It is a complex affair when looking to calculate General Average. It is an involved process that is done by marine insurance companies. These insurers must determine the aggregated worth of the individual losses, in whole or in part, to then divide fairly across the stakeholders. We shall demonstrate several major principles used by these insurers when making this complex calculation.
How to calculate general average in shipping with some examples
Principles used to calculate general average in shipping
The law of General Average is a maritime law were all stakeholders in a voyage are to proportionally share losses that result from an emergency where part of the vessel or cargo was sacrificed to save the vessel.
General Average comprises both General Average sacrifice and General Average expenditure. An example of General Average sacrifice is the discarding of freight in order to keep a vessel afloat. In the case of a fire, however, the costs of putting it out constitute General Average expenditure. Aggregation of outlay for both sacrifice and expenditure constitutes the General Average contribution that must be met by the vessel owner and freight stakeholders. In assessing the General Average contribution there are four main propositions.
Stage of journey
All goods and assets forming part of a maritime joint shipping venture are considered as covered by the General Average act. All such goods and assets are protected by the act. Each constitutes part of the General Average to the extent of its worth at the joint venture’s conclusion.
Freight offloaded before the incident, or loaded after it, is not considered part of the General Average. Consider, for instance, a fire starting while freight is being loaded. There would need to be a determination made of what freight was already in situ on the ship when the fire started. Sometimes General Average involves a ship being detained in port in order to make good any damage so it can then safely continue its journey. In this instance other freight going to the same destination, and on the ship when the damage was incurred, will not be included. This is because that particular freight is unaffected.
Value of goods
Basically, it is upon the value of the proprietor’s goods on completion of the venture that the value and General Average losses are determined. Under York-Antwerp Rules 1974, the value of goods is aggregated in accordance with their invoiced or consigned worth.
The value of goods is therefore calculated when the venture ends. This value could differ from when the General Average act occurred; however the setting of value on the basis of the invoiced or consigned worth makes the calculation expedient and robust.
Non-separation
A marine venture is generally deemed ended once freight has been landed at the destination port. Should the vessel need to finish its journey at a different port, then the venture ends at that time. Sometimes, due to an accident or fatality, all freight is sent on to the destination port from a different one, by use of another vessel. In such cases the values, unless a special agreement is in place, are taken from the point when the freight is removed from the original vessel. A ‘non-separation agreement’ is often used to indicate that General Average is to be considered as if there had been no forwarding. Non-separation agreements under discrete signature are usually included in the security documents for General Average .
Costs levied on goods following the General Average act (besides those permitted in General Average) need to be subtracted to calculate the contributory value. In this way each asset and/or goods proprietor puts in the correct amount. This will be in line with the real net value provided by subtracting all costs the proprietor has borne to gain that value.
Equality of contribution
It is essential there be contributory parity between the proprietor or goods sacrificed and that of goods/assets redeemed. This is done through increasing the contributory worth of cargo that has been damaged or destroyed by sacrifice to the extent permitted in General Average relative to that amount. The proprietor of goods offloaded would otherwise get monies from the General Average, indemnifying him for loss of goods he has neither been part of nor given to the General Average losses. The proprietor of goods/assets offloaded safe and sound from the same vessel would still need to put in his portion of the monies, even though he does have the goods and has received nothing from the General Average.
Principles for calculating general average in shipping
Calculate General Average example in shipping
How General Average is calculated when sacrifices of vessel and cargo are dealt with in York-Antwerp Rules 1974. The total quantum of expenses relating to the incident is allowed for in the General Average costs.
How to calculate General Average for fire on vessel
A large fire occurred on a vessel valued at $2,000,000 carrying $4,200,000 worth of cargo. The fire was so severe the vessel could not be repaired and had to be scrapped. Its salvage value is $250,000 (losing $1,750,000). The costs of extinguishing the fire and getting the vessel safely back to port cost $750,000. The fire destroyed $1,500,000 worth of cargo. The administrative costs to resolve the incident were $50,000.
Here is a summary of values:
- Vessel and cargo worth prior to the fire – $6,200,000
- Salvage and cargo worth after the fire – $2,950,000 (47.5% loss of voyage value)
- Resolving incident – $800,000 (12.9% of voyage value)
- Total losses – $3,750,000 (60.5% of voyage value)
A consignee that had $122,000 worth of cargo, of which $67,000 was destroyed by the fire, would get $67,000 in General Average proceeds. They would, however, be charged $73,810 (60.5% of value of goods prior to the fire) General Average costs.
Another consignee that had $33,000 worth of cargo but had none of it destroyed by the fire would not get any General Average proceeds and would be charged $19,965 in General Average costs.
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