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Blog | | by R. Langemeyer

The Risk of General Average

An article by Jörn Groninger, Partner at Groninger Welke Janssen

General average is a system of compensation based on solidarity and way older than any kind of insurance.

If a ship and her cargo face a situation of common danger, sacrifices made or expenditure to save the imperiled property must be borne by the owners of all property, regardless who incurred the expense in the first place. Contributions are calculated pro rata to the salved values that arrived at the end of the voyage. The calculations are made (in accordance with the „York-Antwerp Rules“, an international set of rules established by the Comité Maritime International) by specialists called average adjusters. In Germany, these experts must pass a difficult examination before being publicly appointed and sworn in by the Chamber of Commerce. The partners of Groninger Welke Janssen in Bremen are such „sworn average adjusters“.

The above description of general average appears to be simple plain. But one problem can be seen already which can cause enormous difficulty for a shipowner, particularly in today’s harsh economic environment: one of the parties has to disburse monies for the general average community. In most cases this will be the shipowner as he is the only one who knows about the problems that the vessel is facing and which measures ought to be taken to resolve the dangerous situation. By way of example, if the ship’s main engine has broken down at sea and the crew is unable to fix the problem by own means a salvage tug has to be sent out to tow the laden vessel into a port of refuge. There, repairs can be effected and the cargo voyage completed afterwards. Depending on the type of contract, in most cases the shipowner who has ordered the tug will be the one who has to pay for its services. Such a salvage award, or tug hire, can easily cost hundreds of thousands of Dollars or Euros.

When requested the vessel’s Hull & Machinery underwriters will usually effect a payment on account. But according to most H&M policy conditions their liability is restricted to the ship’s rateable share of the amount paid for the salvage of ship and cargo. Vessel values are low nowadays while cargo values have kept rising; thus, the proportion that can be quickly recovered from H&M underwriters can be pretty small while the shipowner has to disburse the biggest part of the salvage – if he can. After almost ten years of shipping crisis most companies’ reserves stand at or close to zero and bankers are unwilling to grant additional credit. If worst comes worst the towage cannot be paid for. Was it then wrong for the ship’s manager to contract the tug at all? Was it a criminal offence to do so because the respective payment obligation might drive the shipowning company into insolvency?

To avoid this kind of dilemma, Hansekuranz together with experts of Munich Re, the average adjusters Jörn Groninger and Dirk Janssen, and other experts developed „Cargo Contribution Protect“, short „CCP“. If a general average situation arises, Groninger Welke Janssen (as the insurer’s named loss adjusters) review at short notice the circumstances and the nature and quantum of cost incurred. They further estimate the values of ship and cargo and calculate the proportion of general average expenses falling on other property than the ship. Based on their cursory report the insurer remits, within few days, the required funds into a trust account of Groninger Welke Janssen who can then either reimburse the insured shipowner or pay directly to the tugowner.

Of course, the cover provided by CCP is not restricted to salvage expenses. Other potentially high general average expenditure may, e.g., include:

  • port charges, pier dues and bunker consumptions in a port of refuge during the period needed for repairing damage to the ship;
  • the cost of pumping out and disposing extinguishing water following a fire on board; or
  • (in certain circumstances) the discharge, storage and reloading of cargo in the port of refuge or the hire for a replacement vessel.

Also for this kind of expenses the non-ship’s proportions can be paid from the funds made available under the CCP cover.

Last summer this new insurance product was tested in practice. In the first ever case about USD 250,000 could be paid to the salvor within eight days after Groninger Welke Janssen’s report to the CCP underwriter – to the utter satisfaction of both the salvor and the shipowner. And because the quick availability of funds had been clearly communicated from the very beginning, all parties were able to fully concentrate on the solution of more important, practical problems in order to get the vessel back on track as soon as possible. And the shipowners don’t need to spend additional energy on calming down their bankers while waiting for completion of the general average adjustment and payment of the contributions due from cargo interests…

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