General Average is declared in the aftermath of a maritime catastrophe and is very costly for shippers without cargo insurance.
General Average is a principle of maritime law born out of the idea that the shipper and the vessel owner are entering into a joint business venture, and that if it weren’t for the shipper’s cargo, the vessel would not be sailing on its (at times dangerous) voyage.
General Average dictates that in the event that an intentional sacrifice is made for the safety of the individuals and cargo on board the vessel, all parties involved with the ocean voyage will proportionally share in the losses of the cargo and the ship. All parties involved must share the cost of any losses caused by the sacrifice so that in the event of an emergency, the crew doesn’t waste time deciding whose cargo should be sacrificed. The party whose cargo is lost in the incident has the right to compensation from the parties whose cargo was saved as a result of the sacrifice.
Each party who suffered a loss will be credited for the value of that loss, and all parties involved in the ocean voyage will be charged a percentage of their own interests’ value to pay for shared costs and others’ loss of interests.
A fire breaks out on a ship valued at $1,000,000 with $3,000,000 worth of cargo on board. The vessel has to be scrapped and is sold for a salvage value of $100,000 (losing $900,000) after the incident. Firefighting and returning the vessel to a safe harbor costs $500,000. $900,000 worth of cargo is lost, and the administrative costs following the events are $50,000.
So someone who had a total of $25,000 worth of cargo aboard the vessel and had $10,000 of it sacrificed in the incident would receive $10,000 in general average proceeds, but they would also be charged for 58.75% of their interests aboard the ship, or $14,688.
Someone who had $50,000 worth of cargo aboard the vessel but lost none of it in the incident would be charged $29,375 and would not receive any general average proceeds.
After the vessel owner declares General Average, the General Average adjuster, a neutral party appointed by the vessel owner, will determine the costs owed to and by each party involved in the vessel voyage. The General Average adjuster will determine which losses qualify for General Average, the total costs of the incident, the amount each party owes, etc.
Immediately following the incident, parties with cargo aboard the ship will need to provide General Average guarantees. If the cargo owner has cargo insurance that covers General Average (as Flexport’s cargo insurance does), the insurance company will issue the guarantee. If the cargo owner doesn’t have insurance, they will need to provide the guarantee themselves, usually with a cash deposit or surety bond that will cover the prorated General Average claim. Cargo will not be released to the cargo owner until the General Average guarantee has been provided.
Final settlement of General Average could take months or even years.
York-Antwerp Rules - 2016 edition - Rules of General Average