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Allianz Global Corporate & Specialty

General Average
and Salvage
Charges

Marine Insurance Considerations:


A technical report.

Foreword by Ron Johnson

Introduction a history of General Average

What is General Average?

Salvage Charges

Delay in delivery of cargo

Conclusion

General Average
The law of General Average is a legal
principle of maritime law to which all
parties, in a sea venture, proportionally
share any losses resulting from a
voluntary sacrifice of part of the ship
cargo to save the whole in an emergency.
The tenet of General Average is
that a party who has suffered some
extraordinary expenditure or loss in order
to save property belonging to others has
the right of compensation for its loss
from all parties to the voyage who have
benefited from it (e.g. a merchant whose
cargo is jettisoned to save a voyage).

Foreword
The laws of General Average have been deeply embedded into
maritime law for hundreds of years. The earliest documented laws
date back to the Digest of Justinian, Book XIV, in 530 ACE.
The recent grounding of a fully loaded cargo vessel on a
reef off the coast of New Zealand highlights the dangers
and consequences of even a minor maritime shipping
event.
Owners of cargo onboard a grounded vessel face an
anxious time waiting to see what develops before filing
an insurance claim or potentially re-ordering lost cargo.

Ron Johnson
Regional Manager
Marine AGCS - Pacific
+61.3.6332.3184
ron.johnson@allianz.
com.au

For those cargo owners who rely on insurance protection


from supplier-arranged foreign marine carriers, it is
unsettling not knowing if or when these insurers will
respond to claims at the point of discharge.
Such cases are complex and potentially touch on several
aspects of maritime law not regularly encountered by
cargo owners such as General Average and Salvage
Charges.
We have developed this report in response to frequently
asked questions by brokers about how marine insurance
policies respond to such events. It can be used by brokers
to discuss certain exposures with their clients.
Some of the questions asked by cargo owners, when
discussing the effectiveness of their marine cargo

insurance protection in the event of a grounded vessel,


may include:




What do you do in case of potential loss?


Could you face costs associated with the vessels
salvage?
What if your cargo insurance was arranged by an
overseas supplier?
What if the cargo is critical to get a project
completed and operational?
Do you even have insurance cover for such an
exposure?

We are pleased to share this report as a useful reference


tool and to provide technical information regarding
standard marine insurance wordings.
Allianz Global Corporate & Specialty offers expert
knowledge such as this paper to assist our global
customers in understanding technical insurance matters
and complex exposures. We hope you appreciate the
quality product we offer to you and your customers.
Ron Johnson
Regional Manager Marine
Allianz Global Corporate & Specialty - Pacific

Introduction: A history of General


Average and maritime law
Global cargo transit has been a regular feature of the history of
maritime activities up to the present day.

Ships carrying cargo and the masters who operated


them were protected by a maritime system dating back
to the unwritten Lex Maritima.
This early type of coverage was developed on the island
of Rhodes, an important maritime center, around the 9th
Century BCE.
The code was later adopted by the Greeks and the
Romans who added their own regulations, which
eventually led to the Digest of Justinian Book, XIV, in 530
ACE.
The law of general average is also deeply rooted in
Rhodian Law, which stated that in order to lighten a ship,
merchandise has been thrown overboard; that which has
been given for all should be replaced by the contribution
of all.

Due to the international nature of shipping and the


differences in the laws application, however, as a means
to introduce international uniformity, General Average
was formally codified into the York-Antwerp Rules, in
1890.
The rules have been updated numerous times, most
recently in 2004. The rules state:
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.
While general average traces it origins back to ancient
maritime law, it still remains a part of admiralty law
today .*

* Lowdnes & Rudolfs Law of General Average and The York Antwerp Rules by J F Donaldson and CT Ellis; Stevens & Sons Limited, London.

What is General Average?


