Some thoughts on Average Disbursements Insurance

1. Average Disbursements Insurance (“ADI”) is a cover generally taken by Owners for General Average (“GA”) disbursements which they would incur on behalf of all interested parties prior to collection. Given that GA is not an everyday phenomenon, the practice of ADI is well known to average adjusters and the students of this subject, and of which the author is oneⁱ. Our intention of writing on this topic is to perhaps relook on ways to get a perfect recoveryⁱⁱ from ADI.
2. What is ADI: As mentioned above, on the occurrence of a GA Incident, Owners may be obliged to incur expenses, and which would form a part of the GA to be shared by the various parties involved in the adventure. However, if the properties/freight (at risk)ⁱⁱⁱ involved in the General Average either become a total loss or reduce in value, then this would impact the recovery of these expenses. Accordingly, it would be in the best interests of Owners and / or financiers of GA disbursements to take an appropriate cover, known as ADI, which would make payouts in such instances, the payouts being dependent on the cover taken.
3. Types of cover: The present cover available in the English market is the ADI Clauses (A) and (B), 14/5/87^iv. The difference between these two clauses is that the (A) clause will kick in whenever there is a reduction in the value of the properties / freight whereas the (B) clause would only kick when the values of property / freight after the reduction in value is less than the amount of the disbursements incurred i.e. if the value of the property / freight at the end of the adventure is less than the disbursements incurred. Given that the A cover is wider, we are considering this further. The intention of A cover is to ensure that the property / freight interests do not pay more than what they would have originally been liable for the disbursements (if this cover is not taken, given that the property / freight values would have reduced due to the subsequent incident, the amounts payable by them would necessarily have to increase to consider the reduction in values).
4. Adjusting principles:
   1. The common adjusting principle being followed is, if the ADI policy is triggered to make payouts, then these amounts would first go to payout the disbursements incurred by Owners. Subsequently, the remaining sums are shared proportionately by the various property / freight interests.
      Let us consider a simple example as follows:
      Value of Property following the GA is as follows:
      Ship: $ 2,000,000
      Cargo: $ 3,000,000
      Freight: $ 100,000
      The Owners incur say $ 400,000 (including costs of ADI cover) as disbursements and have insured this under cover (A) for the full value. Subsequently, the ship suffers a PA incident and due to which there is a reduction in the value by say $ 500,000 i.e. the value of the vessel at the termination of adventure is $ 1,500,000 ( $2,000,000 – $ 500,000).
      The recovery under the ADI policy would be as follows:
      Reduced Value of Property / freight = $ 500,000
      Total Value of Property / freight at inception of risk = $ 5,100,000
      Payouts of the ADI (A) would be $ 400,000 X ($500,000/$5,100,000) = $39,216
      Brokers commission^v say 1% for collection: $392
      Actual payouts received by Owners would be $ 39,216 – $ 392 = $38,824.
      Hence, the GA would be adjusted as follows:

      GA incurred:	$   400,000
      Commission as provided in YAR 1994 – R XXvi for provision of funds – 2%	8,000
      YAR 1994 R XXI say for 1 Year @ 7%vii	28,000
      Total GA	436,000
      Less payouts from ADI (A)	38,824
      Balance to be adjusted	397,176
      Vessel $1,500,000 pays	129,514
      Cargo $ 3,000,000 pays	259,028
      Freight $ 100,000 pays	8,634

   2. The other way is to simply credit the ADI (A) recoveries to the property / freight which has suffered a reduction in value and the answer would be similar to what is being followed by adjusters. However, as you would note from the example above, there is no provision in ADI (A) for the recovery for the commission for the provision of funds and interests as provided by York Antwerp Rules 1994. If we do not consider these, then the recovery would be as follows:
      1. Adjusters Method
         

         GA incurred:	$ 400,000
         ADI payoutsviii based on the reduction in property values $500,000/$4,100,000	39,216
         Balance	360,784
         Vessel $1,500,000 pays	117,647
         Cargo $ 3,000,000 pays	235,294
         Freight $ 100,000 pays	7,843

      2. The other way to adjust the GA would be to credit the ADI payouts to the property which has suffered reduction in value.
         

