General Average in Marine Insurance

As the name suggests, it is a general calculation carried out by the parties involved in the trade, including the shipowners, the cargo owners, and the insurance policy providers. So, what is this general calculation?

The general average clause is a principle that strives to protect the interest of all the abovementioned parties involved in case of an unforeseen event at the time of trade. It is a deliberate sacrifice or unfair expense incurred by the parties involved in order to protect the common interest, like cargo goods, crew, the ship, etc.

These situations call for a proportional distribution of cost incurred in the interest or loss of the assets, leading to mitigation of expenses, shared responsibilities, and distribution of burden. The respective parties’ financial gain will determine the contribution each party makes to the cause.

For example, if the ship owner decides to throw something off the ship to save the cargo from damage, all parties will have to contribute proportionately to this upgrade.

As mentioned above, the proportion of each party’s financial contribution is determined by their gains. However, we will learn more about it in this section of the blog.

York-Antwerp’s rules determine the contribution’s proportion. These rules are a standardised set of guidelines established in 1890. They are also a globally accepted and recognised standard for a marine insurance policy. These York-Antwerp rules establish a uniform methodology to calculate the contribution of each party involved in the trade.

The primary parties in this trade are usually the shipowners, the cargo owners, and the insurance providers, whereas there can be additional members based on the case. These rules enable the calculation of the contribution by distributing and determining the party’s contributory value in the common interest.

(This clause also states that the parties can exclude losses under a particular average, but we will discuss that in the later part of the blog.)

So, because the general average loss in marine insurance is also mitigated within the parties, it becomes a just system. The average adjusters play a crucial role in assessing and determining the cost every party will incur following a particular incident. This enables fair distribution and a transperant procedure with the methodology given by York-Antwerp’s rules.

The loss due to sacrifice will be counted and considered for general average calculations only if the sacrifice and the financial loss caused by that sacrifice were absolutely necessary in order to safeguard the cargo and the ship and to make the overall trade profitable. Other than that, there will be no consideration!

The general average clause will be applicable to a sacrifice and, hence, the financial loss if the loss is directly related to the material value of the goods and cargo being transported. Any indirect loss, like a loss in the market or economic changes, cannot be considered for general average calculations.

Usually, the financial burden is borne by all the parties proportionately, depending on various determinants. However, if only one party is responsible for the loss or the incident seems to have happened due to negligence, then the other parties can take legal action.

If the ship was beached or salvaged to save the cargo or prevent further loss, the reason might be anything. The expenses for remuneration will be calculated under the general average.

The abovementioned are some standards mentioned in the general average clause of the marine cargo insurance policies. There are a few more that state that the loss incurred for the safety and minimisation of loss will come under the general average, and the others won’t.

General average and particular average are the two terms that were introduced to us by the ancient marine cargo laws, which were a standard for trading. As we have seen before, a general average is the distribution of financial loss due to sacrifice or loss incurred in the best interest of the trade.

As the name suggests, a particular average is targeted at a specific party involved in the trade. If the loss or damage to the cargo or ship occurs due to reasons like natural calamity or accidents during loading or unloading, the financial burden will be the respective party’s responsibility. In such cases, the cargo owners or the person in interest will be affected by the loss of goods and property, but no one else.

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As a trader or someone who deals with an import and export business, one should be aware of the general average and particular average. The general average is a standard protocol mentioned in your marine insurance policy that safeguards all parties alike. It facilitates equitable mitigation of losses that are easily possible in the dark, wild ocean waters.

We hope this blog helped you with clearing any potential doubts or questions regarding these rules!

Who does the general average protect?

While the general average states that it safeguards the financial interest of all the parties involved in the trade, the clause primarily protects the crew members. Since it encourages any kind of loss if it is going to protect the crew, the ship, and the cargo, it safeguards these elements of the trade as well.

What is the role of the average adjusters in general average?

Average adjusters are marine law specialists who understand every nook and corner of insurance and marine law. These people or institutions play an essential role in determining the proportions of each party in the mitigation of financial losses.

Are there any international standards to determine the general average?

Yes! York-Anwerp’s set of rules is internationally recognised as the standard for the general average and its calculation. These rules provide a transparent, fair, and consistent method for carrying out the calculation.