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General Average Background

General Average was introduced because in an event of grave situations the safety of the ship, crew members, and cargo was jeopardized as it was always a difficult decision for the ship’s crew to decide whose cargo to jettison (jettison being the deliberate throwing overboard of cargo or ship’s material, equipment to save the ship, crew, or remaining cargo) to salvage the situation. The time constraints in such emergencies do not allow the ship’s crew to decide which cargo to jettison and which to leave. Consequently, there would be a hot debate arising among cargo and ship owners as to whose cargo has been jettisoned and whose interests compromised if the loss is to be on one person’s account. With General Average in place, the consigner whose goods have been jettisoned is not worse off than the consignors whose freight was not. The principles of General Average remain the most effective and mutually beneficial way of dealing with such cases and there is yet to be suggested any suitable alternative process.

The key benefit to all parties is that it provides a framework that allows for the crew to take immediate action in an emergency to attempt to save the property involved, with the reassurance that, in due course, once the danger has subsided, these expenses and losses will be contributed to by all parties involved based on their cargo values. This is not only for the benefit of the shipowner but is beneficial to all parties involved.

Situations Warranting Declaration of General Average

The following are some examples of the situations where general average might be declared:

• Fire onboard.
• Stranded or grounded ship due to machinery breakdown.
• A shift of containers due to a heavy storm or other inclement weather-related incidents which may threaten a ship’s stability.
• Situations where the vessel needs assistance from tugs or other vessels.
• Calling at a port of refuge.

Essential features of General Average in shipping

There is a General Average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety to preserve property involved in a common maritime adventure. The under noted are essential features of General Average:

• Sacrifice or expenditure must be extraordinary – Normal costs or damages sustained by a marine transport company in meeting its contractual obligations do not constitute General Average.
• Exists real and substantial risk – It is imperative there be risk and danger to vessel and cargo. It does not have to be immediate, but it must be genuine and considerable.
• Need for common safety – Overall, anything done must be for the sake of overall wellbeing, not just a percentage thereof.

Types of General Average Costs

Cargo jettisoned to prevent a vessel from becoming a total loss, or cargo damaged by water used in extinguishing a fire on board are examples of General Average Sacrifices while expenditure arising when a vessel, due perhaps to heavy weather, puts into a port of refuge and incurs additional costs such as port charges falls under General Average Expenditure. Both sacrifices made and expenditure incurred for the safety of the ship and cargo are by Maritime Law apportioned between ship and cargo based on their respective values.

The General Average Process

Upon declaration of GA, the cargo interests will be asked to provide an average bond, signed by the owners of the cargo, along with an average guarantee, signed by the cargo insurers. These documents provide an undertaking that the party will pay any General Average contribution ultimately due from them under the final adjustment. Shipowners have a possessory lien on cargo for reasonable General Average security, which they are required to collect on behalf of all parties to the adventure, including those cargo interests who have sustained sacrifice.

Cargo is not released until full security is in place. Where cargo is insured, the process is straightforward. Cargo insurers provide the required guarantee. Challenges exist on security for the uninsured cargo on board where cargo owners are required to pay a percentage of their cargo value as a cash deposit in respect of their ultimate General Average contribution. Cargo will not be released to the cargo owners until the General Average guarantee has been provided.

How is General Average Calculated?

Each party who suffered a loss will be credited for the value of that loss, and all parties involved in the ocean voyage will be charged a percentage of their own interests’ value to pay for shared costs and others’ loss of interests.

For example:

A fire breaks out on a ship valued at $1,000,000 with $3,000,000 worth of cargo on board. The vessel has to be scrapped and is sold for a salvage value of $100,000 (losing $900,000) after the incident. Firefighting and returning the vessel to a safe harbor costs $500,000. $900,000 worth of cargo is lost, and the administrative costs following the events are $50,000.

• Total value of the ship and cargo before the fire: $4,000,000
• Total value of the ship and cargo after the fire: $2,200,000 (45% loss of value)
• Total cost of handling the incident: $550,000 (13.75% of the voyage value before the incident)
• Total cost of losses due to the incident: $2,350,000 (58.75% of the value of vessel and cargo before the fire)

So someone who had a total of $25,000 worth of cargo aboard the vessel and had $10,000 of it sacrificed in the incident would receive $10,000 in general average proceeds, but they would also be charged for 58.75% of their interests aboard the ship, or $14,688.

Someone who had $50,000 worth of cargo aboard the vessel but lost none of it in the incident would be charged $29,375 and would not receive any general average proceeds.

