Every shipper knows that when cargo is lost, damaged, delayed, or stolen while in transit, they could be liable to recoup the cost.
However, every day we run into shippers who don’t realize that they could also be responsible for other cargo on board a ship or even the ship itself!
This liability is thanks to a principle of maritime law called “General Average.” In this blog, we will be covering what General Average is and why it is important- now more than ever- to make sure your company is protected from General Average claims through the right insurance.
What is General Average?
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. Today, we’re seeing an increase in General Average being declared.
How does General Average and General Average Insurance work?
General Average is a maritime law principle that states if one cargo suffers a loss due to an event out of the shipper’s control, all other goods on board bear a proportionate loss.
The law comes from an ancient merchant co-operative system where goods were pooled for a collective voyage and losses were shared among the participants.
These days, when General Average is declared, not only are ocean carriers not liable for loss or damage to cargo but every cargo owner with goods on that ship becomes fiscally responsible for the ship itself, as well as for the lost cargo of others.
That means even if you didn’t lose cargo, you are still on the hook and must share in the expenses of both the damaged ship and lost cargo.
A General Average claim can be hugely detrimental to a cargo owner and their company. Time and time again, we see cargo owners ending up owing more money than their lost cargo is actually worth.
Does General Average law still apply to shippers today?
General Average is still practiced throughout the world today. Even though it was created thousands of years ago, this law has very real meaning and consequences.
If you are going to be shipping goods abroad in the future, it is important that you understand how General Average works and what can trigger an event.
What kind of events can trigger General Average?
General Average is most often declared because of cargo loss during inclement weather. It can also be declared when cargo is destroyed because of fires on board the ship or when machinery breakdowns.
General Average is also claimed if a vessel is stranded or a ship is grounded, situations where vessels need assistance from tugs or other vessels, or if a ship must call at a port of refuge.
Is General Average insurance important?
With ship accidents increasing, insurance that covers General Average claims is more important than ever. Having insurance that protects you from General Average means you can avoid paying astronomical costs associated with the claims.
With more and more shipping container accidents happening around the world, having insurance that protects you from General Average is even more important than ever.
The risks of not having protection for General Average insurance.
By this time, you are aware that if your insurance does not cover General Average claims, you’re on the hook financially for other shippers’ cargo or even a ship itself.
However, what many people don’t realize is how inconvenient and tedious the General Average claims process is for the cargo owner.
General Average Claims Process
After General Average has been declared, all parties must travel to the ship’s location and board it to provide General Average guarantees. If the cargo owner has insurance that covers General Average (as TLR’s cargo insurance does), the insurance company will issue the guarantee.
If not, the owners must provide the guarantee themselves with a cash deposit or bond that will cover the prorated claim. Cargo will not be released to the owner until the General Average guarantee has been provided which could lead to serious disruption in your supply chain.
To add insult to injury, even if General Average covers some of your losses, settlements can take months if not years to be finalized. You also must help pay the additional expenses of a hired General Average adjuster.
As you can see, these claims aren’t just a financial burden. General Average claims can be a huge hit to cargo owners’ time as well as their supply chain.
What type of insurance do you need to protect against General Average?
The most common mistake we see cargo owners make is believing they are covered by carrier liability insurance. What they don’t understand is that carrier liability typically only covers damage or loss that occurred due to the carrier’s negligence.
When General Average is declared, ocean carriers are not liable for loss or damage to cargo. This lack of coverage is often a huge shock to cargo owners.
All-risk insurance is a type of marine cargo insurance that protects the shipper against losses caused by any hazards during transportation.
All-risk marine cargo insurance covers all perils and liabilities, including General average and piracy.
At TLR, we always recommend our all-risk insurance because being protected from warehouse to warehouse isn’t just smart, it’s essential.
How do I know if my insurance covers General Average?
The only way to know if you are protected from when General Average is declared is to check your insurance policy.
Too often, we see clients who assume their cargo is covered and they are protected from General Average claims until it’s too late. The best thing you can do for your company today is to review your insurance policy.
TLR offers a free risk assessment of your current cargo insurance plan.
We will look for any gaps in coverage and help you understand your policy so you can rest assured your cargo is protected from General Average and potential disruptions in your supply chain are minimized.
Frequently Asked Questions
What is General Average?
The law of 'General Average' was established to ensure both the safety and security of a vessel while at sea. It enables passengers or consignees who have interests in cargo on board a ship, typically to compensate them for financial losses they incur because of risks during the voyage.
In essence, it acts as a type of insurance that covers out-of-pocket expenses incurred from loss or damage arising from an event usually attributed to an unforeseen accident or even piracy.
How can I protect myself from General Average?
You can protect yourself from these claims with the right insurance. TLR's all-risk insurance protects your cargo from warehouse to warehouse, giving you the confidence that your cargo is safe, secure, and free from any liability.
Are General Average declarations increasing?
Given the supply chain issues brought on by the pandemic, experts agree General Average claims are increasing. The World Shipping Council estimates the total containers lost at sea averages about 1,400 every year, 56% of which are attributed to catastrophic events.
Who decided the General Average claim amount?
When a vessel owner decides to declare General Average, they appoint a neutral third-party who is responsible for determining how much each stakeholder owes in relation to their share of expenses.
How much do cargo owners pay during General Average?
Parties have to negotiate how much should be paid out of the fund to settle all claims. The determining factor for settlement will depend on the type of cargo, the size of the vessel, as well as other factors. As a result, it's difficult to generalize an average amount that is compensated.