         GA incurred:	$    400,000
         Vessel $ 2,000,000 pays if there was no further loss	156,863
         Cargo $ 3,000,000 pays	235,294
         Freight $ 100,000 pays	7,843

          

         Vessel to pay	156,863
         Credit ADI Payouts	39,216
         Vessel balance to pay	117,647

         
         Hence, it makes no difference as to how the ADI payouts are credited given that the results are the same. However, the adjuster’s method is preferred given that the commissions (Brokerage and Provision of funds) and Interests would need to be factored in the final sums.

5. With respect to GA encountered in Bulk vessels, we believe that due to the limited number of parties involved, the adjustment of the GA could be accomplished swiftly limiting the interest’s payouts. However, in the case of GA’s incurred, say in a container vessel, where the number of interests may well exceed many thousands, completion of the GA adjustment would take time such that the interests’ components, particularly at 7% per annum, would lead to significant sums. In this case, the payouts of ADI would not have the desired effect as intended. Accordingly, we would suggest the following:
   1. Use of YAR 2016^ix instead of earlier rules as 2% commission for the provision of funds is no longer applicable. Additionally, the interest rates allowed for the provider of funds appears to be keeping in line with the market conditions
   2. Requesting for a payment on account (“POA”) from the ADI insurers as and when the Average Adjuster is able to determine the broad effect due to reduction in values. While there may be no legal basis for a POA, the fact is that Hull Insurers regularly provide POA’s if requested and therefore we submit that in principle, there should be no objection by ADI Insurers to such a request. A POA would obviously lead to reduced interests accruing.
   3. Considering the sums insured to include the Brokerage commissions for collection of funds as this would be known at the inception of risks^x.
6. Conclusion:
   1. ADI does play an important part, following a GA, to facilitate the provision of funds with the risks being catered to.
   2. The actual ADI payouts may not provide a perfect indemnity intended for as they do not consider the payouts for both commission for provision of funds and interests for the funds provided. Accordingly, consideration should be given to the use of York Antwerp Rules 2016 in contracts of carriage and / or POA to ensure that the indemnity is as perfect as possible.
   3. With respect to other costs, such as brokers commission for collection of funds, it may be best include it in the amounts insured so that any payouts would have factored these commissions.

ⁱ. If there are any errors in this article, the fault is entirely ours and we would welcome comments to correct the same.
ⁱⁱ. Although a perfect recovery may not be possible, a close enough recovery is something which should be aimed for.
ⁱⁱⁱ. If freight is not at risk i.e. freight is earned on loading, then this gets merged in the value of property. However, if freight is due on rightful delivery, then freight will be an interest which will contribute to the GA.
^iv.We would recommend the book The Insurance of Average Disbursements and other Subsidiary Interests following a marine casualty by D J Wilson and which is available to the members / subscribers of the Association of Average Adjusters, UK in their website and The Insurance of Average Disbursements by N Geoffrey Hudson. Also, the book Marine Insurance Clauses, Vth Edition page 313 – 335 touches on this subject.
^v. If the risk is insured by various insurers, Brokers would be coordinating for the claim payouts and for which they would incur administrative costs. The common practice in the English market is for Brokers to charge a commission (say 1%)  for insurance payouts and remit the balance to the Insured.
^vi. There is no similar provision provided in York Antwerp Rules 2016 and therefore the provider of funds would not be entitled to the 2% commission.
^vii. York Antwerp Rules 1994 provides for 7% Interests and which in our opinion is way more than the interests charged for loans of similar amounts by various financial institutions. Accordingly, a financier of such expenses can actually benefit out of this exercise and which we believe was never the intention of the provision in the YAR. York Antwerp Rules 2016 R XXI(b) is more fairer and reasonable and should be adopted given that its provides “The rate for calculating interest accruing during each calendar year shall be the 12- month ICE LIBOR for the currency in which the adjustment is prepared, as announced on the first banking day of that calendar year, increased by four percentage points. If the adjustment is prepared in a currency for which no ICE LIBOR is announced, the rate shall be the 12-month US Dollar ICE LIBOR, increased by four percentage points”.
^viii. Without considering the application of Brokerage commission for collection of payouts.
^ix. The York Antwerp Rules are incorporated into the contract of carriage and not decided when a GA occurs. Hence, parties should consider which edition of the York Antwerp Rules should apply to their contract in advance. To see the major changes made in York Antwerp Rules 2016, please see article published at http://averageadj.com/blog/2016/06/10/71180/
^x. This could also be considered in other Insurances where a collection commission is charged.