LEENA MODY ASSOCIATES Average Adjusters Marine Claim Consultants

LEENA MODY & ASSOCIATES Average Adjusters & Marine Claim Consultants HDFC Ergo General Insurance Company Limited Webinar - General Average Demystified 22 nd May, 2020 Leena B Mody Fellow Member of Association of Average Adjusters, UK

Sea Transportation • Transportation by Sea is the largest carrier of freight throughout recorded history. • Today, around 90 percent of world trade is carried by the international shipping industry. • Tankers transport fluids, such as, crude oil, LPG, LNG, chemicals, vegetable oils, etc. and comprises one third of the world tonnage. • Construction of Mega vessels with capacity to carry huge amount of goods in thousands of shipping containers at competitive freight costs has led to enormous expansion of trade. LMA

Sea Perils Fire Collision Stranding Sinking LMA

Short story on GA Way, way back in ancient Greece, there was a man named Domestos who owned a boat. He would moor his boat on one of the Islands in Greece and carry barrels of wine from the owners of vineyards to the city of Rhodes. One day Domestos arrived at a very small port where he was met by three merchants each of whom wanted him to carry barrels of wine from outlaying island in Greece to the city of Rhodes. They paid him, the barrels were loaded and the boat sailed. LMA

Few hours later, the boat ran into a storm and Domestos / his crew feared that boat would capsize. They decided that the only way to survive was for the boat to be lightened to enable it to ride out the storm. Thus, ten barrels of wine were thrown overboard and by this act, the boat was able to ride the storm and complete its voyage to Rhodes. LMA

1 st Merchant with his 10 barrels Upon arrival at Rhodes, Domestos was met by three merchants who had purchased the wine from the owners of the vineyard. The first merchant received his ten barrels of wine, as did the second. 2 nd Merchant But for the third merchant there was with his 10 barrels 3 rd Merchant with no barrels nothing, for it was his wine which had been thrown overboard. A great argument started between the third merchant and Domestos. “What right did you have to throw it overboard”, “Why did you pick only my ten barrels and not someone else’s? ”, “What you have done has ruined me”. The other two merchants realized that this was not fair, for the barrels of wine had been sacrificed in order to save their wine and Domestos’ boat. It was Domestos who hit upon the idea that they should each contribute in the proportion to the value of the property that was saved. LMA

Accordingly, Domestos’ boat would contribute on 100, 000 drachma. which was her worth and the merchants all agreed that each barrel of wine was worth 1, 000 drachma and, therefore, 10 barrels contributed on 10, 000 drachma. Domestos arrived at calculation as under: Domestos’ Boat worth 100, 000 pays 8, 334 Merchant One - 10 barrels worth 10, 000 pays 833 Merchant Two - 10 barrels worth 10, 000 pays 833 Merchant Three - Nil barrels receives 10, 000 LMA

“Now hold on”, said one of the Merchants “although the other merchant whose barrels have been jettisoned will be paid 10, 000 drachma for his loss - the same value as my wine - after I have paid my contribution to his loss, I will only have 9, 167 drachma i. e. (10, 000 - 833), that cannot be fair”. “Quite right”, said Domestos, “we must all end up in the same position - it shouldn’t matter whose property has been sacrificed”. Accordingly, he redid the calculation as follows: Domestos’ Boat worth 100, 000 pays 7, 693 LMA

Principle in Rhodian Law “That if in order to lighten a ship merchandise has been thrown overboard that which has been given for all should be replaced by the contribution of all” LMA

Definition of GA “There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure” LMA

Essential Elements of GA • Common Maritime Adventure. • Common Safety. • Sacrifice or Expenditure must be Extraordinary. • Intentional and Reasonable. LMA

Distinction between GA & PA Particular Average is a loss, which takes place on the property of a particular party - ‘loss stays where it falls’. General Average is loss incurred for common safety or safe prosecution of voyage and does not fall on one particular party but, is contributed by / or apportioned between several parties / interests, such as ship, bunkers, cargo, freight, etc. PA loss is accidental in nature, whereas, GA loss is a loss deliberately or intentionally made. LMA

Damage done to ship and cargo due to fire is a PA loss, whereas, damage caused in extinguishing the fire is a GA loss. LMA

The efforts taken for extinguishing fire may be hiring firefighting tugs or it could be even scuttling or beaching the burning ship or breaking down of the cargo holds in order to reach the seat of fire. LMA

