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What is “General Average”?

According to Rule A of the York Antwerp Rules 1974, “General Average” is defined as:

“There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.”

Some of you may remember the M/V Hyundai Fortune accident in March 2006. A huge explosion occurred and caused a massive blaze that spread through the stern of the container ship when it was sailing from Singapore through the Gulf of Aden to ports in Europe. After efforts to contain the fire failed, all the 27 crew members abandoned the ship. General average was declared and it appeared that at least one third of the containers were damaged by the blaze. The hull was eventually towed to Oman and the sound containers were offloaded for transport to other ships to Europe.

In case of common casualty such as the above, the shipping company will require the goods owners to pay a General Average Deposit or provide a bond from their bank before picking up their cargoes in the nearest port. If the goods owners took out a marine cargo insurance, the insurance company would take over the case to provide a General Average Guarantee, or otherwise, the goods owners would need to pay the Deposit which may normally be 10% or in some cases (e.g. M/V Hyundai Fortune accident) up to 75% of the invoice value of the goods in cash. In addition, the insurance company would also have to make a General Average Contribution for the insured, the cost of which will be based on the sound value of the cargoes arriving at destination.

To conclude, the above case shows the importance of taking out marine cargo insurance. It is particularly important for SMEs, as their cash flow is usually small. In case of mishaps, not only will they lose their goods, even though their cargoes were saved, they may also need to pay unexpected expenses for a GA Deposit and a GA Contribution, leading them to fall into financial crisis.

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