What are My Risks - General Average

The latest in the world of insurance

Posted 2018-07-30

The majority of cargo arrives safely at its destination.  However, when it does this still may result in a claim which could result in costs, delay and in some circumstances the disposal of your cargo.  This is called General Average... 

Imagine boarding a plane for your summer holidays and the plane breaks down. Rather than receiving compensation for your inconvenience and put on the next flight, you’re locked in a room and asked to contribute to the loss.  Sounds bizarre but a long time ago, cargo and vessel interests decided to club together to support any financial burden in order to save the voyage.  This arrangement has been around far longer than Lloyds of London, or any insurance for that matter. This made perfect sense in Ancient times and is still very much prevalent today, even with multi-millionaire ship owners.  

Many purport to understand or have knowledge of General Average but in fact, there are probably only a handful of experts in the world who actually do.  It is a costly misunderstanding which is often only apparent to merchants when they're at their most vulnerable.

General Average – what are the misconceptions?

General Average only applies to major catastrophes such as the Hyundai Fortune or the MSC Napoli?
The most common reason to invoke GA is when the vessel suffers an engine or shaft breakdown. There is no sign of any damage or immediate danger to the cargo but with the vessel adrift, the voyage is very much in peril. All manner of expenses such as the cost of tugs, temporary repairs, the hiring of equipment, etc. falls in this category.

General Average only applies when the life of the crew is in danger?
Simply, you cannot put a value on life so it does not apply. This is solely for saving the voyage, vessel, and cargo - so everyone is expected to contribute. The only notable exception is luggage.

General Average contributions are only paid in the future?
Whilst the solution may take years, there is a lien over all interests until a security for a deposit is paid. No security, no cargo. Without cargo insurance, you'd be expected to put up a cash deposit of around 20% of the cargo value, before it can be released.

The forwarder is responsible for security, handling the matter, or is at fault for nominating this carrier?
While the merchant or client may feel wronged, the forwarder has done absolutely nothing wrong. Neither has the forwarder have any duty to provide security or handle the matter.  Even if they tried to assist, the adjuster would seek instructions solely from the cargo interest and their insurers. GA cover under any liability policy simply protects the forwarder and does not cover any provision of security or handling under any circumstances.

No need to contribute if my cargo is damaged?
Only if it is a total loss. However, cargo interests will still be expected to contribute to the proportion of sound cargo.  So, if the cargo has water damage, you would be required to provide security for release of the cargo, adjust your claim, and then settle any contribution of the salvaged cargo proportion.  


How does it affect me?

Every cargo insurance certificate issued under WIS programme includes GA coverage. As long as you have cargo insurance, your client is covered. You probably do not need to be inconvenienced whatsoever other than simply notifying insurers. The adjuster and insurers normally work directly to obtain a prompt release of cargo and any final contribution is normally resolved without further communication.

If they don’t have cargo insurance, your client would be expected to correspond directly with the adjuster, sign a GA Bond, and provide a cash despot of around 20% of the cargo value. This will stay in escrow for a number of years until they have come to a mutual agreement with the adjuster on compensation. Ask your client this: "Would you put up 20% of cargo value in cash, within 24 hours, without any worry of having this returned?" That is the question they need to ask themselves when agreeing to decline insurance.

If unable to raise the deposit, the cargo will be held indefinitely and may be destroyed at their cost/expense as well.


How should I protect myself?

Ultimately, always offer cargo insurance to your client and explain the benefits. When GA incidents occur, quite often the shipper cannot - or will not - put up security. They will often times, blame the forwarder. You may find allegations of negligence or cries for compensation to cover the cash deposit are placed on you, but this has nothing to do with the forwarder. 

By offering cargo insurance helps quickly to appease the situation and, hopefully, next time they are more prudent about purchasing insurance. Trying to put up security yourself, or rejecting these GA demands, just causes further anguish. The sooner the cargo owner directly cooperates with the adjuster, the quicker they can obtain the cargo. It is important the Forwarder stays out of this.

For a forwarder it is important to notify your liability insurers about any cargo that remains uncollected because of failure to provide security. Costs arising out of uncleared cargo such as storage or demurrage but even uncollected contributions may be pursued against the forwarder.  A merchants decision to walk away can have enormous consequences on the forwarder, so it's important to hold them fully responsible for failure to clear the cargo.