An ancient logic for sharing loss
2,500 years ago, the Ancient Greeks sat down and thought about what to do if cargo was intentionally destroyed in order to save a ship and the rest of its cargo. They decided that, ‘that which has been sacrificed
for all, shall be made good by the contribution of all’. And this very fair thinking has clearly stood the test of time because it’s the logic behind ‘general average’, the procedure that is still used today to distribute intentional losses made to protect the common insurance interests on a loss inflicted ship.

General Average allows the parties (principally the carrier) to recover losses for which they would otherwise be liable, because of special loss occurrence circumstances; i.e. that cargo or hull has been ‘intentionally’ and ‘reasonably’ damaged or lost to protect common safety and property. Examples could include water damage to cargo or hull caused whilst extinguishing a fire; and the removal of cargo or damage to a ship’s engines caused when attempting to re-float a stranded ship.

If general average applies, salvage expenses are usually included, and damage to the environment and delay costs are excluded.

Is there a problem?
Today’s vessels can carry up to the order of 14,000 separate containers, and each of these may contain multiple insured interests. In the case of a general average loss, every one of those interests will need to be informed by the carrier of a general average occurrence and the appointment of an average adjuster, to provide ‘general average security’ prior to the release of their cargo, and finally to settle the loss. The average adjuster, appointed by the carrier, assists in this process on behalf of all concerned parties, up to the point of advising the individual losses to collect from the respective cargo insurers. If multiple cargo interests are involved, the whole process can be complex, time-consuming and hence costly.

Liability of the carrier
The most common maritime convention is the Hague-Visby Rules 1968, which provide a list of obligations and defences available to the carrier under the contract of carriage. For example, the carrier is not liable if:

1. he can prove that he exercised due diligence to make his ship seaworthy before and at the beginning of the voyage; and
2. he can prove that the loss was a result of an “Act, neglect or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship.”; or
3. the loss was a result of “Fire, unless caused by the actual fault or privity of the carrier.”; or
4. 15 other exceptions.

This convention was followed by the less common Hamburg Rules 1978, which substantially reduced the available defences to the carrier. The requirement of seaworthiness throughout the voyage was introduced and the above list of exceptions was abolished. Under this agreement, a carrier is liable for loss or damage to goods and delay in delivery caused whilst the goods were in his charge, unless he can prove “that he, his servants or agents took all measures that could reasonably be required to avoid the occurrence and its consequences.” Contributory negligence is also possible, again if the carrier can prove the respective fault contributions.

A possible sea change
The UNCITRAL Working Group III draft convention on carriage of goods (version April 2007) may bring about a significant change for carriers, particularly for the majority currently operating under the Hague-Visby Rules 1968 convention. Like the Hamburg Rules, the draft includes that due diligence must be exercised by the carrier not just before and at the beginning of a voyage, but also throughout the voyage (absolute seaworthiness requirement). It also removes the main exception numbered 2 on the preceding page and the fire exception if caused by fault of the crew; as there is often a degree of blame by the crew, this last small distinction could have substantial consequences.

With this convention, proving that he and/or his employees, servants and sub-contractors were not at fault will be the only way that a carrier can escape liability for damage or loss of goods in his charge.

In consequence, the convention will prevent the apportionment of general average losses over the various parties to the common adventure. General average expenditure and loss will have to be borne in full by the carrier, to be apportioned over his Hull?&?Machinery and Protection?&?Indemnity insurance; the latter picking up the likely unrecoverable cargo contributions to general average. A re-evaluation of insurance and shipping costs would likely follow.

When a carrier, shipper?&?general average adjuster met
In October 2007, a carrier (Michiel Starmans, Spliethoff Group), a shipper (Jo Willaert, AGFA) and an average adjuster (Keith Jones, Benfield Corporate Risk) came together at a seminar at PartnerRe in Zurich, to put forward their views on the future of general average to an audience of marine underwriters. Their comments formed the basis of this article, although we have not given full justice here to the level of detail and highly informed perceptions that each gave.

What they said:
The carrier was not concerned in any major way. Yes, this is a costly and complex process when it happens, but the number of large general average cases is low and these are effectively dealt with by the appointed adjuster. The carrier need only attempt to avert, resolve and/or minimize such losses when they occur, as he would in any case do, and to collect the general average security. Indeed, general average gives him a contribution towards his cargo and hull losses, potentially keeping insurance costs down (though this needs to be balanced against claim costs), and the “efficient” process of security collection enables him to deliver undamaged cargo to his clients without much delay.

The shipper was also not overly concerned by general average, the feeling being that the cargo insurers take professional care of this insurance issue, that such cases are rare and also mostly not major casualties. The main concern for a shipper is the timely release of cargo; general average is not seen as a stumbling block to achieving that.

The average adjuster’s perspective concentrated on the specific rules and mechanisms associated with general average claims, and with possible ways of minimizing cost when multiple cargo interests are involved. He wanted carriers and shippers to think more about the potential general average problems and to clause charter parties accordingly. If general average were to be abolished, such claims do not reflect the largest percentage of their business, and the impartial position and expertise of the qualified adjuster in resolving and apportioning general average claims is a clear positive.

Conclusion
Whilst fair and not overly disputed by any of the concerned parties, when multiple cargo interests are involved, general average as it works today in insurance can lead to a time-consuming and costly task. That losses can still be apportioned in such a way seems to principally reflect the fact that the number of large general average losses has remained low.

Perhaps more influential for its future, the UNCITRAL draft convention may put the risk of general average losses in full with the carrier via a widening of carrier liability, preventing the possibility of recourse to all the insured interests.

Depending on how general average loss events and maritime agreements develop, likely alternatives for the future include that the carrier’s Protection?&?Indemnity insurance covers and prices for all ‘general average’ type claims.