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What Is a General Average?

Since insurance coverage is available for shipping, shippers today generally do not have to use the general average to compensate for lost cargo.
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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 17 August 2014
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    Conjecture Corporation
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A general average is a concept in maritime law. It recognizes the mutual risks taken on by people involved in an oceangoing venture. In the event that cargo must be jettisoned or part of the ship is damaged in an attempt to avoid a common peril, people with cargo that lands intact are required to pay restitution to the people who suffered a loss. This restitution is proportional to one's share in the voyage. Thanks to extensive insurance coverage available for shipping today, shippers may not be called upon to rely on the concept of a general average to provide compensation for lost cargo.

The origins of the general average are very old. People involved in a sea venture include the owners of the ship, the people paying for transport of cargo, and other people with financial interests in the voyage. Common perils can include things like fires on board and situations in which the ship is taking on water because it is riding too low. These perils could endanger the entire ship and cargo unless the crew on board take action.

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Cargo can be thrown overboard or damaged as the crew addresses the hazardous conditions, and the ship itself may be damaged as well in the process. This transfers the risk to cargo owned by specific people. These individuals won't be able to make a profit from the voyage because their cargo is no longer intact, but the sacrifice of their cargo ensures that the ship was saved and cargo belonging to others arrived safely. With a general average, people pay proportionally to the person who suffered a loss in order to provide compensation.

The person who experiences a loss also pays as part of the general average. If someone with a 10% share in a ship's financial interests loses cargo, that person will receive 90% of the value of the cargo from other people sharing in the general average. This keeps the policy fair. Everyone involved in the venture shares risk and can be assured that in the event of a problem, they will be compensated.

Without a general average, crew members might be forced to spend time determining the ownership and value of cargo and trying to select cargo of the least value to throw overboard or otherwise expose to danger. This would put the entire ship at risk, along with the crew members. Distributing risks allows crews to focus on doing their job of getting the ship safely into port.

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