Imagine receiving a message from an ocean carrier notifying you that all the cargo aboard a vessel, including yours, has been impounded—and the only way you can retrieve it is a boat load of cash or a guarantee at the very least. Sounds like extortion, right? Well, it’s actually a very common event in maritime shipping known as General Average. Understanding General Average, its implications, and how to protect yourself as a shipper is crucial in the world of ocean freight shipping. So, let’s dive right on in…!

What is General Average?

General Average is a principle of maritime law establishing that all cargo owners on a vessel share liabilities and losses that may occur. This means if a shipper’s cargo is involved in such an incident, even if their goods are not damaged, they must still contribute financially to the loss.

The Basics of General Average

General Average may be declared when an intentional sacrifice is made to preserve the common safety of the ship, persons, or property while at sea. For example, if a ship is in peril and the crew jettisons some cargo to lighten the vessel and save it from sinking, the losses incurred are shared among all cargo owners with a financial interest in the voyage.

The Financial Implications

When General Average is declared, all shippers on a vessel must contribute to the loss, regardless of whether their cargo was directly affected. The amount they’re expected to contribute is based upon the total value of the ship’s cargo.

Here’s an example scenario for you:

  • Total value of the voyage: $200 million
  • Total loss (cargo and vessel repairs): $20 million
  • Percentage of loss: 10%
  • Cargo owner’s contribution: 10% of the value of their cargo.

Given the above example, if a shipper has cargo valued at $100,000, they will need to contribute $10,000 to get it released.

Recent Examples

The principle of General Average is not just theoretical; it happens in real life. And it happens more often than you think. The two most prominent cases in recent memory are the Ever Given and the Dali.

Ever Given: On April 1, 2021, the Ever Given’s vessel owner, Shoe Kisen, declared General Average. In case you might’ve forgotten, the Ever Given ran aground in the Suez Canal on March 23, 2021. With the assistance of 13 tugboats and dredgers, the vessel was successfully refloated on March 29th. The incident caused a blockage of the Suez Canal and halted cargo traffic, delaying billions of dollars’ worth of shipments. The vessel was held for three months by the Suez Canal Authority while they worked to determine total liabilities. General Average was declared at 25%. Once the financial dispute was settled between the shipowners and the Suez Canal Authority, the vessel was allowed to leave.

Dali: Grace Ocean Private Ltd, the owner of the Dali—the infamous ship that knocked down the Francis Scott Key Bridge in Baltimore in March 2024—declared General Average a month after the initial incident. At the time of the crash, there were over 9,000 TEUs onboard the vessel, which became stuck inside the Port of Baltimore for several weeks. It will likely take some time for a value to be declared as cargo and damages must be fully inspected. But you can bet your bottom dollar that the figure isn’t going to be pretty!

Protecting Yourself: The Role of Cargo Insurance

Uninsured Cargo: If your cargo isn’t insured, you will not be able to retrieve it until you post a guarantee, which can be in the form of a cash deposit, bank guarantee, or bond. This can significantly impact cash flow and delay your business operations.

Insured Cargo: Having marine cargo insurance can mitigate the financial strain of a General Average declaration. When General Average is declared:

  • Immediate Notification: Notify your marine cargo insurer immediately.
  • General Average Guarantee: The insurance company will post the General Average Guarantee to meet your contribution and facilitate the release of your cargo.

Insurance can be a make or break in this situation. Not only does it ensure the quick release of your goods, but it also protects and insures you from the financial burdens associated with unexpected maritime events.

Why Shippers Need to Be Aware

Understanding General Average and the role of cargo insurance is essential for any shipper involved in international trade. This knowledge can prevent financial losses and ensure smoother business operations in the face of maritime accidents.

Also, many shippers are under-insured, especially for maritime events. Please do not presume your property policy’s marine clause fully protects you!

Most companies offer cargo insurance, but how many offer you assurance? Whether your cargo is on-shore or off-shore, Shapiro procures, ensures, endures and assures. That might sound like a mouthful to you, but that mouthful could save your bacon—and your bottom line!

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