General Average: What It Is and How To Calculate It

General Average: What It Is and How to Calculate?

There have been several maritime accidents in the past years. Even if your cargo is not affected, you still have to bear a portion of the cost, which is known as General Average (GA). The reason for this is that all parties involved share the risk and cost in the event of an accident.

For those who are not familiar with shipping terms, this can seem unfair. “I didn’t throw the container into the sea. Why should I lose money?” Well, there is something called “General Average”.

This post focuses on the following aspects of GA:

• What is the General Average in Shipping?
• What will happen when the General average is declared?
• General average calculation with example
• Difference between General Average and Particular Average

What is the General Average in Shipping?

Let us know the partial first, partial loss is when part of the insured cargo is damaged or lost. There are two types of partial loss: general average and particular average.

General average (GA) is when the ship, freight, cargo, or additional expenses are deliberately sacrificed to rescue a ship and its cargo from danger or for the common safety of the adventure, under a peril of the sea or other hazards.

This is based on a relationship between the ship-owner and all the shippers who have cargo aboard the same vessel on a particular voyage. All parties are bound together in the “adventure”.

When the whole ship is threatened by a peril of the sea or other hazards, part of the cargo or vessel has to be sacrificed and an act of general average is declared. According to marine law, those whose property has been saved must contribute proportionally to cover the losses of those whose property has been deliberately sacrificed.

The idea of general average liability is to spread the losses suffered by some parties among all parties to the voyage. For instance, if a vessel is in danger of sinking in a storm or collision, some of the cargo may have to be thrown out of the vessel. This is called jettison and is a typical circumstance of general average!

Only if the following conditions are met can GA be declared:

• The general average is caused only by risks such as typhoons, tsunamis, stranding, and collisions that pose a threat to both the ship and the cargo.
• The general average act must be intentional and reasonable. For example, if a ship encounters heavy winds and needs to reduce its load, then the captain’s order to throw heavy and low-value goods (such as wood and scrap iron) into the sea is both intentional and reasonable.
• The general average act must also be effective. If the act (such as discarding cargo) does not protect the ship from danger, it does not qualify as a GA.

What will happen when the General average is declared?

General average liability spreads losses suffered by some parties amongst all parties to the voyage.

• For example, when a vessel is in danger of sinking or collision, some cargo may be thrown overboard (jettison) as a typical circumstance of general average.

A partial loss can be treated as general average if the following conditions are met:

• The danger that threatens the common safety of cargo and/or vessel must be materially existent and unforeseen. A loss due to the master’s wrong judgment or a sacrifice from common accidents that can be foreseen is not considered general average.

The measures taken by the master must aim to remove the common danger of both vessel and cargo, and must be undertaken deliberately and reasonably for common safety.

• If a measure is undertaken only for the interest of part of the cargo or the vessel, the loss is not considered general average.
• If the vessel deviates from its shipping route to repair its refrigeration facilities, the costs incurred due to deviation are not considered general average.

The sacrifice must be specialized and not caused by direct perils, and the expense incurred must be additional expense not within the operating budget.

• Only the surplus part that is out of the operating budget is counted as general average.

The actions of the ship’s master must be successful in saving the voyage.

• If the measures taken by the master fail to save the property, there would be no forthcoming contributions as nobody has benefited from the general average act.

When there is a loss that affects all parties, the party that suffers the loss has the right to receive a proportionate contribution from the other parties involved. This contribution is known as a General Average Contribution (GA contribution), and it is subject to the conditions established by maritime law.

If the goods are damaged prior to being loaded onto the vessel at Ningbo Port, the seller is responsible for compensating the buyer.

General average calculation with example

First, calculate the total general average loss. This is done by adding the cost of sacrifices and extraordinary expenses defined as general average. The resulting amount will be the object of general average contribution.

Total GA Loss =the sum of sacrifice + the extraordinary expenses

GA example:

A cargo ship (valued at $4 million) carrying goods (valued at $8 million) from Ningbo Port to Los Angeles Port suffered a fire during shipping. The fire spread to the ship’s cabin, so the captain ordered seawater to put out the fire for the common safety. This measure was effective.

Although this action resulted in a loss of cargo valued at $2 million, most of the goods were safe. In addition, because the main engine was damaged and unable to continue sailing, the captain hired a tugboat to tow it back to the nearest port for repair, and then returned to Los Angeles port.

In this case, the total amount of GA includes the following two aspects.

• GA sacrifice: cargo loss $2 million; ship loss $1 million.
• GA expenditure: towing charges $10,000; careenage $0.5 million.

Note that there is no “freight collect” involved in the accounting of freight for this event. Moreover, GA expenditure includes additional fuel costs, GA interest, and fees paid to the average adjusters. Even though these costs exist, they are too small and will be ignored for the purpose of this document.

GA loss rate = Total GA Loss / Total GA Contributory Value = ($2 + $1 + $0.01 + $0.5) / ($4+$8) = 29.25%

GA Contributory of Party = Contributory Party * GA Contribution Rate

• For example, if an importer has goods valued at $0.5 million, he needs to bear the GA cost of $146,250 ($0.5 million * 29.25%).

Difference between General Average and Particular Average

The main differences between GA and PA are as follows:

Different Causes

General average (GA) is caused by artificial and reasonable measures to remove risks. Particular average (PA) is the loss of goods directly caused by maritime risks. For example, if a container is blown into the sea by a strong wind, which is a force majeure factor, it belongs to PA.

Different Stakeholders

If the owner of damaged goods does not purchase cargo insurance, they will bear the loss of particular average (PA). However, the loss of general average (GA) shall be shared by all cargo owners on board in proportion.

Different losses

PA refers only to the loss of the ship or cargo, while GA includes the loss of the ship or cargo and the costs incurred as a result.

If you require assistance with marine insurance for your sea freight, it is best to work with an experienced freight forwarder. We work with cooperative forwarders who have marine insurance partners and can handle complex situations such as general average.

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