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What Happens When a General Average Is Declared?

April 11, 2018 Avalon

What Happens When a General Average Is Declared?

As much as we try to protect our cargo from harm, accidents happen and nature strikes. Last month, a fire broke out on the Maersk Honam while it was in the Arabian Sea. Crew members were unable to contain the fire and had to evacuate the vessel. The fire took days to control and resulted in multiple injuries and hundreds of damaged containers. General Average was declared, meaning all shippers must contribute to the loss. While the loss and its cost haven’t been thoroughly investigated, it is expected to be very high.

General Average is a legal principle of maritime law and requires that all cargo owners on a vessel to contribute to the loss. Even if your cargo isn’t damaged, you still need to make a financial contribution based on the total value of the voyage and your cargo in order for your goods to be released. For example, if the vessel was valued at $50 million and the value of the cargo was valued at $150 million, the total value of the voyage would be $200 million. If the cargo loss and vessel repairs cost $20 million (10% of the voyage value) and you had $10 million cargo onboard, you would have to contribute $1 million (10% of the value of your cargo). Do you have the funds to spare?

Cargo will not be released until the shipper posts a guarantee in the form of a cash deposit, bank guarantee, or bond. Insurance can speed up the cargo release process by posting the General Average Bond guaranteeing to meet the cargo owner’s contribution and facilitate release of the cargo. Additionally, the Shipper’s Interest Cargo Insurance may also pay for the physical loss or damage to your cargo. This type of coverage provides broad coverage, where everything is covered except what is specifically excluded.

The value of Shipper’s Interest Cargo Insurance can be summed up by Klaus Lysdal, Vice President of Sales and Operations at iContainers, "As a shipper, you can and should always buy extra cargo insurance to further protect your merchandise and cushion your damage. Given the uncertainties of mother nature, it’s a worthy investment as it would cover your cargo while it’s in storage and in transit until it reaches the safe hands of your buyer." For more information about General Average, please visit our website or contact your local Avalon representation.

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The Quest Newsletter is designed to provide critical information in the transportation industry. Avalon Risk Management is not responsible for the accuracy or reliability of information contained in articles. The reader/user assumes all risk in the use of such information.