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Saturday, April 3, 2010

What is "General Average" - Some Clarifications ..


The principle and practice of General Average is very interesting, though it is very peculiar to voyage by sea.  After posting my article of ‘Fire in the Engine room of Maersk Miami and General Average’ – some friends have evinced interest and have asked some clarifications. Here is one on the difference between GA Expenditure and GA sacrifice ; recovery as particular average from Insurers in case of GA sacrifice and treatment of apportionment when the interests are owned by the same body.

It is evidently clearly that in a sea voyage, when the voyage itself is imperilled – there could be acts done by the Master of the Ship to save the maritime adventure. Such act could either be a GA Expenditure or GA Sacrifice i.e., some extra inevitable expenses incurred for saving the adventure (GA Expenditure) or some property voluntarily lost / sacrificed (GA sacrifice).

Examples of GA expenditure are : expenses in repair of engine / propeller, expenses incurred in entering a port of refuge for safety, amount paid to salvors etc., whilst Jettisoning of cargo for the safety of ship & remaining cargo would be GA sacrifice.

The MI Act (I have referred to Indian Act, the MI Act 1906 of UK is also similar) defines General Average and Sec 66 (4) provides that wherever the Insured has to pay his proportionate of loss in GA expenditure, he may recover the same from the Insurer. The Act further provides that in respect of GA sacrifice (i.e., if the insured cargo was the one sacrificed / jettisoned for saving the voyage), the Insured has recover the same from the Insurer as a cargo loss in full - though theoretically he has the right of contribution from other parties. Even if he is not exercising this right for practical difficulties, the claim would be tenable but he cannot claim under both.

Again, as stated in the Act, this is subject to any express provisions to the contrary in the Policy i.e., the Policy can restrict this option.

Also it is normal for Insurers to consider only such proportion of Insured value as it bears to the Insurable value i.e., there is provision for Under Insurance. If the cargo is insured lesser than its contributory value for General Average, which in general is the CIF value, then the Insurers can pay proportionately.

In reality, the Insurers give GA Guarantee to the Adjuster by which they undertake to pay the claim in full to the Adjuster as and when adjustment is readied and payment called for. To take care of this eventuality, the Underwriters take a counter guarantee from their Insured and can fall back on this to recover such proportion or to collect the money in respect of losses attributed to perils excluded by the Policy coverage.

The Sec 66 (5) makes it explicit that the Insured can recover the GA contribution from the Insurer. A marine policy or any other property policy for that matter covers only the subject matter insured and indemnifies for a physical loss or damage of the subject matter insured.

By the concept of General Average and special provisions thereon the Insurers are to indemnify losses not sustained by the subject matter insured but for which the property insured is called upon to contribute. Would seem strange for a common man but a very sound principle of equity. 

Sec 66 (7) gives additional protection to the insured who would turn out to be the ship owner / cargo owner as well. Theoretically, it almost a liability situation, wherein the one who suffered the loss collects the proportion of loss from all other interests. Thus in a situation where the Ship, Freight and cargo or any two of these are owned by the same assured, they cannot be calling for the proportion from themselves.

Much as a sistership clause in ITC Hulls, this provision enables indemnity from their Insurers reckoned as if those interests are owned by different persons.

Hope the foregoing brought in some more clarify for beginners and lay men. If you liked this post, do provide your feedback.

Regards – Srinivasan Sampathkumar.

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