General Average – What is it and how can it affect your freight?
Following the major fire on the cargo ship the Yantian Express, Hapag Lloyd (the owners of the vessel) have claimed general average for the vessel.The ship was sailing from Colombo to Halifax via the Suez Canal when a fire broke out in one of the containers. The crew had to abandon ship and the fire was brought under control after one week. The ship has now continued its voyage led by a salvage company and under tug escort to Freeport in the Bahamas where the full extent of the damage can be assessed. It is expected to arrive there on 1st February.
So, what is general average? According to BIFA (the British International Freight Association):“General Average is a legal principle of maritime law according to which all interested parties to a “maritime adventure” proportionally share any losses resulting from a voluntary and intentional sacrifice of part of the ship or cargo in order to save the remainder in an emergency.”.By declaring general average for the Yantian Express, all parties with an interest in the cargo, containers vessel and fuel, including all shippers (even those whose goods are unaffected) will be required to contribute to a fund which proportionately shares the losses. Hapag Lloyd will appoint Average Adjusters who will manage the process and collect all documentation, which usually takes several years to complete.Once the Adjusters have been appointed they operate independently and in the interests of all affected parties. All cargo owners (or their representative insurers) will need to make contact. This applies whether or not their goods were damaged during the incident. The adjuster will work out the value of the “sacrifice” as well as the total value of assets that have been saved. The values that interested parties are required to contribute are based on the net values of these assets at the end of the voyage. The General Average fund will collect enough funds to cover the value of the sacrifice. Adjusters will require a GA bond from interested parties, essentially a “promise to pay” and this is estimated at the beginning of the process. These bonds must be guaranteed by a bank or insurance company.No cargo will be released until the GA bond or guarantee is in place.
General Average emphasises the importance of Marine Cargo Insurance. If your forwarder issues a Certificate on their Cargo Open Cover with their underwriters, then that shipment is automatically also covered against General Average Guarantees and you would not have to put up funds or provide a Guarantee. Insurers are obviously happy to do this in order to protect their interests as they are insuring the cargo itself. If Cargo Insurance is not in place then it is necessary for you to raise funds or a Bank Guarantee which could cause both supply chain and financial issues.