General Average

Caralb News   •   May 26, 2021

What are the conditions for general average?

The law of general average is a principle of maritime law whereby all stakeholders in a sea venture proportionally share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency.(1)

A classic example of a General Average sacrifice is jettison to lighten a stranded vessel. Jettison is the throwing overboard of cargo or ship’s material, equipment or stores. Other examples include stranding, fires, and collisions. All participants (vessel and cargo owners) contribute to offset the losses incurred. General Average claims can be in the millions of dollars. What does this mean?

  • All cargo is seized.
  • All cargo owners are held responsible to share in the loss.
  • Such cargo is generally delivered free of lien when the cargo owner puts up a security deposit or bond.
  • Typically the security deposit must be cash.
  • General Average computations are so complex normally a General Average adjuster is retained to determine the total General Average loss amount. The additional expenses for the General Average adjuster are billed on a shared basis to those with cargo on the vessel.
  • General Average claims can take years to resolve.

If cargo is insured, the insurance company provides the guarantee (bond) and any contribution required for the loss. The potential financial loss from a General Average claim amplifies the importance of All Risks Cargo Insurance. The liability for General Average makes purchasing cargo insurance an essential business decision. (2)

Watch this video by Trade Risk Guaranty which provides an introduction to the concept of General Average and how it is declared. (3)

What happens to the cargo on the Ever Given?

The 400m long vessel blocked the canal for six days and more than a dozen tug boats, multiple dredgers and 800 personnel were used in the recovery operation, with Egyptian authorities reportedly seeking more than $1 billion in damages to cover these costs and the loss of canal revenue.

The Ever Given’s owners notified Evergreen on the 1st April that it declared a general average following the work to refloat the vessel, which means that shippers will potentially be required to share the expenses incurred in the ship’s rescue.

The size of the Ever Given and the number of cargo owners involved means that this could be the largest ever general average case so, what is already a complex process, will be even more lengthy and complicated than usual, with insurance experts predicting the total adjustment process could take up to seven years.

Fortunately shippers don’t have to wait until the adjustment is completed to get their cargo, as the adjuster will determine an interim deposit that needs to be put up by individual shippers to retrieve their cargo.

The last significant container vessel declaration of general average was for the Maersk Honam fire and shippers were able to pay to release their cargo within two months.

Cargo owners aboard the Honam had to pay 54% of the cargo’s value to get it released, which was calculated as 42.5% of the cargo value for the security, plus 11.5% as deposit on the general average.

Shipper’s insurance will typically cover the guarantee and other fees associated with the general average, though there is unfortunately a surprisingly high proportion of cargo owners who choose not to buy insurance, even though it’s relatively cheap and their cargo may be subject to lien until the deposit is paid.

General average is an old concept dating back hundreds of years that has evolved over time with the shipping industry. Cargo would occasionally need to be thrown overboard in emergency situations to lighten loads and save the ship. General average arose to help spread this loss.

Sharing the cost of major expenses is at the heart of what a general average declaration means for shippers. Equitable sharing between a shipowner and cargo interest of extraordinary sacrifices, or expenses incurred, to avert a peril that threatens the entire voyage.

These days, the general average terms are outlined in the carrier’s bill of lading and can cover a long list of expenses, including towing and salvors.

Lost revenue for the canal, however, would not fall under general average, according to industry experts and there are reports emerging that insurers may be considering a challenge, possibly via an insurance consortium.

Meanwhile the Ever Given remains at anchor in Great Bitter Lake within the Suez Canal system going nowhere. This is likely to be a very long drawn out situation further delaying cargo that remains on-board. (4)

(1) “General average” 27 April 2021. Wikipedia. https://en.wikipedia.org/wiki/General_average

(2) “Cargo Insurance: What is general average?”. Shapiro. https://www.shapiro.com/resources/cargo-insurance-what-is-general-average/

(3) “Introduction to General Average”. Trade Risk Guaranty. 2019. https://www.youtube.com/watch?v=8qVs-inTcBc

(4) ““MV EVER GIVEN”: Insurances and General Average”. Aiyon Abogados. 17 May 2021. https://aiyon.es/en/mv-ever-given-insurances-and-general-average/