What is meant by General Average and when does it occur?

April 19, 2024

What is meant by General Average in shipping?

When vessel owners incur expenses or intentional losses in order to save the vessel and the rest of cargo, then vessel owner and all the cargo owners will share proportionately in those expenses.

For example, a vessel must jettison cargo in order to keep the vessel afloat, or a disabled vessel must be towed to port for repairs. This is a process between the vessel owner and cargo owners.

Why do you need to participate?

General averaging is a concept that is based on maritime tradition and is governed by a set of rules known as the York / Antwerp Rules, revised in 1990. Participation is as per Terms and Conditions on the Ocean Contract of Carriage.

What happens when General Average is declared?

General Average is declared by the vessel owner. A General Average adjuster is chosen to administrate the process. Their initial job is to ensure all parties participate and a deposit is received from all cargo owners.

The deposits are proportional value of the invoice value that is roughly estimated to cover the cargo owner’s part of the General Average. As the full process can take a very long time to resolve, participation and funds must be ensured from the beginning.

A General Average notice, with instructions and forms, is given to the carrier, who passes it to the cargo owner or via their freight forwarder.

The General Average Process

The General Average documents from the adjuster have two main forms:

General Average Bond, Form A - This form must be completed by the cargo owner. It says that the cargo owner promises to participate in the GA process.
General Average Guarantee, Form B - This form must be completed by the cargo owner’s insurance company. It is a guarantee to pay the necessary funds. If the cargo owner does not have insurance, then they must place a cash deposit with the Average Adjuster.

There is sometimes a third form if a Salvage Security is required. This is a form similar to the Average Form B and would be completed by the cargo owner’s insurance company. The client’s cargo will not be released until their General Average forms and related deposits have been submitted to the Average Adjuster.

If one client, whose cargo is in a LCL container, has not submitted their General average forms, then the whole container is detained.
If the client fails to participate in General Average, their cargo can be considered abandoned and will result in the client having no financial recourse.

Cargo Insurance Coverage

One of the great features of having cargo insurance protecting your shipment is that cargo insurance also covers General Average. If your shipment is included as part of a General Average declaration the insurance policy will cover the general average bond in order to have your cargo released.

This frees your company from having to make any additional cash deposits.