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General Average – Cargo Interests

Jagan - March 14, 2019 - 1 comment

  1. Given the recent spate of General Average Incidents arising due to container fires, we were recently invited to write on the processes following a General Average for the cargo interests and thank Shipping and Freight Resource for the opportunity. While we had earlier written on Salvage & General Average, we have also been receiving enquiries from cargo interests, particularly from uninsured cargo interests involved in APL VANCOUVER on how to deal with the General Average. We are writing this article to consider the various issues which a cargo interest should consider when they have been notified of a General Average incident (we have considered the Institute Cargo Clauses 1/1/82 and 1/1/2009 both of which provide for English Law and Practice in Cl 19 and thereby application of the English Marine Insurance Act 1906).
  2. Following a sacrifice (say by flooding of a vessel hold so that the fire is controlled / stopped), the vessel would be surveyed to ascertain the extent of damage both for Particular Average  (“PA”) and General Average (“GA”). The question which would arise is what is the difference between these two types of “Averages”?
    1. PA: S 64(1) of the UK Marine Insurance Act 1906 states “A particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against, and which is not a general average loss”.
    2. GA: S 66 of the UK Marine Insurance Act 1906 deals with General Average Loss. In particular,
      1. S 66(1) states “A general average loss is a loss caused by or directly consequential on a general average act. It includes a general average expenditure as well as a general average sacrifice”.
      2. S 66(2) states “There is a general average act where any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperiled in the common adventure”.
  3. PA losses are borne by the interests themselves. Accordingly, if cargo is damaged by fire, this being a PA loss, it would have to be borne by the cargo interests themselves. If the cargo is insured, subject to the policy coverage, such PA losses are indemnified by the cargo insurers and who could then pursue the parties at fault. We had commented earlier in “Partial & Total Loss – uninsured cargo interests” that fire is a defence available both under the Hague / Hague Visby Rules and the UK / Singapore Merchant Shipping Act and therefore it would be difficult to pursue the Carrier for recovery. If the cargo is insured, then any recovery action against a Carrier is a decision for cargo insurers to take after they have paid the claim. If the cargo is uninsured, unless the value of cargo is substantially high, it would be best to not consider pursuing the carrier individually for recovery given that the costs for pursuit may make it unviable. If the uninsured cargo interests still wish to pursue recovery, it would be appropriate to consider joining hands with other interests to minimise the costs (say with the costs being shared on a “common user” or on “value of claim” basis).
  4. With respect to the GA Losses, these include damages to the cargo caused by flooding of holds to prevent the spread of fire.
    1. Cargo interests affected by the GA incident: They would be entitled to seek contribution from the other interests who benefited from the sacrifice. If the cargo interests are insured, then the cargo insurers would first make payment under the terms of the policy to their insured and then be entitled to the payment of GA contributions from the other interests (which would obviously take time).
    2. Cargo interests not affected by the GA incident: The cargo interests would have to still contribute to the losses suffered by the other parties due to the GA incident. Property at risk at the time of occurrence of the GA act and saved contribute on its values as the at the termination of the adventure. Invariably the contract of carriage (Bills of Lading) would incorporate York Antwerp Rules (1974/1994 or possibly 2016) to deal with the adjustment of GA. Accordingly, the value of cargo would be on the basis of the cargo invoice or shipped value as provided in Rule XVI of the York Antwerp Rules. In effect, even if the cargo is not damaged, the cargo interests would have to contribute to the GA losses of other interests as any GA sacrifice or expenditure has been incurred for the common benefit.
  5. Time Lines: In a GA incident involving container vessels, there would be many parties involved (sometimes more than 5000 or so) and due to this the adjustment of the GA would take many years. The cargo interests awaiting settlement of their GA contributions are entitled to interests for the delay in payment (as provided in Rule XXI of the York Antwerp Rules). However, the cargo interests would be better served by immediate payment to deal with their business at hand. If the cargo interests are insured, then payments would be available under the terms of their cargo policy. If they are uninsured, affected cargo interests would have to be patient and await payments. While we have not seen any 3rdparty funders involved in funding affected cargo interests awaiting GA payments, we believe that it should be possible to do so. However, given that the amounts involved are not substantial of each cargo interest (at least in general average in container vessels), funding may not sufficiently develop to assist uninsured cargo interests.
