IUMI Conference, Singapore, 12 16 September 2004

Legal and Liability Open Forum, afternoon of Tuesday 14 September 2004

General Average - the figures and their relation to the debate on reform

A Introduction

What is the purpose of general average? Many of us have had to learn the definitions in the Marine
Insurance Act or the very similar wording found in the York Antwerp Rules, but apart from setting
the scene they dont tell us why we have general average for some claims and not for others. How
does it function and why? Those are the questions that statistics can shed some light on. The reason
it is helpful to look at the figures behind general average is that it shows what is happening. There is
no need to handle complicated calculations or concepts to be able to see how the system works.
From this it is possible to deduce why it is used, and why some people find it useful while others
protest about unfairness.

In the first instance I want to go through the background to GA as we find it today, highlighting one
or two of the typical stances found among those involved in the arguments for and against change.
Although it means that we hold off for the moment from looking at the actual statistics, it is worth
doing so to focus on the aspects we have to look at. Afterwards I shall return to the same issues, but
talk about what is actually revealed by an analysis of GA in statistical terms.

I apologize if some of you know only too well the contents of this initial section, but it seems useful
to set out the problems as simply and in as simple language as possible so that we can appreciate the
context of the arguments. I am sorry, too, if in some areas there may be a little duplication today
with my colleagues on the platform, but it is important to set out several aspects of GA in the
context of the statistical data.

I have spoken about GA statistics at IUMI before. This is not, though, simply a repeat of previous
data. The core figures have been kept more or less up to date, and I have recently added a
substantial number of new and recent cases to ensure I am not looking at out-of date information.

General versus particular average

How does a general average arise? In about a third of serious accidents or incidents involving
ships, somebody has to take action to prevent things from getting worse. That is, in two thirds of
cases an accident happens and there is either no opportunity or need to do anything other than carry
out repairs when the ship or cargo can be conveniently repaired, or to replace something which is
damaged beyond repair.

In the other third an incident builds up in severity and continues to escalate, posing a threat to the
property and life involved. Unless someone takes preventative action much more damage will be
caused, and perhaps lives could be lost as well. A ship loses power after the engine room is flooded
in rough seas: if she does not call for help from salvors, she could drift on to the rocks. As well as
the damage to the engine that has already taken place, the ship could become a total loss, the cargo
likewise and the crew drowned.
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Thus in two thirds of the cases, the loss happens, and there is little or nothing more to do about it.
We customarily treat this kind of loss as particular or private to the person who has suffered the loss
it has happened, it is too late to do anything about it, and so we leave the loss where it has fallen.
This is classic particular average.

In the other third of cases, by contrast, there is a strong likelihood that in addition to the loss that
may already have happened, there will be more financial loss incurred. Either property not yet
damaged or lost will have to be sacrificed (for example, by damaging the keel while refloating), or
money must be spent to get out of trouble (for example, by getting help from a salvor). This is
typical general average general because the average (from the Italian avaria, or loss) must be
shared with others since it is to help the entire adventure.

How do we know the proportions are about one third to two thirds? Since the current GA debate
took off in 1991 I have been looking at overall details of casualty reports and classifying them. This
part of the analysis is only rough science what is a serious casualty after all, and more particularly
how do you judge it from the sketchy details that appear in casualty reports in the media?

Nevertheless, here we are talking about a reasonable rule of thumb. Common sense tells us that the
same is not true of minor incidents. Many ships continue sailing in perfect safety for many years
after minor accidents, and perhaps we as insurers only become involved when there is a claim for
unrepaired damage. At the same time, simply because emergency action is necessary we do not
automatically find a GA as the result. Again, though, this picture provides us with the context in
which we can see GA at work. It also tells us that there is no reason why GA claims should fade
away because of a change in the nature of casualties. Any change will either be as a result of
expense and administrative burden or from deliberate action on someones part to alter the status
quo. Latest analysis confirms earlier findings that the one-third to two-thirds split continues
unchanged.

Reimbursement - general average or other claim?