The Ever Given – Average Declared

Despite no reported loss of cargo and minimal damage to the vessel when it got stuck in the Suez Canal, the cost of salvage operation and possible compensation claims are expected to amount to a sizeable bill. The York-Antwerp Rules states that salvage costs are to be treated as General Average. With the assistance of 13 tugboats and dredgers, the vessel was successfully re-floated. Declaring General Average means it is likely that shippers who have cargo aboard will bear the cost of the salvage operation.

Other General Average Cases

The latest General Average declaration before the Ever Give was by Hapag Lloyd in January 2019, on the Yantian Express. The declared General Average was more than 60%. For an uninsured importer who had a $50,000 shipment on board, they would have had to make a cash deposit or bond in the amount of $30,000 for their freight to have been released.

General average was also declared following the 2018 fire on board the Maersk Honam. After declaring General Average, the adjustor fixed the salvage security at 42.5% of cargo value and 11.5% as a General Average deposit – this meant a shipper with a cargo worth $100,000 needed to pay a combined deposit of $54,000 to get its cargo released.

Longchamp was hijacked in January 2009 by Somali pirates. A ransom of USD6 Million was demanded, which after a negotiation period of 51 days, was reduced to USD1.85 Million. During the negotiation period, additional operating expenses were made for a total of USD160 000. Contribution to the ransom and additional expenses were requested under GA rules to the cargo owners that decided to appeal this decision at Court. But the Supreme Court of Justice did not agree with cargo owners and the paid ransom (+ add. expenses) was found to be an allowable expense of the GA.

MSC Sabrina ran aground in the river in Quebec, Canada in March 2008 with USD100Million cargo value on board. General Average was declared after 1 month of trying to rescue the ship. One company that had onboard cargo valued at USD110 000 was required to post USD125 000 average bond to receive its cargo back.

Hyundai Fortune suffered a major explosion and massive fire in March 2006; the cause of the explosion could be fireworks not properly declared. 1/3 of the containers were damaged. Combined costs of the ship and lost cargo were estimated at around USD300 Million.

Conclusion

Some cargo owners may not be aware of their liabilities when a General Average case is declared, and in particular, the costs involved can come as a shock. In light of this unfortunate situation, importers must check if they have adequate insurance for their goods. Not only covering own cargo, but it should also offer protection should a case of General Average be declared, as it needs to cover any charges that the importer would be liable to pay towards the cost of any loss or damage to the vessel and its cargo, as well as any additional expenses incurred (such as vessel salvage). Don’t risk shipping your goods without Marine Insurance. Shippers without appropriate insurance cover are vulnerable to losing their cargo altogether if they do not pay the required cash bond.

About The Author – Alson Nhari is the Head of Business Development at Tropical Reinsurance. He has worked for international risk advisory companies in different capacities for nearly 13 years. Alson has structured and delivered complex risk transfer programs across marine, mining, engineering, financial services, agriculture, pharmaceutical, and aviation among other sectors. He is reachable at alson@tropicalre.co.zw

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On the other hand the Suez Canal is not just any waterway. It is a vital channel linking the factories of Asia to the affluent customers of Europe, as well as a major conduit for oil. It is the shorter of two routes between Europe & Asia (by nearly a fortnight). This incident is estimated to have cost millions as the pathway is the preferred route for +19,000 vessels a year (an average of 51.5 ships per day) and 12% of the world’s freight.

The blockage created long tailbacks in the waterway, with more than 300 vessels blocked, delayed or caused to reroute around the southern tip of South Africa and the Cape of Good Hope. Marine and salvage engineers failed in their attempt to refloat the massive ship for 6 days, a situation which exposed a lot of industries to supply chain disruptions. This disruption highlights how global trade has become dependent on these ‘mega ships’ and how any disruption in trade routes can leave many organisations and their (re)insurers significantly exposed to Business Interruption risks.

THE INSURANCE SIDE

Huge claims in excess of USD100 million are expected from this incident and already arguments around who is liable have started. The ship’s owner apologized, and said that the cargo owners should deal with the chartering company (evergreen) for any losses. On the other hand Evergreen maintains it is the owner’s responsibility along with Suez Canal whose pilots were also on board, though Suez Canal rules clearly state that it is not responsible for any ship that runs aground. The answer as to who is liable will probably come out of a legal battle which we will all monitor closely.

