piracy or Hijacking: Pirates and hijackers sometimes force crew members to jettison cargo in exchange for sparing their lives. Such cargo also falls under the general average.
Conclusion
Maritime isn’t a new industry, as water has served as a means of transport for centuries. Throughout time, sailors and ship owners have come up with various practices and laws to ensure the safe passage of vessels and their cargo.
General average is one of these practices, which helps save the vessel and its cargo in case of an emergency. Modern ship owners and cargo owners can get insurance to cover their portion of the general average expenses, making it less of a burden on them.Â
The guide has simplified the general average for you so that you can approach an insurer with a basic understanding of what it entails.
