What is General Average?
General Average is a long-established principle of Maritime Law which requires contribution from all whose goods were saved to the losses of those whose goods were sacrificed at time of common peril
General Average (GA) exists independently of contract but is now incorporated not only in the bill of lading but also in the Marine Insurance Act 1906, which 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”.
Cargo jettisoned to prevent a vessel from becoming a total loss, or cargo damaged by water used in extinguishing a fire on board ship provide examples of General Average sacrifices.
An example of GA expenditure arises when a vessel, due perhaps to heavy weather, puts into a port of refuge and the ship owner incurs additional costs such as port charges.
Both sacrifices made and expenditure incurred for the safety of the ship and cargo are by Maritime Law apportioned between ship and cargo on the basis of their respective salved values, and any party which has suffered the loss is entitled to recover a proportion of their loss from the other parties who have benefited.
When there has been a General Average act, the shipowner before releasing cargo to a consignee will demand security for the cargo’s proportion of the General Average.
The consignee will in the first place be required to sign a General Average Bond which confirms his agreement to the drawing up of the General Average Adjustment.
The drawing up of a General Average Adjustment will be normally carried out by an Average Adjuster usually appointed by shipowners and this may take a considerable time, perhaps years, and until completed the actual General Average contribution due from the cargo cannot be ascertained. Therefore, as security for this contribution, the shipowner usually requires the consignee to pay a deposit of so much per cent on the estimated arrived value of the cargo and in exchange the consignee receives a Deposit Receipt.
Instead of collecting deposits, shipowners will more usually accept an Underwriter’s Guarantee. Wherever possible the Underwriter will provide a guarantee. Under the guarantee the Underwriter agrees to pay the general average contribution due when the adjustment is completed. To provide for under-insurance, the consignee should be required to sign a counter guarantee unless the policy, which in most cases it does, includes a General Average Clause.
It should be noted that the values used in General Average are the net arrived values, that is to say duty and landing charges are not included, and if the goods arrive damaged, then the damaged value is used and not the sound value.
When the consignee claims under his policy for the deposit, the receipt must be surrendered to the Underwriters who will then refund the amount of the deposit in full provided that the goods are not underinsured. If the goods are underinsured then the Underwriter will only refund the proportion of the deposit applicable to the insured value.
For example, if goods insured for GBP900 have an arrived value of GBP1,000 and a deposit of 10% or GBP100 is collected by the shipowner, then the Underwriter will refund only 10% of the GBP900, i.e. GBP90.
For more information on Cargo Insurance or General Average, please contact your Development Underwriter.