While the ship is facing peril, the master and crew (and nowadays the owner/manager, at the other
end of a satellite phone link) have choices to make. Do they abandon ship, do they call salvors or
fire crew, and whatever they do, how is it going to be paid for? The textbook answer would be that
thanks to the general average system, the ship can press ahead with taking action to save the ship
without worrying about cost implications, because the costs can be shared out after the event in
proportion to the values at risk. This could be very important for the cargo the ship itself may not
be worth saving in relation to the cost, so why should the shipowner pay for a rescue effort when it
is cargo that derives the real benefit? Here is a key argument used by the defenders of GA, and it
has much merit. If the cargo benefits most because it is the most expensive part of the equation,
then it is only fair that it should pay most.

The textbook answer is, however, far from being the only way of looking at it. Originally there was
no marine insurance instead, GA involved as a kind of retroactive insurance system to spread
losses among the interests directly involved in the adventure. It was an ad hoc arrangement, which
used our common fund concept among the only people likely to want to participate in it those who
had actually been at risk from the storm, pirate attack, grounding or other emergency. As the idea of
taking out insurance before sailing spread, and the common fund became a fund with participation
by an entire shipping and trading community, so we might suppose that the need for a smaller fund
confined to the ship which had suffered the casualty or near-casualty would disappear. Why have a

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small fund, when all the parties were likely to have their own insurance which would cover them
completely when the loss was particular and not general?

But we know that it didnt disappear, and indeed is still here today, many hundreds of years after
marine insurance markets became established across Europe.

Reducing accumulation and shifting the burden

It seems that one or more additional functions of the GA must still have had some use perhaps its
action in reducing the concentration of loss. In the days before reinsurance the comparatively high
values found in shipping posed a real threat to anyone, assured or insurer, if a serious loss occurred,
and the advantage of GA was that it cut the accumulation before it even reached the insurer.
Moreover, insurers saw themselves as indemnifying their assured for his loss and were unwilling to
expand their payment if there was a chance that part of it could be channelled to someone else.

Today we have some enormous combined values for hull and cargo with the current generation of
large container ships, and the potential for still further accumulations as the size of those currently
planned and in the shipyard continues to grow must give us pause for thought. The latest specialist
tankers are another example. Nevertheless in most cases combined values are easily absorbed by
most medium-sized insurers, and it is questionable to use accumulation as a justification for the use
of GA as a whole. The values at stake do not really stand comparison with large risks in aviation
and non-marine business.

Another aspect of the same reasoning could be found among shipowners if they could reduce their
claim on insurers, there was a chance that their renewal premium might be lower. Even though they
would recover losses from the original incident either way through cargos GA contribution or
their hull insurers increased claim payment the cost implications for future insurance premiums
meant that they would favour the retention of GA.

Regardless of these issues, the master, being free to take action without fear of the financial
consequences, is able to do whatever he thinks appropriate in the circumstances. He may be an old
hand at dealing with losses to his companys best advantage and it is clear from the data we have
collected that some are. However, in general he will simply be looking for the best and safest
outcome for the ship, its cargo, and most importantly, its crew. Any thought of how to deal with a
resulting claim will be a long way down his list of priorities.

Initiating and controlling the GA

Even though the ship is in peril, and fulfils all the requirements for a general average, it is far from
certain that it will be treated in that way. Whether it is will depend on many different factors, not
least the financial outcome. However, what we may be reasonably sure about is that it is the ship
interests who are in a position to declare GA rather than cargo. They will naturally consider their
own circumstances when deciding how to treat the loss to absorb it themselves, treat it as sue and
labour (recovering it under the hull policy), handle it simply as a salvage (if and LOF or similar is
involved) and absorb other costs while allowing cargo to pay whatever the salvage award
establishes as cargos share, or to declare GA. We must remember that GA is not an automatic
solution, but the result of a deliberate choice and a choice that takes financial consequences into
account. Notably, choice of GA may allow wider recovery, e.g. of crew wages.

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When I was doing research for this project, I asked a lawyer friend from New York if he were aware
of any case where interests other than hull had declared GA. Off he went to dig in the legal records
and ask his colleagues. He came back with the answer that he had found one single case since the
war where cargo interests or rather their insurers had banded together to force a declaration of
GA, and had had to go to court to get it enforced. I am sure that there are more cases, and that some
of them may not even get to court, but the matter is clear in practice cargo is not in a position to
get a GA declared. While cargo interests are often entirely ignorant of the existence of GA, their
insurers are not and could do so if they wished. It is surely significant that they dont.

I am not implying that there is anything wrong that it is always hull interests who declare GA,
merely that we should remember it and recognize the implications. Perhaps I should also say at this
point that while some of the things I say here appear to be in favour of cargo interests, my own
stance is neutral. I currently spend rather more time working with ship interests than cargo and have
long served both parts of the market equally.