The law of General Average is a legal principle of maritime law to
which all parties, in a sea venture, proportionally share any losses
resulting from a voluntary sacrifice of part of the ship cargo to save
the whole in an emergency.
The tenet of General Average is that a party who has
suffered some extraordinary expenditure or loss in order
to save property belonging to others has the right of
compensation for its loss from all parties to the voyage
who have benefited from it (e.g. a merchant whose
cargo is jettisoned to save a voyage).
The claim is adjusted by an average adjuster who
calculates the value of each saved interest. Each
interested party is then obliged to contribute towards the
general average loss or expenditure proportionately.
An important point is that the voyage must be saved for
General Average to apply.
The four essential prerequisites for a General
Average declaration are:
1. Incurrence of an extraordinary sacrifice or
expenditure
2. Occurrence of an intentional or voluntary, but not
necessarily inevitable, act
3. Presence of a real and substantial, but not
necessarily imminent, peril
4. Resolution must be for the common safety and not
merely for part of the property involved.*

Guarantees are usually only accepted from reputable


insurers with a strong financial backing. Where the
insurer does not meet the minimum financial strength
criteria, additional security may be required before
release of cargo.
Therefore, cargo owners and their brokers, in the current
global financial climate, are advised to deal with a
respected marine insurer with a healthy solvency margin
and a strong international credit rating.

What types of marine casualties can


give rise to General Average?
The following are some examples of events and
expenditures that are likely to be involved in a General
Average loss:
Event

Expenditure

Grounding /
stranding

Calculation of General Average


Calculation of General Average contributions is quite a
complex task. Given the somewhat hybrid development
of the rules, correct interpretation continues to be a
specialized task for correct interpretation continues to
be a challenging task left to experts who specialize in
General Average adjusting.
General Average security usually takes the form of a
General Average Bond signed by cargo owners, together
with either a cash deposit for the amount determined
by General Average adjusters or a General Average
Guarantee provided by the cargo insurers.

* Notes on General Average by J S Crump, Rishards, Hogg International.

Damage to vessel and


machinery through refloat
efforts
Loss or damage to cargo
through jettison or forced
discharge
Cost of discharging,
storing and reloading of
discharged cargo
Port of refuge expenses

Damage to ship or cargo


due to efforts to extinguish
a fire on board
Jettison of cargo
Port of refuge expenses

Cargo shifting in
heavy weather

Jettison of cargo
Port of refuge expenses

Heavy weather
collision or
machinery
breakdown

Port of refuge expenses

Fire

Enforcement of rights in General


Average
Under international shipping law, the shipowner has
a duty to obtain General Average security not only for
their own benefit but also for the benefit of other cargo
owners who have suffered a loss recoverable under
General Average.

The shipowner enforces this duty through a lien held


over the cargo while in custody for cargo owners
General Average contributions.
This lien enables the shipowner to demand lodgement
of acceptable security for estimated General Average
contribution before release of the cargo.

Example of General Average Claim adjustment for a piracy event.


Amount
Contributory Value
Ship Sound Value per certificate

US$ 13,000,000

Cargo CIF Value of all cargo on board

US$ 12,000,000

Summary of GA Disbursements
Ransom payment

US$ 2,500,000

Delivery and success fee

US$ 250,000

Negotiation fees

US$ 300,000

Lawyers fees

US$ 100,000

Bank charges

US$ 10,000

Adjustors fees

US$ 40,000

Total

US$ 3,200,000

Appointment of General Average


Ship

US$ 13,000,000 pays 52%

US$ 1,664,000

Cargo Owner 1

US$ 5,000,000 pays 20%

US$ 640,000

Cargo Owner 2

US$ 4,000,000 pays 16%

US$ 512,000

Cargo Owner 3

US$ 2,000,000 pays 8%

US$ 256,000

Cargo Owner 4

US$ 1,000,000 pays 4%

US$ 128,000

Salvage Charges
Salvage Charges to refloat a grounded vessel usually are expensive,
often running into the millions of dollars.
The term Salvage refers to the practice of rendering aid
to a vessel in distress. Maritime law has long decreed that
third parties who freely participate in a successful salvage
of life or property at sea without doing so under the
terms of a contract are entitled to remuneration.
Essentially, Salvage Charges apply in the event of a
successful salvage due to a voluntary act independent
of any contract. Conversely, under the Lloyds Open
Form, a standard legal document for a proposed marine
salvage operation, under the heading No cure - No
pay, if an attempted salvage has been unsuccessful, no
award/compensation will be received for the effort or
time spent if the salvage is unsuccessful.
However, this principle has been somewhat weakened
in recent years and awards are now being permitted
in cases where, although the ship may not have been
salvaged, pollution or damage to the environment has
been avoided or mitigated.