The Ever Given is said to be insured in the Japanese market with an estimated Hull value of between USD100 – 140 million. (Re)insurance companies have been monitoring the grounded ship with some interest not necessarily because of hull damage, but the potential for huge liability claims.

The bulk of the liability claims will likely be reinsured through a programme run by a wider International Group of P&I (Protection and Indemnity insurance) Clubs. P&I club provides cover for open-ended risks that traditional insurers are reluctant to insure. Typical P&I cover includes carrier’s third-party risks for damage caused to cargo during carriage; war risks; and risks of environmental damage such as oil spills and pollution. The club is part of a group of 13 such mutuals, the International Group of P&I Clubs, which share their large exposures. Under this arrangement, UK P&I would pay the first $10m of any claim. Further losses up to the $100m level are shared with the pool. Beyond that, the group has $3bn worth of reinsurance cover.

While it is difficult to put out cost estimates yet, primary policy and reinsurance limits may come into play, likely putting industry losses in the hundreds of millions of dollars and the eventual pay-out for this incident will span a whole host of insurance sectors.

There’s precedent for big marine claims. The capsizing of the Costa Concordia cruise ship led to a pay-out of $1.6 billion in 2012. While that didn’t disrupt global trade like the Suez incident has, it required a huge salvage operation.​  Salvage operations are typically expensive as salvage companies usually work on a so-called Lloyd’s Open Form basis and are paid a success fee based on the value of the ship and cargo. This fee is likely to be in the tens of millions of dollars for the Ever Given and is borne by the hull and machinery insurer.

POTENTIAL CLAIMS

Although the current situation is still uncertain, potential claims scenarios are likely from a number of different areas detailed below:

•  Damage to the vessel itself – which is said to be covered in the Japanese market.
• Loss of Revenue claims from the Suez Canal Authority; this can be around USD15million per day; which is to be covered under the P&I Club.
• Cost of Salvage operation including the freeing, refloating and towing of the vessel.
• Business interruption/loss of hire from other owners of vessels blocked.
• Compensation for loss of perishables and of cargo delays – Ships moving through the canal are likely to arrive at busy ports all at once, forcing many to wait before they can unload thus causing further delay. (However on delay we need to note that most cargo insurance policies adopt the Institute Cargo Clauses issued by the Institute of London Underwriters Wordings. These wordings use English law and practice, meaning that the terms of the UK Marine Insurance Act 1906 will apply. Most of these policies are of the all risks type, and delay is excluded, per Clause 4.5: “loss damage or expense caused by delay, even though the delay be caused by a risk insured against” This would apply unless the policy is amended by endorsement to remove this exclusion, which would be the reasonable and prudent action for the brokers and insureds to take)
• There could also be claims for damage to the canal. Photos shared by the Suez Canal Authority showed a digger removing earth and rock from the bank of the canal around the ship’s bow.

NB – Ships that routed around the Cape of Good Hope will be unable to make claims against the Ever Given for the extra cost and time involved because this is considered an “economic loss” and is not usually recoverable – nor often is it insured by ship-owners.

Some parties involved will seek maximum defence as we have already seen between the ship owner and the chartering company. On the other side affected parties will seek maximum recovery from those they deem liable which may also bring rise to defence lines such as the force majeure clause in contracts – which again creates interesting legal arguments that (re)insurers the world over will keenly follow.

LESSONS FROM THIS INCIDENT.

Single points of failure (SPOF) can and do happen but they don’t need to be a complete blockage of the Suez. Assess your SPOF early. Take steps in your risk assessment process to first identify SPOF and mitigate where possible. If you can’t engineer out the SPOF during the design phase, make sure you’re compensating controls remain effective as demand on the underlying processes grow. Keep a check on the current inherent risk and re-assess the adequacy of your current controls – if they are not effective, do something about that. And if the worst comes to the worst, and the failure occurs, make sure you can unblock your canal as quickly as possible!

About The Author – Alson Nhari is the Head of Business Development at Tropical Reinsurance. He has worked for international risk advisory companies in different capacities for nearly 13 years. Alson has structured and delivered complex risk transfer programmes across sectors such as marine, mining, engineering, financial services, agriculture, pharmaceutical and aviation among others. Alson is an Associate of the Insurance Institute of South Africa, he holds a B.Com in Risk Management & Insurance (NUST), MSc in Business Strategy (CUT) and an Advanced Diploma in Short Term Insurance (Milpak) among other qualifications. Alson is also a graduate of the Wits Business School Executive Development Program.  He is reachable on alson@tropicalre.co.zw

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