Hire of tugs for carrying out salvage operations or to pull a vessel off the ground, whether on daily hire basis or on LOF basis, are allowed in GA. Subsequent towage of the vessel to a port of refuge and expenses incurred for repairs necessary for safe prosecution of voyage is also GA. LMA

Accidental stranding or grounding of vessel with cargo onboard either due to heavy weather or negligence of crew or due to an error in navigation is a PA. Efforts taken to refloat the grounded vessel and her cargo is a GA. LMA

General Average Loss • General Average loss may be a GA Sacrifice and / or Expenditure. • General Average Sacrifice is the deliberate loss of property voluntarily made for the common safety of property involved in common maritime adventure. The value of any sacrifice of property leads to diminution in its arrived value at the destination. • General Average Expenses are incurred for common safety and to enable the ship and cargo to safely prosecute remaining voyage and involves monetary expense but not property. LMA

Example of How GA works? A loaded ship was hijacked in West Nigerian waters and the ransom amount demanded by pirates for release of the ship was negotiated at US$. 5 Million. The ransom amount was delivered and the ship was released. Following expenses were incurred to save the ship and her cargo: GA Expenses Ransom Lawyer’s Fees Amount ($) 5, 000 500, 000 Property saved Ship and Bunkers Freight Value ($) 10, 000 3, 000 Negotiation and Search Expenses 1, 000 Cargo Consignee 1 14, 000 Port of Refuge Charges 200, 000 Cargo Consignee 2 36, 000 Adjuster’s Fees 200, 000 Cargo Consignee 3 6, 000 Total 6, 900, 000 69, 000 LMA

As per the principle of general average, all the parties who benefit from the ransom amount paid by the shipowner should bear their proportion of loss. But then what is the basis on which each one would pay? Owners of cargo with less value should not pay the same amount as other cargo owners who had huge amount of cargo onboard. Costs incurred Ransom Lawyer’s Fees Negotiation & Search Expenses Amount ($) 5, 000 500, 000 Property saved Ship and bunkers Freight Value ($) GA loss 10% 10, 000 1, 000, 000 300, 000 1, 000 Cargo Consignee 1 14, 000 1, 400, 000 Port of Refuge Charges 200, 000 Cargo Consignee 2 36, 000 3, 600, 000 Adjuster’s Fees 200, 000 Cargo Consignee 3 6, 000 600, 000 69, 000 6, 900, 000 Total GA 6, 900, 000 Total Value Property of LMA

Steps to be taken to settle a GA loss • Identify a GA situation. • GA declared by the Master of the ship. • Notice to the cargo receivers. • Bill of lading and cargo manifest are provided to the GA Adjusters. • GA security documents given by the Adjusters to all interests involved. • Value of the property involved is determined. • General Average Loss / GA fund is estimated. • GA percentage to be contributed is quantified by the GA adjuster. • This percentage is applied to the GA loss to determine the amount of security deposit to be collected from each interest. LMA

Example of how the GA security amount is decided? Value of the vessel US$. 200, 000 Value of total cargo onboard 200, 000 Freight at risk 100, 000 Total Value of Property 500, 000 • It is determined that cargo valued at US$. 5, 000 was jettisoned. • None of the jettisoned cargo belonged to Shipper ‘A’ whose cargo was valued at US$. 10, 000. • ‘A’ will contribute in GA at 1/100 th or 1% of value of his cargo. • ‘A’ will give GA security deposit of US$. 100, 000. LMA

Process of GA Security Collection • Shipowners have a possessory lien on the cargo for GA contribution and cargo is not delivered until security in lieu of contribution is provided. • Collection of GA security by GA Adjuster. • GA Bond or Agreement, Valuation Form and Invoice to be submitted by the cargo receiver. • GA Guarantee is given by the cargo underwriters or GA cash deposit by cargo receivers, if cargo is uninsured. • Counter Guarantee to be given by the cargo assured to his insurer before a guarantee can be issued by them. • Non-Separation Agreement from cargo interests in case of transshipment / forwarding of cargo. LMA

