General Average is a maritime insurance term that refers to the cost of goods lost or damaged during a marine incident. General Average is declared when the value of the lost or damaged goods would exceed what it takes to safely salvage them. General Average can be declared by both ship owners and carriers.
This blog post will explore the most common situations where General Average is declared.
What is General Average?
General Average requires a shipowner and its customers to share a proportionate amount of the costs associated with saving a vessel after a major casualty. Cargo owners are required to contribute to the general average fund before cargo can be released.
General Average was created to protect the individual cargo owner from bearing the entire burden of a loss due to uncontrollable circumstances. General Average also ensures that there is a fair system of apportioning costs among all parties involved in the process of salvaging goods at sea. General Average is crucial because it ensures that trade continues to occur on deep seas despite an increase in risk factors.
The first incident where General Average was declared was the collision of the “Seabridge” with “Achille” in 1875. The collision happened off Dungeness near the Goodwin Sands which led to the sinking of the “Seabridge”. The cargo was saved and General Average was declared.
When is General Average Declared?
General Average can be declared for a number of reasons including, inclement weather, when cargo is lost, when there are fires onboard, machinery breakdown, stranded or grounded ships, situations where vessels need assistance from tugs or other vessels, or if a ship has to call at a port of refuge. The three most common instances when General Average is declared include:
#1 General Average Declared in Inclement Weather
One of the most significant causes of damage for vessels is extreme weather conditions. Each year, the World Shipping Council reported 1,320 container overboard losses. In October of 2020, 1,816 cargo containers from Japan’s freight ship One Apus went plunging into the sea of 16-meter swells in the Pacific Ocean due to heavy winds.
#2 General Average Declared for Stranded or Grounded Ships
Another major instance when General Average is declared is when a ship has been abandoned or disabled, and its cargo is at risk of being lost.
One of the most significant General Average cases from this year was the Ever Given that was stranded in the Suez Canal in March of 2021 for nearly 6 days, blocking one of the world’s biggest trade routes. When General Average was declared, $550,000 had to be donated by General Average donors to pay for it before it could be towed out. General Average was declared because this grounding and canal blockage exceeded the actual cost of the ship.
When general average is declared it covers all costs related to salvage operations including but not limited to:
- salvage expenses incurred by the salvors
- the cost of repairing any damage to port facilities caused by the casualty
- costs for providing temporary alternative accommodation for passengers and crew left on board during salvage operations
- costs involved in evacuating passengers and crew from the vessel
- hiring tub boats to move the vessel to port
#3 General Average Declared After Fire or Machinery Breakdown
General Average can be declared after a fire on a ship. It can also be declared if there is a breakdown of machinery on a ship. General Average is not only implemented when there are casualties, but also in situations where there are mechanical defects or accidents that threaten life, property, or the stability of the vessel.
In May of this year (2021), General Average was declared on the X-Press Pearl after a fire engulfed the ship due to strong winds and chemical materials in the containers onboard the ship.
The incident caused devastating chemical pollution and environmental damage that affected the people in the surrounding Sri Lankan cities. Cargo surveyors and a marine investigator were sent to investigate the loss of cargo and determine the necessary course of action regarding General Average.
Other Situations Where General Average is Declared
General Average can also be declared in the instances of piracy or ransom of the ship, a collision, or even the sacrificing of cargo. The sacrifice must be extraordinary and made for the safety of the people.
What Happens After General Average is Declared?
General Average requires all parties involved (cargo owners, shippers, insurance companies) to contribute money for general repairs regardless of whether or not they are at fault. This is to ensure that the cargo is delivered in good condition.
When General Average has been declared, who pays for what becomes very important. If you are a shipper or cargo owner, it may be worthwhile doing some research into this area before entering any contracts if your goods have an intrinsic value that could come under scrutiny should General Average be declared.
When is General Average Not Declared?
One of the most common reasons a General Average claim would not be declared is in cases of negligence where a person or company has failed to act in accordance with their duties, which causes damage and increases average costs for others on board the ship. Shipowners have to fulfill the requirements listed in the bill of lading to qualify for a General Average claim. If the vessel is not maintained properly in accordance with the requirements listed in the bill of lading, it is not considered seaworthy, and therefore a General Average claim would not be approved.
The act qualifying for General Average must not be inevitable and the claim must not be made for the safety of the cargo, but the safety of those on board the ship.
The essential conditions of the general average
To declare General Average, three conditions must be met.
- The first is that the ship has to be in peril or that the voyage has been terminated.
- Secondly, General Average has to have been agreed upon by all parties involved in General average- specifically cargo owners, carriers, insurers, and salvors.
- Lastly, General Average requires that the total loss exceeds one-tenth of what was carried on board at the commencement of the voyage
Frequently Asked Questions
What are General Average and Particular Average?
Particular average refers to the partial damage or loss of cargo or a ship that only affects the specific cargo or shipowner. In contrast, General Average refers to the loss or damage of cargo or a ship that is shared by all ship and cargo owners.
What is an example of General Average?
An example of General Average being declared would be if the cargo was destroyed and the ship could not be repaired. General Average's function is to establish fair compensation for whoever has suffered losses. General Average payments are made to those who have lost their goods and cannot recover them by other means. General average payments can also be paid to those who have salvaged goods and exporters, among others. General average is not insurance, and it does not protect people from losses at sea, but rather tries to fix those losses as much as possible.
How do you calculate General Average?
To calculate General Average, you need to use the following formula:
General Average = (sum of Value of Contribution)/(Sum of Values Contributed).
Calculating General Average is a very complicated process and takes a lot of work which is usually completed by a professional.
General Average is the responsibility of all parties involved in a maritime incident. General average is not insurance and doesn’t protect people from losses at sea but rather tries to fix those losses as much as possible. Not all cargo insurance policies offer his protection. As you can see, general average situations are unpredictable, and without protection, the cargo owner is fully liable for their portion of the claim. If you’re interested in finding out if your company insurance includes a General Average clause, get a free consultation today.