DC Velocity - June 2016

was equivalent to 3 to 5 percent of the value of the cargo, but now we are seeing 7 to 10 percent as the norm,” mostly because today’s larger ships cost more to tow, unload, and repair, says Bridges. (See the sidebar for a hypothetical example of how a cargo owner’s share is calculated and some very costly real-life examples.)

To ensure that cargo owners pony up, the carrier places a lien on all shipments aboard the stricken vessel. The cargo cannot be picked up until whoever owns the risk at that point—the exporter or the importer, depending on the terms of sale—or that party’s insurer pays an estimated share of the expenses that are already known. Early on, that’s usually the cost of towing the ship, and possibly crew rescue and cargo handling expenses.

But there’s more to come, Bridges cautions. Cargo owners or their insurers must also post a bond to guarantee payment of additional charges that may be calculated after the cargo has been released. Examples might include ongoing costs like debris removal and environmental remediation. It can take a long time for the carrier to complete those activities and determine its final expenses, according to Bridges. Then it has to correctly apportion those costs among potentially hundreds of cargo owners—a monumental task he compares with handling a class-action lawsuit. “Some general average claims take up to seven years to complete, and three years is the norm,” he observes.

BE PREPARED

Although many aspects of general average are out of the cargo owner’s control, there are steps you can take to manage your costs and make sure your rights are protected.

One that may seem obvious but is often overlooked is to become thoroughly familiar with the terms of the carrier’s bill of lading, says Suzanne Richer, director, trade advisory practice at Amber Road, a provider of global trade management software and advisory services. “People forget that the bill of lading is a contract of carriage. The back of the bill of lading is loaded with restrictions favoring the carrier, yet few people read it,” she says. As a result, some shippers and consignees are not fully aware of their contractual obligations and may be unprepared for what’s coming.

Surprisingly, another often-overlooked protective measure is to educate yourself about what your insurance policy does and does not cover, Richer says. That’s because people frequently “set it and forget it” when it comes to cargo insurance.

Most policies, including “all risk” and less-inclusive ones,
provide coverage for expenses incurred as a result of a
no hurry to pay a general average claim. “In some cases, the
exporter may even decide to abandon the freight, leaving
the importer stuck,” Bridges says.

Be aware that there’s more at stake than just covering the cost of general average assessments. There’s also the physical loss or damage to the goods, and business costs associated with the delayed delivery and loss of the use of the cargo. Such unpredictable matters are excluded by most policies, but it’s possible to purchase additional coverage, Richer says.

Richer recommends carefully considering the legal liabilities and contractual obligations that may apply and quantifying the financial impact in light of the value of the cargo and business impacts. “With that information, you can make a decision about the best option: to pay this or reject the freight, and if I do that, what will be the repercussions?” She also suggests working with your insurance carrier to find out how often such incidents occur in the trade lanes your shipments frequently traverse, and whether it’s more economically advantageous to absorb a certain amount of loss.

Regardless of how well informed and prepared you might be, if you export or import a large volume of cargo on a regular basis, sooner or later a notice of general average is likely to arrive in the mail (or your inbox). Don’t let the notice sit around, advises Otenti. Alert your insurance carrier and transportation lawyer that you’ve received the notice and consult them right away about what to expect and the best way to proceed, she says.