General Average in marine insurance is a fundamental principle that protects all parties involved in a sea voyage. When a ship, cargo, or freight faces a common peril, and the crew voluntarily sacrifices part of the cargo or incurs expenses to save the rest, the resulting loss is shared by everyone with a financial interest in the voyage.
Indian businesses involved in import or export need to understand how the General Average works because it directly impacts their financial liability. Let us explain the basics of General Average, its relevance, and its practical application in marine insurance.
What is the General Average Clause in Marine Insurance?
General average is a legal principle that applies when a deliberate sacrifice or expense is made to protect a ship and its cargo from a common danger at sea. The loss or cost is shared by all parties with a financial interest in the voyage, not just the party whose property was sacrificed.
In India, the Marine Insurance Act, 1963, recognises the principle of the general average. Indian courts generally follow the York-Antwerp Rules, just like many international jurisdictions. This rule ensures that everyone on board contributes fairly when someone takes action to save the entire venture.
Marine insurance policies usually cover the insured party’s contribution towards a general average loss.
When Does the General Average in Marine Insurance Apply?
Not every loss or expense at sea qualifies as a general average. For a loss to be declared as general average, certain conditions must be met:
- There must be a real and immediate danger threatening the entire venture.
- The sacrifice or expense must be voluntary and reasonable.
- The sacrifice must successfully contribute to saving the ship or cargo.
- The voyage must continue after the peril has passed.
If these conditions are satisfied, the ship’s captain can declare a General Average. After that, an average adjuster calculates each party’s contribution based on the declared values.
Importance of Freight Insurance and General Average
A freight insurance policy covers the loss of freight revenue during a marine journey. This type of policy protects the financial interests of the cargo owner or shipping company. If the goods are lost or damaged before reaching the destination, freight insurance pays for the lost freight charges.
Businesses in India that ship goods by sea may choose freight insurance for added security. It ensures that shipping companies do not suffer financially if the goods are not delivered safely.
Indian exporters and importers must consider both freight insurance and general average clauses when buying marine insurance. These coverages protect businesses from unexpected financial losses during transit. Insurers like TATA AIG offer marine insurance solutions that help safeguard your shipments and revenue.
What Happens When the General Average is Declared?
- Declaration by the Shipowner: The ship’s captain or owner declares a general average after taking emergency actions to save the ship and cargo.
- Appointment of an Average Adjuster: The shipowner appoints a professional known as an average adjuster to handle the process. The adjuster follows international York-Antwerp Rules for a fair and transparent process.
- Collection of Evidence: The adjuster gathers all documents, including cargo values, bills of lading, and details of the incident.
- Calculation of Contributions: The adjuster calculates how much each party must contribute based on their cargo’s declared value.
- Issuance of General Average Guarantee: Cargo owners may be asked to submit a deposit or a general average guarantee before goods are released.
- Claim Settlement Through Insurance: If the shipment is covered under marine insurance, it takes care of the cargo owner’s share.
Why Should Indian Businesses Consider the General Average Clause?
If your company imports or exports goods by sea, you face the risk of the general average whenever your cargo is on board a ship. The general average can delay cargo delivery and lead to unexpected expenses. Without marine insurance, you may have to pay a significant amount before your goods are released at the port.
For businesses, this can cause cash flow issues and disrupt operations. Having proper marine and freight insurance ensures your interests are protected, and your cargo is released without hassles.
Indian businesses shipping goods abroad should stay aware of their rights and responsibilities under these rules. Even a small mistake, like undervaluing your cargo, can increase your financial liability if a general average is declared. Always declare correct values and keep your insurance policies up to date.
Conclusion
General average is a unique but essential concept in the world of marine insurance. It promotes fairness by ensuring that losses from sacrifices made for the common good are shared among all interested parties. Indian businesses should never underestimate its importance, especially when shipping goods overseas.
With the right marine and freight insurance in place, you can secure your business from unexpected costs and delays. By staying informed and properly insured, you can trade confidently and focus on growing your business, knowing that your interests are well-protected.