Freight containers on the Suez Canal

General Average and the Price of Forgoing Cargo Insurance

Despite it being a rare occurrence, general average (GA) is a process that could have a catastrophic impact on your business.

According to BIFA :

"General Average (GA) is a global legal principle of maritime law, dating back many hundreds of years, under which all interested parties to a 'maritime adventure' proportionally share any losses or expenses resulting from a voluntary and intentional act on the part of the ship or cargo in order to save the remainder in an emergency."

As freight vessels increase in size to accommodate more vehicles, the total cost of GA losses incurred by BCO (beneficial cargo owners) and freight forwarders increases too. On many of today's ships, tens of thousands of interested parties could be implicated by a single incident.

Because of this, general average claims take a significant amount of time and resources to resolve. In fact, adjusters could take years to settle all the claims. Another fact compounding this issue is an industry-wide lack of understanding around GA processes.

Here’s everything you need to know about general average, and how you can safeguard your business against extreme losses.

The General Average adjuster will make a request for security

To ensure that they receive payment, the General Average adjuster will require each interested party to provide a GA bond. This will be carried out before the loss has been valued, so the adjuster will make an estimate at this stage. This is also where the BCO, NVOC or freight forwarder will be made aware of the GA event.

What is a GA bond?

Signed off on by the cargo owners, a GA bond is an agreement made to ensure that, when GA occurs, all relevant parties will pay towards the GA loss sum.

Without providing a GA bond as soon as possible, the BCA's cargo could be held from release at the port.

How are interested parties identified?

Just as cargo vessels are expanding, the global supply chain is also becoming greater and more complicated to deal with, especially where GA is concerned. Because of this, mistakes can happen. For example, the GA adjuster's initial request may be made to a freight forwarder or NVOC, where it should have been made to the BCO. In this instance, the freight forwarder or NVOC would be responsible for passing this on to their customer immediately.

Typically however, the GA adjuster will review the carriers' bills of lading to identify the interested BCO parties.

The consequence of having no cargo insurance

According to BIFA, as much as 50% of all consignments transported globally are moved without cargo insurance.

This is particularly worrying because of the huge and increasing costs incurred by GA losses. Just one incident could potentially crumble a business.

And yet, with just standard marine cargo insurance, BCOs can protect themselves. The cargo insurer will take responsibility for the process in the event of an incident by making sure the requested securities are placed and that your cargo will be released at its intended destination.

Without the integral safety measure that is cargo insurance, the BCO will be responsible for responding to the GA adjuster's request and providing security to ensure that the cargo will be released at the port.

To avoid having to provide huge cash payments and significant resources to fulfil your GA obligations, getting relatively inexpensive cargo insurance is a no-brainer.

At Freightlink, keeping our customers satisfied and informed is our number one priority.

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08 March 2023

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