Maritime transport: how to manage the risk of general average

Maritime transport: how to manage the risk of general average

Upply — 2023-04-26

Maritime and Ports

Shippers can sometimes be called to the rescue financially by shipping companies in the event of incidents on a ship, in the name of the principle of general average. A greater risk today than in the past.

General average is an internationally recognised marine system, which allows certain losses and expenses to be shared between the shipping company and the owners of the cargo in the event of an incident during a voyage. One of the most prominent recent examples was that of Ever Given, after its grounding in the Suez Canal.

This long-standing principle in maritime law is based on the premise that the sea is by definition a hostile territory, where many unforeseen events can occur. It therefore creates solidarity linking the fate of the goods with that of the ship, the co-contractors tacitly agreeing to share a “maritime adventure”. In the event of an incident falling within the scope of general average, it shall be assumed that the goods contribute financially to the operations enabling the ship to be returned to the seaworthy state in which it was before the event that caused the damage.

If the outcome is fatal and results in the complete sinking of the ship and all of its cargo, we enter a case of total loss, which is almost easier to manage and does not fall directly into the field of general average. There may be more obscure cases, when one part of a ship which has broken in two sinks with its cargo (total loss) while the other part, which has been able to be brought to dock with its cargo, enters into the scope of general average. Fortunately, cases of this type are rare but of unimaginable legal complexity in their resolution...

One might think that thanks to technological advances, the risk is now lower. But in fact this is not the case. We even believe that the risks faced by shippers in the containerised shipping sector are currently higher than they were a few years ago, and that is why we wanted to carry out a review of this subject.

1/ Why are general average risks on the rise?

Several factors are now contributing to the increased risk:

  • The average age of the fleet has risen to over 14 years old, up from 12 before the pandemic, according to data collected by the specialist company Alphaliner.
  • According to the same source, ships built since the early 2000s show greater risk of premature structural ageing than the previous generation.
  • The planned wave of older ships being sent to the scrap yard, announced for 2023, has not yet materialised.
  • Increased transport of lithium-ion batteries undeniably increases the risk of fire. The IMO is now required by insurers to find suitable transport procedures that take into account these new specific risks.
  • Climate change, by producing more extreme weather, is an additional factor raising accident rates despite better forecasting tools.
  • The size of the ships is also an issue, with a significant increase in the number of ships over 400 meters long.
  • The direct or collateral effects of acts of war are tending to increase.

For all these reasons, which are not exhaustive, transporting goods on a container ship is not a trivial affair, even taking into account the technological advances specific to the 21st century.

2/ A risk too often neglected

In the case of a declaration of general average, the financial consequences can be very significant. When purchasing a shipping service, shippers logically focus on freight rates and delivery times, which are the two main issues. And yet, failure to take into account the risk of general average can lead to a double penalty, namely a delay or even non-delivery of the goods, combined with expenses that can greatly exceed the value of the goods transported.

Too often, I see a lack of knowledge of shippers on this subject, based on the following arguments:

  • “We have an insurance department at the group level that takes care of everything.” 
    In practice, however, the central services of the major groups in charge of insurance matters rarely cover the field of maritime transport insurance.
  • “I'll take the risk; my merchandise is worthless.” 
    Due to ignorance of the system, some people think that the risk is at worst the sole loss of their goods.
  • “My freight forwarder takes care of that for me, along with everything else…”
    Again, this is a mistake. The freight forwarder may effectively undertake to insure the goods against the risk of general average, but only provided that he has received express and detailed instructions.

There is indeed a simple and inexpensive product to cover the risk, the transport insurance "Free of Particular Average (FPA)", a kind of equivalent to a "third party" motor insurance policy. This device covers the goods at least against the obligation to contribute financially.

3/ What to do in the event of general average?

In 2016, the Comité Maritime International published guidelines for commercial parties to help them master the basic principles of general average. These guidelines, updated in 2022 October, provide an excellent insight into the procedure.

"The assessment of allowable expenses is carried out by an independent professional called an average adjuster, who then divides the total general average amount in proportion to the value of all property that has been saved and reaches destination, in a final adjustment report," recalls the Comité Maritime International.

  • If your merchandise is covered by insurance, it is your responsibility to ask your insurer to contact the average adjuster without delay. It is your insurer who will manage the case directly with the adjuster. You will be able to concentrate on the operational aspects, such as placing a new order to satisfy your customers quickly, without waiting for the resolution of the case.
  • If you are not insured, and you are considered to be a shipper for the principal maritime transport from a legal point of view, you must also contact the average adjuster without delay to find out the amount of the security deposit to be paid. Be careful though, the final settlement of the dues can take several years before intervening and the amounts can evolve according to the procedure to ultimately result in values much higher than that of the goods.

In all cases, due diligence should be exercised. I have never known of any cases in which the goods could have been exempted in one way or another from a general average procedure which, as an important reminder, is initiated by the shipping company concerned, unilaterally. It is not possible for the shipper to escape the procedure, even if they consider that the general average declaration is abusive on the part of the company, which may sometimes be the case.