The law of general average and why it pays to have cargo insurance.

The recent tragic fire on board the ultra large container ship, Maersk Honam, has once again, highlighted the importance of cargo insurance. This not only indemnifies the policyholder for loss or damage to the goods being transported, but will also respond to general average and salvage claims when declared by the shipowner.

On the 6 March 2018, a huge fire erupted on the Maersk Honam leading to the tragic death of five seafarers and significant damage to a large number of containers on board. Fire fighting and salvage operations have been extensive with general average declared by Maersk on 9 March 2018. The ship has now been towed to anchorage in Dubai where fire extinguishing efforts are continuing before any unloading operations can commence.

So what is general average and why is it an important consideration for all businesses who are sending goods on the high seas?

FIRST A BIT OF HISTORY

The principle of general average goes back to ancient Greece, whereby a mechanism was agreed to share loss between parties to a voyage. Essentially, where cargo had to be jettisoned overboard and sacrificed to maintain the flotation of a vessel, it was agreed to share the cost of the sacrifice proportionally between the other parties to the voyage. In this way, an equitable outcome was achieved. "That which has been sacrificed for the benefit of all shall be made good by the contribution of all".

In more recent times, it was recognised that there was a need to formalise the principle to create uniformity across seafaring nations. A set of rules were laid down following conferences in York and Antwerp in the late 19th century. These York-Antwerp Rules define a general average act and are written into present day marine cargo insurance wordings as follows:

"There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure."

WHAT HAPPENS WHEN GENERAL AVERAGE IS DECLARED

A specialist average adjuster is appointed to co-ordinate the claim who formulates the extent of the loss which can encompass the repairs to the ship, salvage and towage costs, loss or damage to cargo including sacrificed loads, unloading costs, marine survey costs etc. These costs, whilst not impacting directly on some parties, need to be shared. The average adjuster approaches the parties to the voyage for a contribution towards these costs in line with the principle of general average.

If cargo insurances is in place, the insurers will deal with the average adjuster and provide a guarantee to satisfy the terms of the general average call; this will enable any undamaged goods to be released.

On the other hand, if no cargo insurance is in place, the average adjuster will request a cash deposit from the goods owners before allowing release of any undamaged goods. In certain circumstances, this can be a significant amount of money which can put a strain on any business.

IN CONCLUSION

It is therefore important to ensure cargo insurance is in place prior to transporting any goods. This will not only protect you for loss or damage to the goods themselves, but will deal with any general average and salvage claim should a catastrophe happen. It is the general average cover that sometimes is forgotten, but in the scheme of things, can be the main benefit of the policy cover!

General average claims are still not that common, although there is a school of thought, with increasing sizes of container ships, that there will be more high profile catastrophe losses. The Maersk Honam is the latest one and the estimated cost to the insurance industry is likely to be in hundreds of millions of dollars. A sobering thought.

So remember cargo insurance. It makes sense.

John Baty ACII - Director - Cheviot Insured