Explanatory notes

Background

General Average (GA) is an internationally accepted principle of equity relating to the apportionment of loss due to losses sustained for the common safety during a maritime adventure – basically, a voluntary sacrifice of part of the cargo or ship undertaken to save the rest of the cargo and ship in an emergency. The system dates back to antiquity and is most commonly regulated by the incorporation of the York-Antwerp Rules into contracts of carriage. The concept has, in recent years, been questioned, primarily by cargo insurance underwriters.

However, following an intensive review conducted by the CMI (Comité Maritime International), as custodians of the York-Antwerp Rules, new provisions were agreed and adopted in 2016. BIMCO subsequently endorsed the York-Antwerp Rules (YAR) 2016 and agreed that they should be recommended for inclusion in all new and revised charter parties, bills of lading and waybills.

Nevertheless, while BIMCO fully supports the system and its preservation, at the same time a GA declaration will not always be the appropriate response to an incident. According to circumstances, and usually for financial and administrative convenience, a shipowner may not wish to claim contributions from other parties but recover instead under a hull insurance policy. The mechanism for this type of recovery is usually referred to as an “absorption clause”.

A GA absorption clause is a provision inserted into a hull insurance policy. The clause requires the underwriters to “absorb”, up to an agreed amount, a claim in GA that the insured shipowner has against another party, most commonly cargo interests. Such clauses are frequently found in hull policies in a wide variety of forms, some better worded than others. At present, absorption clauses are widely used by shipowners, especially those involved in the container sector, to avoid the adjustment of small, and therefore uneconomic, general average claims often involving hundreds, and sometimes thousands, of contributing parties. One of the disadvantages to shipowners of declaring GA where multiple cargo interests are involved is the high risk of delay at the discharge port because GA security must be in place prior to the delivery of cargo.

It is generally acknowledged that small GA claims are uneconomic because of the amount of work involved in collecting security and settling the contributions due under the adjustment. Collecting security from all contributing interests and subsequent settlement is an extremely time-consuming business for average adjusters and could account for up to 50 per cent of GA costs. This work and the consequential cost thereof is the same irrespective of the amounts allowable in GA. It has been estimated that an absorption limit of 3 per cent of the insured value of the vessel would eliminate one-third of GA claims. A limit of 6 per cent of the insured value of the vessel would reduce the number of GA claims by half.

The BIMCO Standard General Average Absorption Clause

Insurance underwriters and average adjusters have acknowledged that an acceptable standard absorption clause helps to promote a broad move away from declaring GA for small and uneconomic claims in all sectors of the industry. To fulfil this objective in 2002 BIMCO, working closely with insurance underwriters, average adjusters, shipowners and the P&I clubs, drafted a Standard General Average Absorption Clause to be incorporated into shipowners’ hull and machinery policies.  The clause was intended for use in policies covering all types of vessels from container ships, bulk carriers and tankers to cruise ships.  It was designed to benefit shipowners and insurers by avoiding the time and expense associated with pursuing modest GA claims.

Technical amendments were made in 2017 to bring the clause into line with the York-Antwerp Rules 2016. The provision has now been further amended to streamline the basis for determining insurers’ upper limit for paying general average, salvage and special charges. The previous option for agreeing a percentage of the insured value of the vessel has been deleted in favour of parties agreeing a stated figure which should not be less than USD250,000 (increased from the original USD150,000 to reflect the rise in ship values since the clause was first issued in 2002).

Owners operating a number of ships are likely to agree per vessel absorption limits in the marine insurance policy. While the “single vessel” approach in the clause might be seen as detracting from its wider use, the position can easily be addressed by parties agreeing an amendment to Clause 1 to list all vessels covered and the absorption limit for each one.

The clause has been reissued as the BIMCO Standard General Average Absorption Clause 2018.

Triggering the Clause

The BIMCO Standard General Average Absorption Clause 2018 is triggered if a shipowner decides not to claim general average, salvage or special charges from cargo, freight, bunkers, containers or any property not owned by the shipowner for an amount up to and including the limit agreed under the clause. If the total of the general average losses exceeds this limit, the policy pays up to the limit but the shipowner cannot recover any excess. It is important to note that, unlike some absorption clauses currently in use, the decision to trigger the BIMCO Standard General Average Absorption Clause rests with the shipowner. However, it should be noted that the shipowner is not required to make any formal “election” of a claim under the clause by giving notice; the clause is given effect under the insurance policy by the simple fact that the shipowner has not claimed GA contributions from other parties. This mechanism avoids any question of whether, why and when the “election” could or should have been made.