The result of declaring a GA is that rather more of the loss is likely to be passed on to other interests
primarily cargo, but also including containers, barges, charterers bunkers and freight than
would otherwise have been the case. In other words, there has been a transfer of loss from one party
to another. It is not of course certain that the ship always benefits, for in some cases there may have
been a major cargo loss which is spread in the other direction, but as a rule we can see that the ship
is likely to finish as the beneficiary. How much of the loss remains with the different types of
interest is one of the aspects of GA which statistics can illuminate. In the past, anecdotal evidence
allowed all sides of the argument (and there are more than two!) to support their own case.

Delayed settlement

GA claims can take a long time to prepare. They rely on coordinating information from many
sources and it is not surprising that they take so much time. To be fair, they also have to wait until
other complex issues such as salvage remuneration and collision liability are resolved, matters
which can take years to finish. GA is often criticized as lengthening the typical tail of both hull and
cargo underwriters.

Blame game
The sore point among the supporters of reform or abolition of GA was always associated with fault.
Why, they argued, should cargo have to bear a share of the cost of saving the adventure when in so
many cases the incident could be attributed to poor maintenance or poor navigation? I might
express it in this way: the idea that a GA is simply an equitable distribution of the costs and
expenses necessary to save the ship and its cargo is fine when we look at the moment when the
emergency arises. On the other hand, if we go back to five minutes before the emergency we may
see an accident waiting to happen, and from that point of view it is unfair to pass the cap round to
get other people to contribute to the inevitable result of negligence. Here, too, analysis of data
allows us to form an opinion of whether it is fair to point the finger of blame at the ship.

At the same time, their opponents argued that fault was irrelevant. This is a more serious argument
than might appear at first case. While fault has become more important during the twentieth century
as a means of apportioning blame and damages after the event, it is by no means a one-way street.
We have also seen the growth of strict liability as a way of meting out rough but simple and
expedient justice. While the liability may have shifted from the person suffering loss to the person
deemed to be responsible, it is still allocated without reference to fault on the basis of cutting
through the arguments and concentrating on paying the victim. Moving back to GA, what could be

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wrong with leaving the cargo with a proportion of loss that would anyway be carried by its insurer?
Moreover, many cargo owners would deliberately choose lower freight rates on older, less well-
maintained ships in order to save on carriage costs, so to that extent they were in a sense complicit
in the outcome of poor maintenance. Like many of the arguments in the GA debate, this ran two
ways since often there would be no choice in the quality of vessel chosen, or the cargo owner was
so far removed from the point of choice that he could have no influence on it.

The same argument has not reared its head to the same extent in salvage, where it seems to be more
accepted that paying the salvor as a third party is irrelevant to questions of fault. Perhaps it is
because cargo is directly involved with the salvor that the shipowners fault is put to one side, and
then probably dropped because of the exemptions in the contract of carriage.

Fault has been an argument from the beginning of the modern GA debate in the 1860s. A clause to
address the point was first produced for an Antwerp conference back in 1903, leading in turn to the
predecessor of the modern Rule D of the York Antwerp Rules being introduced in 1924. Its practical
effect is to set aside fault as a reason to change the application of GA. This negligence in navigating
the ship would not be a reason for cargo to decline to pay its part of a grounding GA.

There is one crucial exception, however, which would have significant consequences if the
Hamburg Rules were ever adopted more widely, or if the current CMI/UNCITRAL draft
replacement convention ever joined it on the worlds statute books. That exception means that if the
GA arose through an actionable fault of the shipowner which could lead to recovery by cargo of any
resultant losses, then rather than cargo having to pay its GA share and then being able to get it back
from the ship under an existing legal regime there would be no GA in the first place.

Under the Hague and Hague Visby regimes, the ship escapes liability for faulty management or
navigation, so any emergency arising as a result of such failures may still be treated as a GA. On the
other hand, with no such exoneration under Hamburg, and very possibly the same situation under
the CMI/UNCITRAL draft, there would be no possibility of recovery under GA for any such
emergency. We shall see the implications of this later.

Shipping quality

Some casualties and emergencies are inevitable. However new or well maintained the ship, however
alert the crew, there will always be some problems which cannot be avoided. Severe weather,
careless navigation by other ships and poor work standards from dockside labour may all contribute
without any fault on the part of the ship suffering the GA.

