What does general average mean?

01 April 2019

What does general average mean In this regular feature we take a look at common clauses found in Energy Insurance that are often not well understood and try to look at what their intentions are, and what they cover or exclude. In this article we look at ‘General Average’.

Marine Energy policies including those covering mobile offshore drilling fleets and offshore construction projects will often include the phrase ‘General Average’ but what does this mean?

First we need to look at what ‘Average’ means in a marine insurance policy. Average is the marine insurance term for a loss (this is where the term Average Adjuster comes from which is another term often used in marine insurance for a Loss Adjuster).

In this context Average should not be confused with its meaning in non-marine insurance policies. In non-marine policies Average is where the loss is reduced if the amount insured is less than the full replacement value of a property (in marine insurance this is called ‘under insurance’ or ‘co-insurance’ by the Insured).

Average under a marine insurance policy can be ‘Particular’ or ‘General’. Particular average is the partial loss of the subject matter insured (as defined in the Marine Insurance Act 1906 section 64) that is not a ‘General Average’ loss (sometimes a policy that covers only the total loss of the subject matter may be referred to as ‘free of particular average’).

General Average is a ‘rule of the sea’ incorporated into contracts of carriage whereby all parties to an adventure who benefit from the sacrifice or expenditure must contribute to make good the amount sacrificed or the expenditure incurred. Section 66 of the Marine Insurance Act 1906 defines as “where any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in the time of peril for the purposes of preserving the property imperilled in the common adventure.”

An example of a General Average act is where a cargo carrying ship in peril jettisons some of its cargo overboard to save the vessel.

The cargo insurers will pay the loss to the cargo owner and claims General Average form the ship-owner and any other cargo owners whose cargo was not lost. The General Average contributions are in simple terms proportionate to the Insured value of the preserved interest but will typically be adjusted under York/Antwerp Rules and most polices will accept such adjustments.

For a General Average to apply all of the following must occur:

  • The whole adventure must be in peril
  • The peril must be factual and imminent
  • The act must be intentional and voluntary
  • The act must be reasonable and prudent
  • The sacrifice or expenditure must be extraordinary in nature

A General Average Guarantee or Average Bond is often issued by a consignee of goods (or by his insurer) to a marine carrier (who is responsible to arrange General Average adjustment and collect contributions from preserved cargo interests, and has a lien on the goods until the General Average Contribution is paid) to release goods prior to the General Average adjustment being made.

General Average only applies to maritime adventures so it can not arise in connection with goods in transit overland.

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If you would like to talk about any of the issues raised in this article, please contact John Cooper, Managing Director -Technical on +44 (0)203 394 0464.