Enforcement of Rights for Salvage


Charges
An important difference between Salvage Charges
and General Average is that with Salvage Charges the
remuneration may not always be for the common good.

Consequently, under Admiralty Law, each party is liable


to contribute independently of the other parties, with the
Salvor being entitled to proceed against each party of the
property saved for which he has a separate lien.
While Salvage Charges technically fall into a separate
category than General Average, for simplicity they
are usually treated as General Average expenditures.
Accordingly, the important aspects discussed under
General Average will equally apply to Salvage Charges.

How do marine cargo policies respond


to General Average losses and Salvage
Charges?
Exports on a Cost, Insurance and Freight (CIF)/
Carriage and Insurance Paid to (CIP) basis
Clients with marine cargo insurance policies covering
exports sold on a CIF/CIP or similar basis can expect to be
covered for General Average contributions under their
cargo policies. Institute Cargo Clauses (A), (B) and (C)
each provide protection for General Average and Salvage
charges.

However, an important aspect of all of the Institute Cargo


Clauses is that they specifically exclude delay.
Losses incurred merely due to delay in delivery are not
commonly allowable expenditures for General Average
purposes under York-Antwerp Rules.
Recommendation: Project owners should consider
buying additional insurance protection against any delay
in start-up of a project attributable to delay in delivery of
procurements critical to the projects completion.

Exports on Cost & Freight (CFR), Free (or


Freight) On Board (FOB) or similar terms
Clients exporting on a CFR, FOB or similar basis may have
no claim for General Average and Salvage Charges.
This is the case since the title to the goods would have
transferred to the buyer, regardless of whether or not
they hold marine insurance covering exports due to lack
of insurable interest.
In practice, this should be of little or no consequence to
the seller unless the buyer defaults in settlement.

Thus, a claim filed under any form of marine cargo


policy the exporter held for security would be unlikely
to succeed unless the policy wording was very
carefully constructed to respond to such events.
The Maersk Tacoma incident off the Victoria coastline
in Australian waters in 2001 raised an interesting
twist to the notion of buyer default when the vessel
returned to the port of origin for the cargo to be
transhipped.
The cargo would not be transhipped without a General
Average security, which left some exporters in difficult
negotiations with buyers.

Imports purchased on CIF, CIP or similar


terms.
Clients purchasing goods on CIF, CIP or similar terms
where marine cargo insurance is arranged by the
seller are in the hands of the suppliers insurer.
While this should normally be a simple matter, delays
in providing the necessary paperwork and suitable
guarantees can often occur at the point of discharge
where the insurer is not represented in the country.

The risk of buyer default could significantly increase in


cases where the buyer holds no marine cargo insurance
and is unwilling to or cannot provide suitable General
Average security for release of its cargo.

Recommendation: In such cases, purchasers should


contact the nominated local claims settling agent to
avoid an unnecessary delay in release of the cargo.

In such cases of default, the exporter would be unable to


obtain release of the goods without providing proof of
the required General Average or Salvage security to the
shipowner.

Imports purchased on CFR, FOB or similar


terms

In this scenario, the exporter would face an added


difficulty. Security might be required since the cargo
would likely be in a foreign country, although technically
the exporter would have no insurable interest in the
goods at the time of the event.

Clients holding a marine cargo insurance covering


imports can expect the policy to respond to any costs
related to General Average and Salvage Charges for
cargoes purchased CFR/FOB or similar.
Delay, however, remains as an exposure where clients
should consider cover, especially when it comes to
critical items for projects.