However, general casualty records tell us that the older the ship the more frequent the accidents.
Older ships, then, have more accidents and at the same time have lower values. Thus cargo on board
old ships not only has a greater chance of being involved in an accident, but when that accident
involves a GA it is likely to have to pay a higher proportion of the loss.

Summary

Let me summarize the issues from the above description of GA.

We are interested in how the burden of GA payments is spread between the parties. Who benefits as
a result?

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Why do GAs arise in the first place?

Are there common characteristics shared by the ships which suffer these casualties?

What role does fault play?

How long do GAs take to handle?

Does GA achieve any significant reduction for underwriters of reducing accumulation of loss?

Are there any changes in the current state of GA as compared with during the time the original
study was compiled?

What are the financial implications of the changes?

B The figures

General average as revealed by an analysis of cases

The original studies for IUMI were founded on a large number of individual cases. I obtained
summary data for about 1700 incidents, which I compiled largely from the monthly sheets which
Lloyds used to publish. In most of those cases I did not see the actual adjustments but was able to
work with ship details, details of adjustment times, claims percentage in relation to total values at
risk (that is, contributory values) and a range of other fields. I then worked much more closely with
the actual adjustments I had obtained in about 500 cases. Recently, as part of IUMIs ongoing work
on GA, I have obtained approaching a hundred cases by which I mean adjustments with the
primary intention of checking the current picture against the past. My own view was that there
would be little if any change, because the previous study was made with cases spanning many years
and yet not varying significantly from each other. Moreover, in working with straightforward
casualty data we can see great similarities from one year to the next. Even if there has been a slow
downwards trend in serious casualties over the past ten years or so, most features remain much the
same and against this background it would be surprising to see GA change in a different manner.

If we were to expect any changes in the pattern of GA claims from the period of the original study
until the present, it might be expected to be in the proportion allocated for payment by hull interests.
As hull values rise and fall with the cycles in the freight and sale and purchase markets, so we might
expect to see the proportion of GA claims taken by hull to increase and decrease correspondingly,
changing the share of cargo.

Another possibility is to see change as a result of the recent spectacular growth in container
shipping. The earlier data covered a period during which container ships began as a tiny minority
but grew steadily to form a significant part of the world fleet. However, since the mid-90s we have
seen an explosion both in the numbers of container ships and in their size, with ever-larger ships
and even larger ones still planned. Two things could affect our data here. Firstly we could expect to
see a rise in cargo proportions of GA claims, as even the largest ships are lower in value than the
container cargoes they carry. Secondly, we could see a reduction in smaller GA container cases
since only the largest losses would exceed the GA thresholds in the absorption clauses carried by
the major container lines. These clauses are designed to reduce the nuisance of GA claims to cargo
interests. Cargo owners, of course, are potentially repeat customers of the same container line

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holding up their cargo shipments with an unwelcome demand for security and the accompanying
flurry of paperwork.

There is some evidence of both of these influences in the cases I have considered, though
unfortunately the picture is not cut and dried. There are other factors at work which mask their
effect. For example, there is a much steeper decline in hull values as a result of ships ageing than as
a result of ups and downs in the freight market. Without many more cases than are currently
available we simply do not yet have enough raw data to give us conclusive answers. I am
continuing to work on building up the records, and expect to be able to provide more certain
information in future.

At this point I should like to thank profusely those among you whose offices provided additional
cases. I appreciate how long it takes to extract and copy the material, so I am well aware of the
burden it has imposed on you. Unfortunately a few provided summary data only, which I simply
could not use as it cannot be integrated into the other figures. To those I would ask if you could
supply the cases behind your headlines. As always, it will be kept completely confidential. No
individual cases are ever disclosed so there is absolutely no breach of confidence with your
customers.

The picture today

One thing of concern to us is whether the number of general average cases is rising or falling.
Because the number of cases I have received for the present update is still limited compared with
the previous trawl, it is not possible to shed any light from those I have received whether there is
any significant change in total numbers. However, as far as is possible to tell from the cases coming
from some of the smaller markets, which I can at least compare with the numbers I received in the
1990s, I see no reason to assume that there has been a great decline worldwide. What is perhaps
clearer is that the instances of GA in the major traditional markets seem to have declined somewhat.
With fewer players, but also with less centralization in handling of GA claims, it is more difficult to
gather information about GA cases simply because that information is more dispersed than in the
past. However, I also know that the system is alive and well in its effect on some of the smaller
developing markets. As the balance of world trade shifts and the Asia-Pacific region plays an ever
larger role in world trade, so I believe there are now more cases to be found in this area while the
proportion taken by the rest of the world declines.

