The Importance of General Average

October 1st, 2012 - Lack of insurance can sink a shipping venture

The international maritime law of general average dates back to the nineteenth century but still has an enormous impact on companies shipping goods around the world today, says Sylvain Mulliez, head of insurance at SDV in Paris.

 « There are risks involved with shipping containers such as storms, fires or vessels running aground, » warns Mulliez. « The law of general average means that companies can take a huge financial hit from these events unless they are insured. »

The international law of general average states that all parties in a sea venture must proportionally share any losses that result from the captain’s decision to sacrifice part of the ship or cargo to save the ship in an emergency. The expenditure must be reasonable and voluntary, says Mulliez.

The law was first codified in York, U.K., in 1864 and later revised in 1877 in the Belgian port of Antwerp, becoming known as the York-Antwerp rules. The last revision of the rules in 2004 included the provision that the wages and maintenance of the crew during the period of general average were no longer included in the settlement, says Mulliez.

When a shipping company declares general average, the cargo owners must make a provisional contribution to cover the losses of the other parties before they can recover their merchandise. “This can be hard for companies to understand when they haven’t lost their goods,” Mulliez says.

The payment is based on the value of the cargo and typically amounts to between five and 15 percent. These sums can quickly escalate since a twenty-foot container is worth an average $50,000 and some shippers may have 50 or 60 containers loaded on a ship, Mulliez notes.

Unless the cargo owner is insured, they must make this provisional payment immediately and in cash before they can recover their goods. “This can be financially catastrophic,” says Mulliez. He advises SDV clients to cover their risks by buying insurance costing between 0.2 percent and 0.5 percent of the value of the goods.

The dangers are real. At least one commercial ship runs into trouble in the world’s waters every day, estimates Mulliez, while between five and ten thousand containers are lost at sea every year.

Mulliez says he deals with “several cases” of general average every year. Most recently, for example, the CMA CGM Libra container ship, with a capacity of 11,400 twenty-foot containers, ran aground in the port of Xiamen, China, last year. SDV had loaded around 60 containers on the ship, destined for Hong Kong and Europe, and just half these clients were insured, estimates Mulliez. The rest had to pay eight percent of the value of their containers in cash before they could recover them.

Payments proved higher for cargo customers of the APL Panama container ship that ran aground on a beach in Mexico at the end of December 2006. The rescue operation to refloat the vessel was one of the largest ever and cost cargo owners 60 percent of the value of their merchandise in general average costs, says Mulliez.

“Companies still do not realize the risks they are taking by loading containers on ships,” he says. “It is very important that they insure their goods to avoid this huge problem of having to pay general average.” 

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