Transportation & Logistics Analysis

Marine insurance: pay attention to general average

February 17 2020

Focussing excessively on freight rates sometimes distracts attention from subsidiary parts of shippers' maritime transport budgets like transport insurance. It is an area which should not be neglected, however, if one wants to avoid rude awakenings.

Let's start this quick tour of transport insurance in the maritime sector with Incoterms® , the new 10-year edition of which came out in the autumn. French exporters who have minimal control over their export flows via "CIF named port of destination" need to consider the kind of cargo insurance they have for the main shipping segment of the transport chain. Too many shippers still neglect the scope and level of responsibility they incur via this type of exportation because they are convinced that their suppliers, direct and direct (freight forwarders and/or shipping companies), are insuring their merchandise for them.

Protecting oneself against third party risks

The Incoterm® CIF provides for the merchandise to have at least " FPA Unless" (Free of Particular Average Unless) cover for the maritime segment, which is taken out by the seller for the benefit of the buyer. This cover, which is not expensive, is roughly equivalent to civil liability motor insurance cover. It does not, however, provide for any reimbursement of the total value of the merchandise; it protects rather against exposure to risks in relation to third parties.

The paradox is that the third party representing the greatest risk in the operation is the shipping company itself. Under the secular principles of general average and solidarity between a ship and the merchandise aboard it under bill of lading, the shipper and the company agree to temporarily and proportionately share a "maritime venture". This major commitment is recorded by the issue of the bill of lading.

Financial solidarity with the shipping company

These very particular provisions are related to the hostility and natural unpredictability of the marine environment. The cargo party must agree to be called to the rescue financially in cases of general average so as to help the company to restore its vessel to the state of navigability it was in prior to declaration of the casualty.

In practical terms, in cases of general average and in the absence of cargo insurance, the shipping company has the right to seek compensation directly from the party responsible for the cargo under the terms of the commercial contract (buyer or seller depending on the Incoterm® designating the sale). For example, ONE has recently declared General Average following an engine room fire

This compensation or contribution to repair costs, can be 100 or 500 times greater than the cost of the merchandise which the shipper has already lost…When tender calls are issued periodically, if sales are proposed under Incoterms® C and D, always check who is subscribing the transport insurance. Some people have made surprising discoveries…

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
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