There does at least seem to be a reduction in the number of very small GA claims. In earlier years,
some GAs were so small it was impossible to see any justification for producing them the smallest
being just under $4,000, with several more (2% of the total) under $10,000. The minimum in the
current samples has risen to $17,500, hardly a realistic figure itself but at least showing some
progress. 25% of them are below $100,000, and thus below what we might expect as a typical
absorption clause level. What is more surprising is that only one of these cases relates to an incident
with total contributory values of under half a million dollars. In that case, the $99,000 GA
represents almost a quarter (24.8%) of total contributory values, so in terms of scale the treatment as
a GA is reasonable. In the other cases only one comes in at around 5% of contributory values, while
the others are 2% or lower. Given that one of the prime purposes of retaining GA could be the
spreading of large losses between several interests, these cases then fail to serve that purpose.

On the other hand, it could be that such cases fall below the hull policy main deductible itself and
the owner is simply looking to recover whatever he can, even though in over half of them (as is
more likely with small GAs) hull bears the major share.

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The second quartile of the sample ranges from $100,000 to $200,000, the third from $200,000 to
$730,000 while the fourth extends up to $5.6m. There have been several higher GAs in the past few
years, particularly as a result of some large container ship casualties, but none are as yet included in
the IUMI figures.

The following table shows how size of GA claims in USD has changed since 1986.

Table 1 size of claims in USD

Year band mean lower quartile median upper quartile

1986 to 1990 510,000 70,000 210,000 560,000
1991 to 1995 600,000 75,000 220,000 600,000
1996 to 2003 710,000 100,000 200,000 730,000

It is interesting to note how the mean continues to rise while the median remains at around the same
level. (I do not think we need read anything significant into the small drop in the latest figures, since
they are from a somewhat smaller sample and are within a reasonable margin of error.)

There are not yet enough cases to be able to segregate these claims according to the type of trade.
However, it is surely significant that while the two largest claims are container casualties, within the
top five we also have two tankers and a dry bulk shipment. All the smallest cases since 1996 are
general cargo or bulk shipments except for one case involving a surprisingly large container ship.
Overall there are relatively few container cases (8%) but the claims involved are far more
significant (32% of the total). This excludes ships classed as general cargo multi-purpose vessels
with containers on board at the time of loss.

The following table shows the distribution of claims in the most recent claims between ship types
by number of cases and amount involved. By and large we may set aside the effect of tonnage
these GAs include small container ships, bulkers and tankers, so we cannot account for differences
through tonnage alone.

Table 2 Claims by type of ship in recent GA cases numbers v amount

Ship type by number by amount of claim

Bulk 32% 32%
Container 8% 33%
General cargo 48% 16%
Tank 8% 16%
Other 4% 3%
Total 100% 100%

General Average as a means of redistributing loss

As well as looking at GA through the actual values adjusted and transferred between participants,
we can also examine claims as a percentage of total values at risk. In absolute terms small claims
remain small and appear an inefficient means of processing the loss. Relatively, however, there
might be an argument that could be raised that the small claim was not so small when compared
with the total value of the cargo and hull interests at risk from the incident.

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Here there appears to be a slight shift towards higher percentages of contributory values. Perhaps
this is the result of the wider application of absorption clauses. The decline in GAs of under 1% of
total contributory values is certainly marked. The chart accompanying the presentation shows a
lower quartile figure of 0.5%; this is because the cases used to compile it are drawn from the wider
study on 1700 adjustments, which span a longer period than the 500 used to draw up the figures
below.

Table 3 Size of GA relative to total contributory values

Year band lower quartile median upper quartile GAs below 1% of

contrib. values
1986 to 1990 0.9% 2.4% 8.0% 30%
1991 to 1995 1.1% 2.6% 9.1% 23%
1996 to 2003 1.5% 3.8% 11.8% 13%

While there is clear progress is this area, it is still difficult to argue that a general average claim
within the lowest quartile offers any material protection to any participant in the process.