  6. Underinsurance: Some cargo interests may be underinsured such that the recovery under the cargo policy both for PA and GA would be adjusted considering the actual value of the cargo. In this regard, S 81 of the UK Marine Insurance Act 1906 states “Where the assured is insured for an amount less than the insurable value or, in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured amount”. The practical effect of this is that in the case of Total Losses (either under PA or GA), the Insured would be paid the amount insured. However, in the case of Partial losses, the Insured would be paid on a proportionate basis i.e. Insured value / Actual Value and with the balance to be borne by the Insured themselves. Accordingly, Insurers may only issue GA / Salvage Guarantee’s for their proportion of the risks leaving the Insured to deal with provision of security for the balance portion of the risks. 
  7. Steps to consider: On being informed of a GA Incident, cargo interests should:
    1. Seek details from their Carrier / Average Adjuster on whether their cargo is affected by the incident? If affected, is it due to
      1. PA
      2. GA
      3. Whether it is a Partial or Total Loss
    2. Ascertain whether their cargo is insured?
      1. If yes, they should inform their cargo insurers providing complete details received from Carriers / Average Adjuster so that the Insurers can engage surveyors to attend during any survey of the cargo which may be conducted to ascertain the nature and extent of damage.
      2. If uninsured, cargo interests should consider whether it is necessary to engage a surveyor to attend to the survey ( this would depend on the value of the cargo involved).
    3. Check if the cargo is adequately insured (no underinsurance)
      1. If there is no underinsurance, it would be best for cargo interests to allow their insurers to deal with the loss (the cargo insurers have sufficient expertise to deal with such incidents).
      2. If underinsured, then cargo interests should be aware that any payouts from their Insurers would be on a proportionate basis (as stated in 6 above). Additionally, they would have to provide security for the GA and Salvage (if salvage is involved) for the “uninsured” value of the cargo.
    4. Recovery Potential:
      1. If Insured, best to allow cargo insurers to deal with this aspect.
      2. If Uninsured, the potential should be considered vis-à-vis the costs which may be incurred for the exercise. If the values involved are not substantial, joining other cargo interests to pursue on a joint basis would lead to saving of costs for all parties (costs can be shared either on a “common user” basis or on the basis of the values involved for each interest).
  8. Conclusion:
    1. This article tried to detail the common steps which a cargo interest should consider on being notified of a GA.
    2. The increasing number of GA arising due to fire especially in container ships should be of grave concern to the cargo interests. Cargo interests may therefore consider exploring whether the “fire defence” available to Carriers could be rejected to deny the GA Claim and also seek recovery for their PA losses.
    3. Cargo interests should consider insuring their cargo risks so that issues arising out of a GA are dealt by their cargo insurers given that they have expertise and experience to deal with this issue. 

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1 comment

  1. Joern Groninger

    Dear Jagan,

    Thank you for another good piece on general average. Explanations like these help to ease our lives!

    As a publicly appointed and sworn German average adjuster I am strictly bound to act impartially and independently, virtues that we also promote within the national associations of average adjusters and also in the international association AMD (the current president of which I happen to be). Nevertheless, too often we are still seen as standing in the shipowners’ camp, and while we are happy to provide information and explain the procedures of G/A to cargo interests, it is certainly helpful to have advice from other parties around as a reference.

    I like the practical approach you take. I remember, e.g., from an earlier article your recommendation that cargo interests should encourage the adjuster to make use of a cash deposit, paid as security, for payments on account of G/A expenditure in order to earn interest under the YAR. And your idea of third party funding to bridge the time gap between a sacrificial loss and the G/A settlement is interesting as well – factoring banks, I think, would be the right address, but it might be difficult to explain G/A to them… Thus, of course, your last suggestion is much easier to follow, i.e. to take out cargo insurance from the beginning!

    Kind regards
    Joern Groninger

    Groninger Welke Janssen
    Sworn Average Adjusters
    Bremen / Germany

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