More than 190 maritime incidents were reported in the six months from January to June 2014, ranging from the grounding of cargo ships, collisions at sea and in port, water ingress, engine failure through to suspected piracy - with the crew, ships and cargo reported missing for months on end. These perils represented significant financial losses tocargo owners without the requisite marine insurance to protect their financial interests in their cargo, and in particular, for general average losses. 

 

“Many importers and exporters run the gauntlet of not insuring their cargo in a bid to save on costs, the reality is that goods in transit are highly susceptible to damage by fire or storm, theft, jettison or mishandling.  Cargo insurance is an essential means to guard against serious financial loss, and in particular as the application of general average losses grows and become more commonplace,” explains Jeffry Butt, Marine Manager at Aon South Africa. 

A General Average occurs when a voluntary sacrifice is made to safeguard the vessel, cargo and / or crew from a common peril for example, jettison of cargo to lighten a vessel in order to get to the closest port to prevent a ship from sinking and even piracy.  If the sacrifice is successful, all parties contribute to the loss based on a percentage share that their cargo value bears to the full value of loss suffered, with the maximum contribution not exceeding the full value of their cargo.

 

“Let’s take an example of cargo being jettisoned to prevent a ship from sinking. When general average loss occurs, the owner of the vessel will arrange for an average adjuster to assist with the evaluations of the cargo on board, the value of the vessel as well as potential consequential risk to lives and the environment. The average adjuster will then provide each cargo owner with an average guarantee or bond to be signed and returned. This confirms the commitment from each cargo owner that they accept responsibility to pay their proportionate share of the collective cost of the cargo that was sacrificed to save the ship and all the goods and cargo still on board.  General average only applies in the case of a successful sacrifice,” explains Jeffry.  

 

There have been instances of General Average where the proportionate share each cargo owner had to pay was equal to 60% of the value of their cargo on board the affected vessel, however, it has become more common that open ended average guarantees are required to be signed and returned to average adjusters. For example, if a particularcargo owner had cargo to the value of R10million on board the affected vessel, his contribution will be R6million up to R10million. For any business without adequate marine insurance cover in place, this kind of exposure can be potentially devastating. 

 

If the cargo is not insured, the cargo will not be released until the cargo owner posts a guarantee in the form of a cash deposit, bank guarantee or bond. If the cargo is insured, the insurance company will post the General Average Bond and Guarantee to meet the cargo owner’s contribution and facilitate release of the cargo.

“Consequential losses and trade disruptions are also a huge risk factor. Salvage operations can take weeks and even months, leaving companies without their cargo and no sales activity. In the case of piracy, ships and cargo can be held for months on end before any ransom negotiations even begin. This leaves business massively exposed to profit loss risks if they are not insured properly,” explains Jeffry. 

 

Given the quantum of risks that can befall valuable cargo while in transit, is essential for all ship and cargo owners to make sure that they have spoken to a specialist advisor who understands the full set of risks facing a marine business in order to provide a comprehensive risk assessment. “This will assist not only in identifying what type of cover is best-suited for the business but will also save the company from suffering significant potential losses, especially in the event of a sacrifice being made and a general average being declared,” concludes Jeffry.