Role of GA Adjusters • On receipt of security, GA Adjusters issue release orders for cargo to be delivered at destination port. • Appointment of GA surveyor who acts ‘in general interest’. • GA is adjusted at a place and as per provisions of YAR incorporated in the freight contract. • Assessment of Contributory Values and Apportionment of GA loss. • GA Adjustment prepared recommending GA loss / contribution payable / receivable by various parties and their underwriters. • Settlement of GA loss between parties and discharge of lien. LMA

Contributory Values Contribution to GA is on the actual net values of the property at the termination of adventure or on arrival at destination. ‘Amount made good’ towards GA sacrifice is added to this value. • Ship contributes on her value on completion of discharge at the final port of destination. Cost of repairing any damage carried out subsequent to the GA act is deducted and ‘made good’ in GA is added. • Cargo contributes on value as per commercial invoice or the shipped value. The value includes the cost of insurance and freight. • Freight contributes on the basis of gross freight at risk, less ‘contingent expenses’ i. e. expenses incurred subsequent to a GA act. LMA

Example of Apportionment of GA • Value of Vessel in sound condition at destination was $. 4, 000, loaded cargo of iron ore valued at $. 1, 000. • Prior to reaching destination, ship ran aground and cargo worth $. 200, 000 was jettisoned to lighten the vessel before refloating. • Ship was successfully refloated but was damaged in refloating operations. • Vessel safely completed her voyage to destination and carried out repairs. Cost of repairing grounding damage - $. 100, 000 whereas, cost of repairing refloating damage - $. 400, 000. • Total GA Cargo jettisoned Cost of repairing refloating damage Total $. 200, 000 $. 400, 000 $. 600, 000 LMA

Calculation of CV & Apportionment of GA Particulars Ship: Value in sound condition Less: Cost of repairing PA & GA sacrificial damage. Vessel’s arrived value Add: Cost of repairing GA sacrificial damage C/V $. G. A. Contribution 4, 000 500, 000 $. 3, 500, 000 400, 000 $. 3, 900, 000 $. 477, 551 Cargo: CIF value $. 1, 000 Less: Value of cargo jettisoned 200, 000 Arrived value of cargo $. 800, 000 Add: Amount made good in G. A. LMA

GA & Marine Insurance Act, 1906 • Section 66(6) as well as Institute Hull & Cargo Clauses provide that GA loss / contribution are recoverable only if incurred to avoid, or in connection with avoidance of a peril insured against. • Section 66(4) - assured entitled to recover 100% of GA sacrificial damage directly and immediately from the insurer. GA sacrifice is not subject to underinsurance. • Where the assured has incurred a GA expenditure, he may recover from the insurer in respect of the proportion of loss which falls upon him which is further reduced for underinsurance. • Section 66(3) provides that where there is a GA loss, the party on whom it falls is entitled to a rateable contribution from the other parties interested. LMA

GA & York-Antwerp Rules • York Antwerp Rules derived its name from conferences in York (1868) and Antwerp (1877) which served as a vehicle for international unification in treatment of General Average. • Under the custodianship of CMI, these Rules are periodically revised to conform to the changing needs of trade and commerce. • GA clause in contract of affreightment invariably provides for the adjustment of General Average in accordance with YAR. • YAR were last revised in 2016, which consists of: Rule of Interpretation Rule Paramount Lettered Rules (A to G) Numbered Rules (I to XXIII) LMA

GA & York-Antwerp Rules • Rule of Interpretation provides that the Rules will apply to the exclusion of any law or practice inconsistent therewith. • Numbered Rules take precedence over the Lettered Rules. • Rule Paramount takes precedence over both, Numbered as well as Lettered Rules. • Rule Paramount excludes allowances for sacrifices or expenditure unless they were reasonably made or incurred. LMA

GA Due to Fault • GA arising due to fault of the shipowner where negligence, unseaworthiness or deviation are involved. • GA situation may also be due to fault of one of the cargo interest e. g. mis-declaration of cargo leading to fire. • Where GA act arises from fault of one of the parties to the adventure, and that fault is not excused by the contract of carriage, the guilty party cannot claim in GA for any loss he sustains, though there may be adjustment drawn for the purpose of contribution between innocent parties. LMA

Thank You!! Leena Mody & Associates 301 Megor Arcade, Plot No. 15, M. G. Road, Opp. Satyam Shopping Complex, Ghatkopar (E), Mumbai 400 077 (India) Email: leena@leenamody. com Tel: +91 (022) 2506 5090 URL: www. leenamody. com