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Saving The Shipper And The Ship - How To Protect Against A General Average
May 9, 2012
Perils of the sea have always been a part of ocean shipping. Today, with economic and environmental pressure on carriers to “slow steam” or “super slow steam,” mechanical damage to ships may become more common. Regardless of whether a ship comes to harm due to natural or man-made forces, the cargo owners may be responsible for helping to pay for the damage. Understanding the concept of General Average and the insurance that may be available can help a shipper avoid substantial unexpected costs.
A claim of General Average by a vessel owner and/or ocean carrier is essentially a reimbursement mechanism by which the vessel owner or carrier demands a pro-rata contribution from all parties to the voyage, including the cargo owners, to pay for a loss of cargo or damage to the ship caused by sacrifice, accident or other event that affects all parties to the venture. In this context, “Average” is synonymous” with “loss.” The theory is that each participant in an ocean venture (whether the vessel owner, charterer and/or owners of freight) should share in the risk of that venture. Therefore, when a sacrifice is intentionally incurred in a time of peril, or an expense is incurred, the purpose of which is to save or preserve the venture for the benefit of all, then all those involved in the enterprise must share proportionately in the loss or cost.
A declaration of General Average by a vessel owner or ocean carrier typically occurs in three situations:
- When cargo is jettisoned or damaged in order to save other cargo or the ship;
- When the vessel requires towing and repairs during the voyage because of damage caused by an accident or severe weather; or
- When the vessel requires towing and repairs during the voyage resulting from wear and tear, if the vessel owner is able to establish that it exercised due care prior to sailing to ensure the vessel was seaworthy.
Modern cases, however, have broadened the circumstances that may trigger a General Average declaration. As a result, General Average may be declared even if cargo is not jettisoned and even if the peril to the adventure is not imminent. For example, in one case, a vessel’s propeller was damaged during a voyage to Leningrad. Although the vessel was able to reach port in Rotterdam, the vessel owner was held to have stated a claim for General Average contribution for the cost of dry docking the vessel, unloading and reloading cargo, paying the vessel’s crew, and repairing the propeller. This was proper even though the vessel was not in imminent danger because the voyage could not have continued without the repair.
When a General Average declaration is properly made, the owner of the ship as well as the owners of the cargo are required to bear a proportionate share of the costs to compensate either the cargo owner whose freight was singled out or, the ship owner for repair costs. In such a situation, and without proper insurance coverage, the cargo owners may be required to post a bond to cover their potential liability, resulting in monies being tied up for years.
Because of the significant costs that may be incurred in repairing a ship damaged at sea, as well as the inherent risks of ocean carriage, insuring oneself against a General Average contribution is a necessity. Such insurance is readily available; however, coverage may differ from policy to policy as it pertains to General Average contribution and other perils of the sea. Therefore, understanding those differences and how they affect coverage is critical and can mean the difference between a full or partial indemnity from the insurer.
“All Risk” policies typically provide coverage for a General Average declaration irrespective of the percentage loss and these policies will usually state that General Average is covered. All Risk policies usually have many exclusions, including FC&S (Free of Capture and Seizure) or SRCC (Strikes, Riots and Civil Commotion). However, FC&S coverage is available through a war coverage rider and there are endorsements that will provide coverage for strikes, riots and civil commotion. Many policies contain a provision that the policy is “Warranted Free from Particular Average.” This clause does not provide coverage for a General Average declaration. Rather, it applies to a loss borne by a party whose goods are damaged without the benefit of contribution from the vessel owner or other cargo owners.
In an effort to bring both clarity and uniformity to what are centuries old concepts, there have developed common insurance provisions called the Institute Cargo Clauses or Institute Marine Cargo Clauses, which are intended to replace the older concepts of All Risk, Free of Particular Average and like clauses.
Clause A coverage is the broadest and covers “all risk or loss or damage to” goods (including General Average contribution and salvage charges) except for loss attributable to willful misconduct, ordinary leakage, wear and tear, insufficiency of packing, inherent vice, delay, insolvency or loss caused by nuclear events, unseaworthiness known to the insured, civil war or strife, capture seizure, strikes, lock outs and the like.
Clause C coverage is the narrowest, and while it is subject to the same exclusions applicable to Clause A coverage and also covers general average and salvage charges, the damage or loss must be “reasonably attributable” to specifically identified events, such as fire, explosions, stranding, capsized, collision “or discharge of cargo at port of distress”. However, with respect to a General Average claim, the loss must be “caused by” a general average sacrifice or jettison.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2012 Posternak Blankstein & Lund LLP. All rights reserved.