Shipping insurance policies contain various clauses that define the policy coverage, terms, conditions, and limitations. Understanding these marine insurance clauses is crucial for cargo owners, shipowners, insurance companies, and all the parties involved in the contract. The general average clause is one of the important clauses of shipping insurance. In this article, let us understand more about a general average clause in marine insurance.
What is the general average clause in shipping insurance?
The “General Average” clause is an important principle in maritime law and shipping insurance. This principle is made to address the set of circumstances where there is a deliberate made to protect the entire vessel and cargo from a common peril. In simpler terms, if actions are taken to safeguard the entire voyage or minimize a larger loss. The costs are shared proportionally among all parties financially involved in the cargo and vessel.
This concept of general average contribution ensures that the financial burden of such sacrifices is shared proportionally among all parties involved in the shipping insurance contract, especially the ones who hold financial interest in the voyage.
Example
Let us take an example to understand this concept of the general average clause in maritime law. Let us assume that a container ship is sailing through rough seas. And the ship suddenly starts to experience the significant risk of capsising due to a severe storm. To prevent the huge loss or damage this catastrophe can cause, the ship’s captain decides to jettison some containers to save the ship. This lightens the ship to sustain the storm and intern saves the other containers in the ship. This intentional act of jettisoning the cargo by sacrificing some containers is considered a general average act in shipping insurance.
In this example, parties with financial interest in the cargo and vessel include shipowners and cargo owners. When the ship’s captain decides to sacrifice some of the containers to save the entire ship and the remaining cargo. The action is considered a general average act that is taken for the common good of all the parties involved in the shipping. Following this, the general average contribution is determined by evaluating the overall losses incurred. The assessment of loss includes considering the value of jettisoned cargo and other expenditures. The calculation of the general average contribution is based on the proportional value of each party’s financial interest in the voyage.
Before the cargo is released to the owners, they may need to provide security such as a cash deposit or a guarantee from insurers to cover their share of the general average contribution. The contributions collected are subsequently utilized to reimburse the shipowner for the sacrifices made.
Crucial elements of a general average clause in shipping insurance
The following are the crucial elements of a general average clause in the shipping insurance:
-
Common peril
The general average clause in shipping insurance typically applies when there is a common peril. This includes situations like deliberate jettison of cargo due to natural catastrophes and fire on board, etc.
-
Deliberate sacrifice
When the ship’s captain or owner voluntarily takes action to prevent or minimize damage from a common peril. The incurred cost is considered a general average sacrifice.
-
General average act
The voluntary sacrifice or expenditure must be a “general average act”. It implies a purposeful action for the mutual benefit of all parties engaged in the voyage.
-
General average contribution
After the incident and the voyage are completed, all parties with a financial interest in the voyage, contribute proportionally to cover the costs of the general average sacrifice. The calculation of this contribution is based on the financial interest value of each party involved in the voyage.
-
Security clause in shipping insurance
Before releasing the cargo to the owners. A security measure, such as a cash deposit or an insurance guarantee, may be necessary to cover a party’s share of the general average contribution.
Conclusion
In conclusion, the general average clause ensures a proportional sharing of the financial burden for sacrifices made to protect the entire voyage among all parties involved. The concept of general average is a crucial element in international maritime law and shipping insurance. The concept promotes the idea of sharing the burden of sacrifices made to save the entire voyage when the parties involved face a collective threat.
