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General Average and Salvage Charges. - Allianz Global PDF
General Average and Salvage Charges. - Allianz Global PDF
General Average
and Salvage
Charges
Marine Insurance Considerations:
A technical report.
1 Foreword by Ron Johnson
4 Salvage Charges
6 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 recent grounding of a fully loaded cargo vessel on a insurance protection in the event of a grounded vessel,
reef off the coast of New Zealand highlights the dangers may include:
and consequences of even a minor maritime shipping
event. • What do you do in case of potential loss?
• Could you face costs associated with the vessel’s
Owners of cargo onboard a grounded vessel face an salvage?
anxious time waiting to see what develops before filing • What if your cargo insurance was arranged by an
an insurance claim or potentially re-ordering lost cargo. overseas supplier?
• What if the cargo is critical to get a project
For those cargo owners who rely on insurance protection completed and operational?
from supplier-arranged foreign marine carriers, it is • Do you even have insurance cover for such an
Ron Johnson unsettling not knowing if or when these insurers will exposure?
Regional Manager respond to claims at the point of discharge.
Marine AGCS - Pacific We are pleased to share this report as a useful reference
+61.3.6332.3184 Such cases are complex and potentially touch on several tool and to provide technical information regarding
ron.johnson@allianz. aspects of maritime law not regularly encountered by standard marine insurance wordings.
com.au cargo owners – such as General Average and Salvage
Charges. Allianz Global Corporate & Specialty offers expert
knowledge such as this paper to assist our global
We have developed this report in response to frequently customers in understanding technical insurance matters
asked questions by brokers about how marine insurance and complex exposures. We hope you appreciate the
policies respond to such events. It can be used by brokers quality product we offer to you and your customers.
to discuss certain exposures with their clients.
Ron Johnson
Some of the questions asked by cargo owners, when Regional Manager Marine
discussing the effectiveness of their marine cargo Allianz Global Corporate & Specialty - Pacific
Introduction: A history of General
Average and maritime law
Ships carrying cargo and the masters who operated Due to the international nature of shipping and the
them were protected by a maritime system dating back differences in the law‘s application, however, as a means
to the unwritten Lex Maritima. to introduce international uniformity, General Average
was formally codified into the York-Antwerp Rules, in
This early type of coverage was developed on the island 1890.
of Rhodes, an important maritime center, around the 9th
Century BCE. The rules have been updated numerous times, most
recently in 2004. The rules state:
The code was later adopted by the Greeks and the
Romans who added their own regulations, which “There is a general average act when, and only when,
eventually led to the Digest of Justinian Book, XIV, in 530 any extraordinary sacrifice or expenditure is intentionally
ACE. and reasonably made or incurred for the common safety
for the purpose of preserving from peril the property
The law of general average is also deeply rooted in involved in a common maritime adventure.”
Rhodian Law, which stated that “in order to lighten a ship,
merchandise has been thrown overboard; that which has While general average traces it origins back to ancient
been given for all should be replaced by the contribution maritime law, it still remains a part of admiralty law
of all.“ today .*
* Lowdnes & Rudolf’s 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 tenet of General Average is that a party who has Guarantees are usually only accepted from reputable
suffered some extraordinary expenditure or loss in order insurers with a strong financial backing. Where the
to save property belonging to others has the right of insurer does not meet the minimum financial strength
compensation for its loss from all parties to the voyage criteria, additional security may be required before
who have benefited from it (e.g. a merchant whose release of cargo.
cargo is jettisoned to save a voyage).
Therefore, cargo owners and their brokers, in the current
The claim is adjusted by an average adjuster who global financial climate, are advised to deal with a
calculates the value of each saved interest. Each respected marine insurer with a healthy solvency margin
interested party is then obliged to contribute towards the and a strong international credit rating.
general average loss or expenditure proportionately.
What types of marine casualties can
An important point is that the voyage must be saved for give rise to General Average?
General Average to apply.
The following are some examples of events and
The four essential prerequisites for a General expenditures that are likely to be involved in a General
Average declaration are: Average loss:
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
The term Salvage refers to the practice of rendering aid Consequently, under Admiralty Law, each party is liable
to a vessel in distress. Maritime law has long decreed that to contribute independently of the other parties, with the
third parties who freely participate in a successful salvage Salvor being entitled to proceed against each party of the
of life or property at sea without doing so under the property saved for which he has a separate lien.
terms of a contract are entitled to remuneration.
