General Average

Making Importers and Exporters aware of the risk of General Average, what it stands for and how it can effect your Customer’s bottom line if they do not purchase Marine Cargo Insurance. Even the most restrictive marine cargo policy covers this risk.

GA is a system founded on a principal of justice to all, making good ocean marine losses voluntarily incurred for the safety of the ENTIRE VENTURE, that is SHIP, FREIGHT AND CARGO. During a voyage, the property of one party may be sacrificed to save all. Following such a sacrifice and the ship safely reaches port, then the fortunate party whose cargo was untouched should contribute to the loss of the party whose cargo was sacrificed.

GA cases have a few essential ingredients. First is the common adventure; that is SHIP, CARGO, FREIGHT must be imperiled, and any sacrifice must be extraordinary in nature. If for example the ships gear is lost whilst being used for it’s original intended purpose, the loss is not General Average. The G.A. act must be voluntary and intentional (i.e. throwing overboard cargo to lighten a waterlogged ship) The act must also be reasonable. For example in jettisoning cargo for the common safety of the adventure, the master of the ship must excercise reasonable care in the selection of goods to be thrown overboard. Then, the adventure must be saved, as the essence of G.A. is sacrifice by one to save all.

WHO PAYS FOR THE GOODS SACRIFICED OR THE EXTRAORDINARY EXPENSES

As the sacrifice is to benefit the common venture, ALL MUST CONTRIBUTE TO THE LOSS. In simple terms the contribution is levied on arrived values of SHIP, CARGO AND FREIGHT. Arriving at these values is no easy task as many factors have to be considered. Cargo ships involved in regular trade often have goods shipped under 1500 bills of lading, which creates voluminous basic work in establishing the arrived values. As well a number of shipments may have arrived damaged, and may have been discharged in different ports in different countries.

The owners of the property sacrificed, or those (usually the owners) who have incurred an extraordinary expense, must as with the practice of insurance be made whole, i.e. Put back into the same financial position had the loss/G.A. not occurred in the first place.

Let us assume that an entire shipment is jettisoned in a General Average sacrifice and that it’s value at destination would have been $1,000, while the owner of the cargo is made whole, they too must contribute to the loss so that all parties are in the same position. This owners contribution is assessed on the $1,000 value

WHAT IS AN AVERAGE ADJUSTER?

The preparation of G.A. adjustments is, as a rule, entrusted to professional Average Adjusters. Although usually appointed by the ship owner they remain quite independent. Their goal is to do justice to all whom had an interest in the voyage.

Please find below a simplified example of final figures in a General Average Adjustment

LOSS
G.A. sacrifice (cargo jettisoned) …………………………… $45,000
G.A. expenditure …………………………… $15,000
G.A. loss of freight (on jettison) …………………………… $7,000
Total …………………………… $67,000
CONTRIBUTORY VALUES(NET ARRIVED VALUES)
Ship …………………………… $300,000
Freight …………………………… $75,000
Cargo …………………………… $300,000
Total …………………………… $675,000
GENERAL AVERAGE CONTRIBUTION
Ship Pays …………………………… $30,000
Freight Pays …………………………… $7,500
Cargo Pays …………………………… $30,000
Total …………………………… $67,500

Calculation of the factor applied to contributory values: $67,500 divided by $675,000 = 0.1 (ship $300,000 x 0.1 = $30,000)

ALWAYS REMEMBER THAT THE MOMENT YOURS OR CUSTOMERS CARGO IS PLACED ABOARD A VESSEL THAT YOU HAVE AN INTEREST IN THE WHOLE VENTURE AND NOT JUST YOUR OWN CARGO

Source: CBMU “Marine Insurance: The Silent Export”