General Average: why you may end up paying for someone else's cargo

What is General Average and who does it affect?

It affects everyone with cargo on board. Small or large, expensive or cheap, fabrics, a car, a bicycle or toys, it makes no difference. Once the shipowner declares a General Average, you contribute to the cost of the rescue in proportion to the value of your goods, even if your shipment arrived intact.

Where does this rule come from?

To explain it properly, we need to look back in history. Petr Rožek, Executive Director of the Czech Freight Forwarders Association, summed it up nicely:

“Imagine a loaded cargo ship sailing between Greece and Sicily. A storm hits, the situation turns dramatic and the ship is in danger of sinking. To save it, it has to be lightened. The crew throws overboard whatever they can get their hands on. The storm passes, the ship and the rest of the cargo are saved and reach port. But who pays for the damage? One merchant has lost everything, while another has brought his cargo home safely, but only because the first one has nothing left. (…) That is how the procedure called General Average came about, which in a case like this divides the losses among everyone involved, the shipowner and his customers alike.”

The principle comes from Rhodian maritime law and survived thanks to Roman law under the name Lex Rhodia de iactu. Historians disagree on exactly when the Rhodian law dates from.

Which rules govern General Average today?

Today it is governed by the York-Antwerp Rules. The latest version dates from 2016, but older versions are still used in practice. Which one applies to your shipment is set by the contract of carriage, typically the bill of lading.

Who decides on a General Average?

At the critical moment, the captain decides. He has to assess the danger, decide what to sacrifice and get the ship and the rest of the cargo to safety as quickly as possible. I certainly would not want to be in his shoes. The shipowner then declares the General Average, and the full settlement (the average adjustment) is prepared by a specialised average adjuster. This can take years.

The shipowner cannot declare a General Average after every incident just to save money, though. If it turns out that the incident was caused in a way the shipowner is liable for under the contract of carriage, for example because the ship was not seaworthy, the cargo owners can refuse to contribute or claim their contribution back.

Why isn't it enough that the ship is insured?

Ships are insured. Hull and machinery insurance, which is split among several insurers and reinsurers because of the huge sums involved, covers the vessel, and shipowners' liability is handled by mutual insurance associations known as P&I clubs. None of these policies, however, will pay your share of a General Average. That always falls on the cargo owner.

How does cargo insurance protect you?

Good cargo insurance (ideally all-risks cover) also covers the General Average contribution. The insurer provides the guarantee on your behalf, handles communication with the average adjuster, and all you have to do is wait for your shipment. Without insurance, you have to provide the guarantee yourself, and immediately. Otherwise the carrier will not release your goods.

What happened with the Ever Given?

Remember the Ever Given, the ship that blocked the Suez Canal for several days in March 2021? The shipowner declared a General Average and cargo owners had to provide guarantees to get their goods. After being refloated, the ship was also detained in Egypt because the Suez Canal Authority demanded compensation, reportedly over 900 million dollars at first. The final agreed amount was not made public. The goods sat on board for months, and anyone without insurance had to pay out of their own pocket.

What to keep in mind when importing a car from the USA

Marine cargo insurance can seem like an unnecessary expense until something happens. But a General Average affects everyone on board, whether or not their goods were damaged. So when importing a car from the USA, do not skip cargo insurance. We break down what makes up the total cost of an import in our article How much does it cost to import a car from the USA, and what to watch out for.