Delay in delivery of cargo, especially


those critical for completion of a project
Delay has long been viewed as a financial business risk and beyond
the scope of the general insurance market.
The British Marine Insurance Act 1907 specifically
excludes any loss caused by delay. Delay has traditionally
been viewed as a financial business risk beyond the
scope of general insurance and thus, delay is a standard
exclusion in all Institute Cargo Clauses.
As many large scale infrastructure projects import
critical items in a modular form from other regions
to the project, project owners are faced by numerous
challenges involving the logistics.
In analyzing the cost-benefits of modular construction
versus conventional stick build construction, the
increased maritime risk is often overlooked.
Project owners and developers are wise to factor in this
exposure when undertaking the cost-benefit analysis.

The very nature of many infrastructure and project cargo


risks means that the consequences of loss or damage
to cargo can have a significant impact by delaying
commencement of operations, most particularly in cases
where the cargo may be critical to the completion of a
project.
Impacts can include potential loss of revenue as the
result of incurring additional expenditure by extending
the start date of the project. Such losses and costs can be
and are regularly insured under a Marine Delay in StartUp Insurance (DSU).
A crucial feature of a Marine DSU policy is that, like most
business interruption policies, insurers rarely offer any
form of business interruption/DSU cover unless they
have control over the material damage loss that might
give rise to a claim.
Even though there are sound underwriting reasons for
this decision, it creates difficulties for buyers of critical
items purchased on CIF, CIP or similar terms.
Such buyers will find it nearly impossible to purchase any
form of Marine DSU Cover. Even if they try to arrange
a separate marine cargo policy, unless the wording
is carefully drafted claims are likely to fail for lack of
insurable interest.
To further research Marine DSU insurance, please refer
to a previous white paper published by Allianz Global
Corporate & Specialty entitled Marine Delay in Start-Up
(DSU): A mysterious insurance coverage simplified.
It can be downloaded at www.agcs.allianz.com and is
recommended reading.
Recommendation: In the very early planning stage,
owners and project managers should consider making
provision for a principal controlled Project Cargo Policy
for procurements.

Conclusion
Awareness and communication are key for the broker to properly
consult with clients about General Average and Salvage Costs.
Shipping was one of the earliest activities that required
international cooperation in terms of laws and
regulations. Over time, maritime law has developed
alongside globalization.
This report outlines the current issues that an insured can
face when considering the appropriate cover.

For brokers, it contains a comprehensive presentation of


measures an insured should consider and understand in
order to obtain appropriate coverage, including:


For protection, in the event that general average or


salvage costs are applied,
For cover in case their insurance supplier is in
another country; or
For control of goods, especially project owners,
rather than relying on the suppliers marine
insurance protection - as the recent grounding in
New Zealand highlighted.

This paper also highlights the risks of relying on a


suppliers marine insurer when sourcing critical
components for a project.
It makes a strong argument for a principal-controlled
Project Cargo and Delay in Start-Up Insurance for new
significant projects in our era of globalization and the
procurement of modules offshore.
Allianz Global Corporate & Specialty manages risk from
a broad perspective and will work with brokers to fit the
cover to the needs of the client. This report sets out to
raise awareness of the risks and inform brokers of some
of the solutions available.
For all inquiries, please contact your local Allianz Global
Corporate & Specialty underwriter.

Copyright 2013 Allianz Global Corporate & Specialty AG. All rights reserved. The material contained in
this publication is designed to provide general information only and was believed to be correct at the time
of publication. Allianz Global Corporate & Specialty AG assumes no obligation to update any information
contained herein. The descriptions of coverage are abbreviated and are subject to the terms, conditions
and exclusions of the actual policy. For full coverage details, please refer to the actual policy forms.
In relation to Australian clients and risks, Allianz Global Corporate and Specialty - Pacific issues Allianz
Australia Insurance Limited ABN 15 000 122 850 insurance
Allianz Global Corporate & Specialty AG,
Fritz-Schaeffer-Strasse 9, 81737
Munich, Germany
November 2013
www.agcs.allianz.com