General Average and the case for cargo insurance

The Maersk Honam tragedy reminds exporters, importers, international freight forwarders and other stakeholders of the risks inherent to international trade and the importance of cargo insurance. The 2017-built vessel was carrying 7,860 containers en route from Asia to the Mediterranean when it caught fire on March 6, 2018 off the coast of Oman. Five crew died and hundreds of containers were lost.

Once the fire was extinguished, the vessel docked at Jebel Ali port for offloading and final assessment. Meantime, Maersk declared General Average (GA), an old maritime law principle that enables a vessel owner to demand that everyone with cargo on board contributes towards the costs, based on the value of their cargo. For the cargo believed to still be in good condition, their owners will have to dish out Salvage security of 42.5 percent and General Average security of 11.5 percent in order to take possession of their goods.

Would these cargo owners have been better off had their merchandise burned or ended up in the ocean, therefore becoming a total loss? Not really, as the maximum compensation an ocean carrier usually offers in case of loss is between US$500 and US$900 per ‘customary shipping unit’, i.e. per container.

If you wonder where these amounts come from, they are based on the carrier’s Bill of Lading terms and conditions, the fine print that nobody reads on the back of the BL. The amount depends on the applicable Convention, which could be the Hague Rules, Hague-Visby Rules, Hamburg Rules, Rotterdam Rules or for incidents involving U.S. trade, the Carriage of Goods by Sea Act.

The solution: have adequate cargo insurance, to get fully compensated for any loss in transit. And cargo insurance usually covers GA situations too! Luckily, such incidents are rare. When it happens to a large multinational shipper, it may be a drop in the bucket. But for a small or medium-size company, it’s easy to imagine the consequences of losing a whole containerload of products – it could be enough to cause it to go bankrupt. So the moral to the story is to always consider cargo insurance to mitigate your risks.

There are, of course, specific conditions enabling a carrier to declare General Average, otherwise it could be tempting to invoke this process to get shippers to pay for repairs to a vessel. Historically, GA dates back to Rhodian Law of 800 B.C., which stipulated that if a ship was in danger and cargo was jettisoned to save it, the remaining cargo was required to make a contribution to the owner of the lost cargo. It was expanded in Roman Law and repeated in subsequent maritime codes to this day.

GA means “general loss”, as opposed to a particular loss under marine insurance. The York Antwerp Rules 1994 have a modern definition as follows: “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 for the purpose of preserving from peril the property involved in a common maritime adventure.”

GA was probably useful before the advent of cargo insurance but has grown beyond its original intent and now looks more oriented in favour of shipowners. It is a complex, seemingly unfair and time-consuming mechanism, perhaps out of step with contemporary thinking.

But the good news is: cargo insurance provides an effective and affordable protection to shippers. When faced with a GA situation, shippers which have adequate cargo insurance are fully protected, as the insurance company deals with the carrier directly, while the ones who don’t have insurance are on their own.