So I’ve been watching the coverage about Ever Forward… I noticed that the owners (or operators, or whoever it was) declared General Average shortly after the grounding, before they even knew that container unloading would be required…
So please explain how this works?? Don’t the operators of the vessel already have insurance on their ship?? I would think that this type of event is exactly what insurance is for… so why did they have to (or choose to) declare GA?? My understanding of that declaration is that it basically means “this is too expensive for us to cope with alone, so the container shippers are going to have to help us out” … but if they had insurance, that shouldn’t have been necessary??
Anyway, please explain what I don’t know about this business… thank ye very much !!!
It’s been too long since I’ve taken a marine insurance course to give you a good description of GA. And maybe I’m feeling a little fuzzy on my first cup of coffee this morning.
In general, the insured and uninsured cargo owners are required to contribute their prorata share of expenses necessary to save cargo, and cover cargo lost or damaged. To save cargo, its usually necessary to save the ship. This includes extraordinary cargo removal expenses to save the ship and other cargo.
The hull and machinery insurers will try to reduce their liabilities by laying off as much of the expenses to cargo interests as possible, and vice versa.
Is the dredging expense a GA claim? Probably some significant portion of it will be covered by GA.
Hundreds of insurance companies will be arbitrating claims against each other, and the hull and machinery insurer about who has to pay how much for what. Most uninsured cargo owners are likely to just abandon their cargo to the GA claims.
GA works best for any given insurance company in the long run. No one insurance company wants to cover an enormous loss. But there are hundreds of shippers on that voyage, and so each shipper’s insurance company now has to cover only a small amount of the loss.
It’s the reason starlings flock together. A starling alone is subject to high chance of enormous loss (death) from a hawk. But swarming in a flock of thousands, each starling only has a small chance of enormous loss.
Not an expert, but believe salvage is a general average claim. It is a normal practice for owners to declare GA, and have their adjuster there. That may not mean GA is in force, but in effect puts cargo owners on notice.
I see, I think… so GA, at least in cases like this, is a method for spreading out the risk among insurance companies… but any shipper who didn’t have insurance on their cargo, is just out of luck, yes?? I don’t know how common that is…
Low value cargos are often uninsured. Some shippers choose to self-insure. Some unsophisticated small shippers don’t realize that their other insurance policies do not cover ocean transportation.
In case of loss, the question becomes, do I want to pay lawyers to arbitrate the GA claim in London (or perhaps hire an independent insurance adjuster)? Or do I want to just abandon my cargo. Obviously, this is a cargo value driven decision.
So the shipper can just abandon their cargo and take the loss?? That’s something I’d wondered about in the past… I mean, I cannot just abandon something that I’ve contracted to buy, I would likely end up with collection agencies chasing me down… they don’t do that with shipping cargos?
Yeah, that shipper is the starling du jour.
It depends on the shipping terms:
FAS ( Free Alongside) or FOB (free onboard), the cargo belongs to the buyer from the moment it arrives alongside or onboard the ship and you are obligated to pay for it, And pay for freight charges, whether it is ever delivered or not.
CIF (cost insurance and freight), the seller bears all risks until its actually delivered.
There are other common shipping terms.
GA is governed by treaty. As I recall GA rules, liability is normally limited to the after salvage value of the cargo.
There is a very long history of shipping being a risky venture and that risk being shared by owners, cargo interests, underwriters.
Thank you all again, these are all very insightful and useful inputs; gives me much to think about…
The way general average was explained to me when I took a class in it along time ago was this:
Imagine 200+ years ago. You and say 20 other principals have decided to ship a a variety of cargoes by sea. Let’s pretend we’re shipping stuff from Europe to the Americas. It’s a big variety of cargo, some in barrels, some in crates and boxes, all break bulk stuff. During the voyage the ship starts taking on water and the crew has to jettison a bunch of cargo in order to maintain stability, or fix the leak or whatever. Maybe only one individual cargo owner lost their shipment, but that sacrifice saved the entire venture. Therefore rather then that one cargo owner having to bear the loss, all the cargo owners have to equally distribute the loss.
There are a few main types of insurance.
Protection and Indemnity
Hull and Machinery
From there we must realize that each might correspond to a different person. The Ship Owner, the Ship Operator and the Cargo Owner(s) might all be different people with different concerns.
Most bulk cargoes are sold C&F, not CIF. Why? The buyers (consignees) own the cargo once it’s shipped.** They don’t want to rely on a shipper (a company without insurable interest in the cargo) to be responsible for placing the insurance and assigning the the insurance to the buyer/consignee (the company WITH insurable interest in the cargo). Typically, in a C&F purchase, the consignee will buy a Marine Policy with a value of 110% of the value: Cargo cost plus freight cost plus 10%.
**Typically, the shipper is paid via a Letter of Credit (LOC). Once the cargo is loaded, and the freight is paid, the shipper runs to the bank with a Bill of Lading (BL) to collect his payment from the LOC. A smart buyer/consignee will demand that the BL be marked “Freight Pre-Paid”. In this way, the buyer/consignee is assured that the freight has been received by the carrier/vessel owner so the carrier/vessel owner cannot lien the cargo for non-payment of freight.They have the document (BL), signed by the Master, confirming that the freight has been received.
In reality, Charterers and Ship owners and Buyers/Consignees have a long standing relationship, one built on trust. In large grain movement, for example, once the grain is loaded on board, the shipper will send the Mate’s Receipt to the buyer/consignee for payment; no Letter of Credit is used. Companies that are new to each other, and have not established a trust between them, must rely on a Letter of Credit in the beginning.
The recognized authority (in the US) on marine insurance and general average is Marine Insurance and General Average in the United States, aka “Buglass.” I have a copy that was the text in my graduate school marine insurance class, and it’s a fixture in every Admiralty law library. However, I was shocked to see how much it sells for, so it’s not something you’ll pick up to satisfy a casual inquiry (a used copy costs more than a 1981 Bowditch…).
@jdcavo - Wow!! Nor is that huge text something that one would turn to, when searching for the kind of summary information that I sought!!! Yikes!!
There are different types of insurance available today. Usually, carriers try to use the cheapest insurance to minimize the cost of transportation. Different types of insurance protect against other incidents. It works the same way with medical insurance. I work as a doctor and cooperate with thefinitygroup.com to protect myself. Doctors’ jobs are very demanding, and they are often parties to lawsuits. I prefer to feel safe.
in all insurance markets??? How about FFO in German market??
Well…I am actually searching for " un-loquacious and diminutive linguistic expression , that will satisfactorily accomplish the contemporary necessity" and not offend and/or disconcert the reading crowd.
However, it may be difficult with this topic.
On a serious note consider my question as an oblique and sneaky way to extract more from You to make the picture complete ,which was satisfied by Your other supplementary links.
In 95% of cases I have gravitated around German companies( having Nordic P&I cover) and remember vividly, that during all the pre-joining briefings the personnel there, was sort of obsessed with reminding me to " not call P&I agents in case of contact with FFO as their FFO was covered by their H&M".
Hence mistakenly I could have concluded, basis such experience about a special character of German H&M insurance . Gard and other Nordic club Rules content prove it is not the case.
However one must say there are some peculiarities as one can see in the table from your link . In my proposed link one can discover a lot more about the differences if interested in this topic.