At a glance
- Ancient maritime law can add unnecessary delays and expenses to shippers
- If general average is declared, shippers can potentially lose their cargo even if it is undamaged in transit
- Zurich not only offers comprehensive cargo insurance, but also a General Average Guarantee allowing for the timely release of cargo caught up in this marine risk that is on the increase
Shipping cargo can be fraught with danger. One issue that is often overlooked is when cargo arrives in port safely but is then impounded by the ship that carried the goods unless a hefty deposit is forked out.
This scenario is being played out more frequently as, unless cargo is fully insured, businesses shipping their goods on the high seas can be liable for losses under the ancient maritime law of general average.
What is general average and why is it a concern?
General average is a term used in shipping to describe the effects when a ship’s master voluntarily sacrifices cargo, equipment or funds to save a voyage.
If general average is declared, all parties involved – including cargo owners – are then required to make a proportional contribution to cover the costs incurred. All cargo, even if it wasn’t sacrificed, will incur a loss.
Unless cargo is covered by an insurer’s general average guarantee, cargo owners will only be able to release their cargo if they pay a cash bond. It is worth noting that a carrier’s traditional cargo insurance will not cover a general average scenario.
The concept of general average applies to all parties in a sea venture who must proportionally share the costs following either a voluntary sacrifice of part of a ship’s cargo or expenditure made to ensure the preservation of the ship and its remaining cargo.
A fire on board a vessel is the most common cause of general average expense, although other scenarios involve jettisoning cargo to lighten a stranded vessel, collisions, engine failure or ships seeking a port of refuge following an accident.
Sharing the costs
When general average is declared, all cargo owners – whether their cargo was affected by the incident or not – are forced to share the costs of the wider loss.
All of which highlights the importance of cargo insurance with a general average guarantee, even for shippers of low-value products.
Without insurance, a cargo owner would need a large cash deposit to secure release of the cargo, and this money can also remain tied up for a significant period of time until general average adjustment is completed.
“Although general average claims are thankfully rare, it is a risk that is just not worth running,” said Mike Hall, Marine Cargo Business Manager at Zurich.
“Shippers may be faced with a general average claim once every decade and any claim could take three or four years to resolve.”
The shipping industry has struggled to emerge from its longest downturn in decades, as freight rates have remained largely depressed since the financial crisis. And because of cost cutting by ship owners, vessels were laid up as global trade dried up.
Case study: Hanjin Pennsylvania
In November 2002, the Hanjin Pennsylvania was on a chartered voyage to the German port of Hamburg with a cargo on board of 3,000 containers. The total value of cargo on board was reported to be $175 million.
However, off the coast of Sri Lanka a fire on the 2002-built container ship started and quickly spread, eventually affecting around 1,000 containers on board the vessel.
The huge fire caused the crew to abandon ship and two men died in the incident. The ship was eventually towed to a port where the remaining containers were discharged.
A general average was declared, but it was found that 80% of the undamaged containers did not have cargo insurance. These boxes then became property of the ship’s master and were sold off to pay for the salvage and put against the general average claim.
Little maintenance work has been carried out on many of these vessels, and Zurich has noticed an increase in general average claims over the last couple of years as these decommissioned vessels have returned to service.
Slow steaming, too, which is now an established industry standard, where ships are run at lower speeds to cut costs, could also be contributing to engine failure as older ships are not designed to run at these slower speeds.
“A poorly maintained vessel is more likely to suffer from a general average loss,” said Brendan McCarthy, UK Marine Development Manager at Zurich.
Shipping is responsible for carrying around 90% of the world’s trade and the latest UK trade figures reveal that the UK’s total exports, in volume terms, have risen 7.2% since 2010, with imports rising 5.2% in the same period.
With this relentless march of globalisation not likely to stop any time soon, general average will continue to be a modern concern despite it being an antiquated piece of maritime law.
However, to mitigate these risks Zurich not only offers comprehensive insurance that covers the movement of cargo across the globe but also a General Average Guarantee that will allow for the timely release of cargo caught up in an incident. And if the goods are perishable, Zurich will assist in the transhipment of the cargo from the damaged vessel to a new vessel – so that no damage to the cargo is sustained.
Zurich can manage the whole process and ensure minimal disruption due to its global network and expert local knowledge on the ground.