There are many risks involved with international shipping, but one often overlooked is the risk when something happens to the ship which is carrying your cargo. If you have taken out the correct marine insurance, it is a matter of contacting the insurer to sort out the claim. If you have decided to save on the relatively small premium for marine insurance, you may be facing a severe claim, especially if the ship owners declared a condition of ‘General Average’.
When an emergency at sea arises and crew members have little time to respond, a declaration of General Average allows them to act immediately. The vessel may have been involved in a collision at sea, or water may be leaking into the engine room. Sometimes the crew may see the only solution to jettison cargo to keep the vessel afloat.
Every entity with cargo on board a vessel when the condition of General Average is declared, is obliged to contribute towards the cost of salvaging the vessel or the loss of cargo, even if their loss is minimal or if their shipment is intact. The well-known insurer Lloyds of London describes this condition as ‘a loss that arises from the reasonable sacrifice at a time of peril of any part of a ship or its cargo for the purpose of preserving the ship and the remainder of its cargo together with any expenditure made of the same purpose’.
General Average also applies when a stricken vessel is towed into port. Insurance generally applies if the loss was incurred to avoid an insured peril. An average adjuster calculates the value of every shipment, and every interested party is obliged to contribute towards the general average loss or expenditure proportionately.
The York-Antwerp Rules (YAR) originally codified the law in 1890, but interpretations of the law varied, and a more recent set of Rules was drawn up in 2004. When the Rules are incorporated into the contract, they will govern the adjustment of general average, irrespective of the relevant law and jurisdiction applicable to international waters or the high seas. Piracy ransoms can also fall within the scope of general average, but the response of insurers will depend on the debate over ransom legality.
When ‘all risk’ or ‘free of particular average (FPA)’ is not in place, cargo owners are forced to post a cash deposit with the vessel owner to have their cargo released. This deposit can be tied up for two or more years until the general average adjustment is completed.
An explosion in the main engine of the container ship Hanjin Osaka on 8 January 2012 led the owners, MS Pelapas GmbH & Co. KG, to declare a condition of General Average. The vessel sailed from Pusan, Korea to ports in the United States with more than 2 000 containers on board. After initial attempts to repair the ship at sea, it was decided to tow the vessel to a port of refuge. Twenty-eight days after the explosion the damaged vessel arrived at the Anchorage of Hakodate, a small island of Japan off the coast of Hokkaido. Considerable costs were incurred by the shipowners to preserve the ‘common maritime adventure’, and a cash deposit of 3% of the commercial value of the cargo had to be lodged with the port agents where cargo was not insured.
