How General Average Could Ruin Your Ocean Cargo Deliveries | Transportfolio
Do you ever worry about experiencing a general average declaration for your ocean shipments? It’s time to assess what’s at stake and think about how you can minimize your risk. Start by building your knowledge of how general average works, how it can impact your shipments if general average is declared, and how marine cargo insurance can help you sleep like a baby at night.
What is general average, and how often is it declared?
General average is a throwback to the days when a crew tossed cargo overboard to lighten the ship in a storm. During the emergency, there wasn’t time to figure out whose cargo should be jettisoned. After the fact, to avoid quarreling, merchants whose cargo landed safely would be called upon to contribute a share or percentage to the merchants whose goods were tossed overboard to avoid imminent peril.
Centuries later, this concept continues. If a ship experiences an extraordinary sacrifice or expenditure at sea today, the ship owner may declare general average. When this happens, all the merchants with freight on the vessel are required to share in the cost of the expenditure before the goods are released.
It can be difficult to determine how many general average declarations are recorded each year, but general average is a growing risk and concern for many risk managers and insurance experts. In recent times, there has been a rise in the frequency and severity of extreme weather events that have led many vessels to become grounded, causing container loss and/or vessel damage. In addition, fires on container vessels are more common now than in the past.
The Allianz 2018 Safety and Shipping Review reports that in 2017, 94 vessels of 100 gross tons or more were declared a total loss; 6 of these were caused by fires/explosions. From 2008 to 2017, fire/explosion was the third most common cause of total losses, behind foundered and wrecked/stranded vessels. Already in 2018, fires have been reported on the Maersk Honam, Maersk Kensington, and SSL Kolkata.
What happens when general average is declared:
1. Ship owners have a lien on the ship’s cargo
At the time the voyage is completed, the level of sacrificial losses will not normally be known. Ship owners will usually call for security from cargo interests, against which the assessed contributions can be enforced. The amount of the claim is usually calculated by average adjusters, appointed by ship owners. Each cargo owner’s contribution is calculated on a percentage of the cargo owner’s interest or commercial invoice value, ranging from 1 to 100 percent. Ship owners have a lien on the cargo until each cargo owner’s contribution or security is satisfied. If a shipment is secured with all-risk marine cargo insurance coverage, the insurance provider should guarantee the cargo owner’s contribution or security so cargo can be released. If the shipment is not secured with insurance, the cargo owner will be required to post their contribution or security in cash before their cargo will be released. As the frequency of general average declarations has increased, so has the amount of the required securities—from about 12% a year ago to about 50% today.
2. Ocean carriers are not automatically liable for loss or damage to your cargo
The U.S. accepted the Hague Rules in 1936 through the passage of the Carriage of Goods by Sea Act (COGSA). The rules expressly remove the ocean carrier’s liability for loss or damage to cargo that arises from one of the 17 stated liability exclusions. Legal liability claims are often met with resistance by carriers. Even if the ocean carrier is found liable at the end of a legal process that can take months to settle, their limit of liability under COGSA is $500 per package or customary shipping unit, or the actual value of the goods, whichever is less. In other words, the onus is on you to assess and minimize your risk exposure.
Scenarios: general average is declared
Why should you care about all this? Imagine that a carrying vessel is on a laden voyage from ports in the Far East to ports in Panama and the U.S. This vessel carries 1,500 containers; one of them is yours. The vessel collides with another carrying vessel off Shanghai. The vessel carrying your freight sustains damage and requires repair at a port of refuge in order to proceed with the intended voyage. In view of the extraordinary expenditures incurred, ship owners declare general average. At the intended discharging port, the cargo can only be released to receivers once the cargo owner’s security is posted or satisfied. In this case, they are assessed at 12% of the Commercial Value and Freight (C&F) value of each cargo/container interest.
What happens when you don’t have marine cargo insurance
You will be required to tender a cash deposit equivalent to 12% of the commercial value AND 12% of the ocean freight charges. If securities are not posted within the allotted free time, you also incur detention, demurrage, and storage costs.
Now let’s switch up this scenario. Let’s say that during the collision several containers went overboard and recovery was unsuccessful. Your cargo was in one of the containers that went overboard. As a result, you now want to file a claim for cargo loss against the carrier.
The claims handling process and the complexities of recovering for damages under a general average declaration can be extremely long and costly. In most cases, the process can take years to resolve, which could require you hire a maritime attorney to represent your interest. Once all is finalized, you may or may not see a return.
What happens when you have marine cargo insurance
The cargo underwriter posts the required security by way of a bond, and your cargo is released. If the first in/first out practice means you pass the allotted free time, the cargo underwriter should be responsible for detention, demurrage, and storage costs.
In addition, if you do have a cargo loss, your cargo insurance settles your claim and makes you whole. No waiting for years in hopes of being paid.
As a natural extension of our global logistics capabilities, we focus on reducing your risk in the supply chain. We can help you identify and avoid potential pitfalls that lurk on the horizon before you face a general average declaration. Talk to us about marine cargo insurance options, including no- or low-deductible options so you can control your costs, pay-as-you-go transactions so you get only one invoice for both freight and insurance, and claims assistance if the worst should happen.