There have been many maritime accidents in the past two years. Even if your cargo is safe, you must bear the average cost. In other words, you must pay when GA happens. Why?
For those unfamiliar with shipping terms, this is unreasonable. “I didn’t throw the container into the sea. Why should I lose money?” Because there is something called “General Average”.
Today’s post focuses on the following aspects of GA.
What is the general average in shipping?
General average is a term in maritime insurance. It refers to the loss and cost of subsequent remediation caused by the intentional and reasonable measures, which are taken for common safety when the ship, goods, and other property are in common sea danger. These two parts of costs shall be shared by all cargo owners according to their cargo value percentage.
For example, a cargo ship runs aground in the shallow sea. In order to get out of it, the machine is overloaded and damaged. At the same time, it is necessary to discard some goods to reach the destination with a lighter load. Once GA is declared when the ship arrives at the first port, all cargo owners on board should share the loss of the ship and cargo.
Only if the following conditions are met can GA be declared.
- The general average can only be caused by such risks (e.g. typhoons, tsunamis, stranding, collisions) that pose a threat to both the ship and the cargo.
- The general average act must be intentional and reasonable. If the ship encounters heavy winds and needs to reduce its load, then the captain’s order to throw heavy and low-value goods (e.g. wood and scrap iron) into the sea is intentional and reasonable.
- The general average act must be effective. If this act (such as discarding cargo) cannot protect the ship from danger, it does not constitute a GA.
What happens when the general average is declared?
The general average happens rarely. But once it occurs, the amount is huge. For example, in the case of containers falling into the sea, the local maritime bureau is required to send rescue vessels to clean up the channel. This is a colossal sum.
GA is declared within a reasonable time when the ship arrives at the first port. The ship will notify the cargo owners to provide the average guarantee (if any) and attach the goods value list (e.g. commercial invoice, packing list). The shipping company will entrust an average adjustment company to calculate the total loss and amount to be shared by all cargo owners.
If your cargo is not insured
You must fill out an average bond (cash payment, usually more than 50% of the cargo value) and pay the designated average adjustment company.
For example, in case of fire, you need to do it whether your goods are damaged or not. If it is unfortunate that some of your goods are burned, and some intact goods (valued at $0.2 million) are damaged in the process of extinguishing the fire with seawater. Only the latter (valued at $0.2 million) is the sacrifice you made for the common safety and will be compensated. You need to bear the loss of the burned ones, because you don’t buy cargo insurance.
If your cargo is insured
Your insurance agent will provide an average guarantee to the designated third-party agency, and then you can collect the goods. In the above cases, the insurance company will pay you the corresponding compensation according to your cargo insurance type. In addition, you will get the compensation paid for the damaged cargo (valued at $0.2 million) caused by the GA act.
As you can see, cargo insurance is very important when the general average is declared.
General average calculation with examples
Calculating the amount of general average contribution is a complex process. Let me explain it simply with a case study.
A cargo ship (valued at $4 million) carrying goods (valued at $8 million) from Ningbo Port to Los Angeles Port suffered a fire during shipping. The fire spread to the ship’s cabin, so the captain ordered seawater to put out the fire for the common safety. This measure was effective.
Although this action resulted in a loss of cargo valued at $2 million, most of the goods were safe. In addition, because the main engine was damaged and unable to continue sailing, the captain hired a tugboat to tow it back to the nearest port for repair, and then returned to Los Angeles port.
In this case, the total amount of GA includes the following two aspects.
- GA sacrifice: cargo loss $2 million; ship loss $1 million.
- GA expenditure: towing charges $10,000; careenage $0.5 million.
Note that in this event, there is no “freight collect”, so it is not involved in the accounting of freight. In addition, GA expenditure also includes the additional fuel costs, GA interest, and fees paid to the average adjusters. These costs are too small and here are ignored.
GA loss rate = total amount of GA / total value of the journey = ($2 + $1 + $0.01 + $0.5) / ($4+$8) = 29.25%
GA amount shared by each party = cargo value by each party * GA loss rate
For example, if an importer has goods valued at $0.5 million, he needs to bear the GA cost of $146,250 ($0.5 million * 29.25%).
Difference between general average and particular average
The main differences between GA and PA are as follows:
GA is caused by artificial and reasonable measures to remove risks. PA is the loss of goods directly caused by maritime risks. For example, the container is blown into the sea by a strong wind, which is a force majeure factor and belongs to PA.
If the owner of the damaged goods does not buy cargo insurance, he will bear the loss of PA. While the loss of GA shall be shared by all cargo owners on board in proportion.
PA refers only to the loss of the ship or the cargo, while GA includes the loss of the ship or cargo and the cost incurred therefrom.
If you need help with marine insurance for your sea freight, you need to work with an experienced freight forwarder. We have cooperative forwarders with marine insurance partners that can handle complex situations such as the general average.
Feel free to contact us if you need help.