Threshold and Upper Limit

The upper monetary limit which the insurers will pay in respect of GA, salvage and special charges is left to the parties to decide on a case by case basis, determined by the size or value of the vessel. To avoid small or low value vessels defeating the objective of the clause a threshold figure of USD 250,000 has been incorporated. It is considered that most general average acts below this figure would cost a disproportionately large amount to adjust. Although this figure should accommodate the majority of vessels, it is given primarily for guidance and the parties can, if necessary, adjust the threshold figure in accordance with their specific needs.

Scope of the Clause

The scope of the clause expressly covers not only cargo but also freight, bunkers’ and containers’ proportion of general average and salvage. In particular cases, containers and bunkers can account for a very high proportion of the contributory values. Consequently, it was considered important not to have to value any of the potentially contributing interests.

The reference to salvage has been included to make it clear that it is payable under the clause. Strictly speaking, however, the reference is not necessary as salvage is brought within general average by Rule VI (Salvage Remuneration) of the York-Antwerp Rules 2016, which are incorporated into the Absorption Clause by subclause 1.3.

Special Charges

The term “special charges” in the first sentence of the opening paragraph is taken from Rule XXII of the York-Antwerp Rules 2016. It should be noted that “special charges” referred to in the clause are included to avoid having to collect security for a shipowner to recover them in cases, for instance, where the charges are substantial or no general average losses are incurred.

Sacrifice

The clause deliberately omits any specific reference to sacrifices. This has been done for the sake of conciseness because to refer to sacrifices would have required specifying all other allowances referred to in the York-Antwerp Rules, thus making the clause long and complex.

Fees and Expenses

Sub-clause 1.1 requires the insurer to pay the reasonable fees and expenses of the average adjuster for calculating claims under the clause in addition to any payment made where the general average losses amount to or exceed the specified limit.

Double Claims

Sub-clause 1.2 places an obligation on the shipowner, once he has triggered the Absorption Clause, not to make any duplicate claim for general average, salvage or special charges from those interests whose contribution he has already claimed reimbursement for from his insurers.

Interest

Claims under the Absorption Clause expressly exclude the payment of interest (subclause 1.3). This is in keeping with common commercial insurance practice in respect of absorption clauses. (Note: the 2002 Clause also excluded the payment of commission under Rule XX. However, the York-Antwerp Rules 2016 do not provide for payment of commission and the express exclusionary reference has been deleted.)

The York-Antwerp Rules 2016

For the avoidance of doubt as to which elements are included or excluded from the Absorption Clause, subclause 1.3 expressly states that claims under the clause are to be adjusted in accordance with the York-Antwerp Rules 2016. The only applicable exception to the York-Antwerp Rules is the exclusion, as noted above, of interest under Rule XXI (Interest on Losses Allowed in General Average).

It should also be noted that the 2016 Rules apply in relation to settlement under the Absorption Clause irrespective of any other general average provision (such as YAR 1974, 1994 or 2004), in a contract of carriage applying to the voyage in question.

Deductible

As explained in the introduction, one of the key objectives of the Standard General Average Absorption Clause is to eliminate uneconomic general average claims. In this connection, subclause 1.4 expressly states that claims under the Absorption Clause are payable without application of the shipowners’ deductible. If the deductible were to apply, a shipowner whose deductible exceeded the agreed limit in the Absorption Clause could be expected to declare general average in order to recover a substantial proportion of the claimed amount from cargo and other interests (although the level of the deductible would preclude any payment from underwriters). This would defeat the objective of the clause. Accordingly, it has been agreed that the Absorption Clause should be free of the deductible to eliminate, so far as possible, small GA claims.

Waiver of Defences

Sub-clause 1.5 requires the insurers to waive any defences to payment under the clause that would have been available to cargo and other potential contributory parties. Recognising that this is a broad waiver, the subclause also expressly states that the insurers may still avail themselves of the defences they have under the insurance policy in the event of a breach of the policy by the assured shipowner.

Waiver of Subrogation

Subclause 1.6 deals only with subrogation made under the Absorption Clause on payment of a claim by the insurers. Where the fault can be attributed to one of the contributing parties, for example the cargo interests, then by virtue of the second sentence of subclause 1.6 the insurers maintain their right of recourse against that party.

Contributory Value

The final provision of the Absorption Clause (subclause 1.7) deals with under-insurance and states that, for the clause to be given full effect, the vessel is deemed insured for its full contributory value for the purposes of general average. This avoids the cost of requiring the adjuster to obtain ship values to determine if the vessel is fully insured.