UNDERSTANDING GENERAL AVERAGE AND HOW IT CAN AFFECT YOUR BUSINESS

General Average explained, and why cargo insurance is so important

General average is a term used for an ocean marine shipping loss that occurs through a voluntary sacrifice of part of a vessel or cargo to safeguard the vessel or cargo from a common peril. If the sacrifice is successful, all parties (including you) contribute to the overall total loss based on their cargo’s value.

If your cargo is insured

You have nothing to worry about. However, your marine cargo insurer should be notified immediately. The insurance company will post the general average bond and guarantee to meet your contribution requirement and facilitate the release of your cargo.

If your cargo is not insured

Your cargo will not be released until you have agreed to and provided a bond guarantee. It is only accepted in the form of a cash deposit, bank guarantee or bond.

Example of above scenario

General average claims require all cargo owners on a vessel to contribute to the loss because it is considered a shared event. This does even include if your cargo isn’t damaged in a catastrophic event. Your contribution is based on the total value of all of the ship’s cargo. Your cargo will not be released until you commit to your contribution of the total value. Each cargo ownermust contribute 10 percent of the value of their cargo before their cargo can be released.

Value of vessel: $60 million

Value of cargo: $140 million

Total value of voyage: $200 million

Assume cargo loss and vessel repairs total $20 million

Therefore, $20 million out of $200 million or 10 percent of the voyage suffered a loss.