While Salvage Charges technically fall into a separate
Essentially, Salvage Charges apply in the event of a category than General Average, for simplicity they
successful salvage due to a voluntary act independent are usually treated as General Average expenditures.
of any contract. Conversely, under the Lloyd‘s Open Accordingly, the important aspects discussed under
Form, a standard legal document for a proposed marine General Average will equally apply to Salvage Charges.
salvage operation, under the heading‚ ‘No cure - No
pay,‘ if an attempted salvage has been unsuccessful, no How do marine cargo policies respond
award/compensation will be received for the effort or to General Average losses and Salvage
time spent if the salvage is unsuccessful.
Charges?
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 Exports on a Cost, Insurance and Freight (CIF)/
salvaged, pollution or damage to the environment has Carriage and Insurance Paid to (CIP) basis
been avoided or mitigated.
Clients with marine cargo insurance policies covering
Enforcement of Rights for Salvage exports sold on a CIF/CIP or similar basis can expect to be
Charges covered for General Average contributions under their
cargo policies. Institute Cargo Clauses (A), (B) and (C)
An important difference between Salvage Charges each provide protection for General Average and Salvage
and General Average is that with Salvage Charges the charges.
remuneration may not always be for the common good.
However, an important aspect of all of the Institute Cargo Thus, a claim filed under any form of marine cargo
Clauses is that they specifically exclude delay. policy the exporter held for security would be unlikely
to succeed unless the policy wording was very
Losses incurred merely due to delay in delivery are not carefully constructed to respond to such events.
commonly allowable expenditures for General Average
purposes under York-Antwerp Rules. The Maersk Tacoma incident off the Victoria coastline
in Australian waters in 2001 raised an interesting
Recommendation: Project owners should consider twist to the notion of buyer default when the vessel
buying additional insurance protection against any delay returned to the port of origin for the cargo to be
in start-up of a project attributable to delay in delivery of transhipped.
procurements critical to the project’s completion.
The cargo would not be transhipped without a General
Average security, which left some exporters in difficult
Exports on Cost & Freight (CFR), Free (or negotiations with buyers.
Freight) On Board (FOB) or similar terms
Imports purchased on CIF, CIP or similar
Clients exporting on a CFR, FOB or similar basis may have terms.
no claim for General Average and Salvage Charges.
Clients purchasing goods on CIF, CIP or similar terms
This is the case since the title to the goods would have where marine cargo insurance is arranged by the
transferred to the buyer, regardless of whether or not seller are in the hands of the supplier’s insurer.
they hold marine insurance covering exports due to lack
of insurable interest. While this should normally be a simple matter, delays
in providing the necessary paperwork and suitable
In practice, this should be of little or no consequence to guarantees can often occur at the point of discharge
the seller unless the buyer defaults in settlement. where the insurer is not represented in the country.
The risk of buyer default could significantly increase in Recommendation: In such cases, purchasers should
cases where the buyer holds no marine cargo insurance contact the nominated local claims settling agent to
and is unwilling to or cannot provide suitable General avoid an unnecessary delay in release of the cargo.
Average security for release of its cargo.
In such cases of default, the exporter would be unable to Imports purchased on CFR, FOB or similar
obtain release of the goods without providing proof of terms
the required General Average or Salvage security to the
shipowner. Clients holding a marine cargo insurance covering
imports can expect the policy to respond to any costs
In this scenario, the exporter would face an added related to General Average and Salvage Charges for
difficulty. Security might be required since the cargo cargoes purchased CFR/FOB or similar.
would likely be in a foreign country, although technically
the exporter would have no insurable interest in the Delay, however, remains as an exposure where clients
goods at the time of the event. 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 The very nature of many infrastructure and project cargo
excludes any loss caused by delay. Delay has traditionally risks means that the consequences of loss or damage
been viewed as a financial business risk beyond the to cargo can have a significant impact by delaying
scope of general insurance and thus, delay is a standard commencement of operations, most particularly in cases
exclusion in all Institute Cargo Clauses. where the cargo may be critical to the completion of a
project.
As many large scale infrastructure projects import
critical items in a modular form from other regions Impacts can include potential loss of revenue as the
to the project, project owners are faced by numerous result of incurring additional expenditure by extending
challenges involving the logistics. the start date of the project. Such losses and costs can be
and are regularly insured under a Marine Delay in Start-
In analyzing the cost-benefits of modular construction Up Insurance (DSU).
versus conventional ‘stick build’ construction, the
increased maritime risk is often overlooked. A crucial feature of a Marine DSU policy is that, like most
business interruption policies, insurers rarely offer any
Project owners and developers are wise to factor in this form of business interruption/DSU cover unless they
exposure when undertaking the ‘cost-benefit’ analysis. have control over the material damage loss that might
give rise to a claim.
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