Proportion of claims allocated to different interests

Probably the key single aspect of our research is to discover how much the various parties are liable
for in GA as a whole. This may not help participants in individual cases, but it tells us where the
true burden of payment lies. As before, we find that the majority of loss is passed to cargo interests.
The proportion is about one-third hull to two-thirds cargo The results vary more widely than most
aspects of GA because of the disproportionate impact of the relatively few large cases. With every
batch of GAs come a few which are so large that they cannot help dominating the overall results.
Even screening out top and bottom values and using other techniques, it remains a problem and
makes it more difficult to assess the true result of ship values changing in response to cycles in the
freight market.

As a whole, however, this is not a serious problem. The proportions for cargo to hull vary over the
years, but apparently within a range of 60-40 to 70-30,emphsizing that there is indeed a constant
transfer from cargo to hull through the GA payments system. This compares with about 16% of all
amounts claimed in GA being attributable to cargo sacrifice and expense. The combined total of
freight and time charterers bunkers, the other two main categories of contributing interest, amounts
to well under 1%. (Containers are included in cargo values for the purposes of this summary.)
In the latest figures the hull proportion has risen slightly but not to any significant degree.

Table 4 proportion of GA payable by different interests (percentage)

Interest Hull cargo bunkers, freight

Original study (total 39.2 60.6 0.2
for all years)
Recent cases 41.0 58.8 0.2

Share of total 44.5 55.3 0.2

contributory values
(all cases)

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Older ships tend to reduce in value usually in absolute terms, but even when the freight market is
rising their relative price is still lower than for the same type of ship at a younger age. This is well
known, but what is perhaps less well appreciated is the corollary for GA. With more casualties
involving older ships, it is not surprising that hull contributory values are usually lower than those
for cargo. Within container trades, however, the high values carried on the latest ships mean that
unless they are voyaging without a full cargo the hull value is lower on new ships as well.

Age and other characteristics

Age is not automatically a confirmation of shipping quality, but it is an indicator. Combined with
other factors such as flag and class it is a very good indicator. Because of the large number of flags
we would need much bigger samples to be able to differentiate accurately between GAs to ships of
different flags, but if you want to know which flags are predominant you can look at the target lists
for port state control authorities.

The same applies to class. I am still surprised how many adjustment I have seen involving ships
classed by Hellenic Register, which does not after all have an enormous number of ships compared
with the major societies.

At the same time, it is not only the usual suspects who are prominent in GA. There seems to be a
tradition among some nationalities of ownership whose coastal and smaller international tonnage
still flagged to the home nation have more frequent recourse to GA than the norm.

We should, however, remember that GA is not the exclusive preserve of the second-rate ship, over-
represented though it is. Ships from the best flags and the best-run lines are still subject to the same
hazards that beset all shipping. And they account for some of the largest and costliest GA claims.
Perhaps we could see this as a sign that there may indeed be a valid role for GA, despite the
cynicism which can be engendered through all the GAs that were obviously waiting to happen as a
result of poor seamanship or lack of maintenance.

The relationship of GA to age is more or less the same as for particular average, as is to be
expected. It does not compare with total loss, a casualty suffered mainly by the oldest ships.

There are a significant number of GAs in the first couple of years after ships have been delivered,
presumably as teething problems are sorted out. This tails off until after the first special survey.
Then, at six years old, there is a sharp increase in the frequency of claims which continues to grow
until eight. This may be as much attributable to the first great change of ownership as to the
cumulative effect of several years wind and weather. It is around this time that many ships are sold
on to new owners, often with fewer resources to maintain and staff them as well as before. Losses
then remain static until a second upsurge at around 12, and a third jump follows at 16 years old.
From about 21 years onwards cases decline, though not as fast as the number of ships still in service
declines. The proportion of GAs occurring to ships over 20 in comparison with those in younger
age groups remains significant, though with relatively few old ships afloat there are not many GAs
occurring at any single year of age above the mid twenties. Also interesting is the fact that many of
them contribute on their scrap values. This presumably allows the owner to retire his ship gracefully
while collecting as much as possible from his last cargo.

The following table shows how the incidence of GA increases with the age of the ship. There are
too few cases in the current batch to produce an accurate spread and allow a meaningful comparison

10
with the main study. As more are added a detailed comparison will become possible, but for the
moment there is nothing to indicate that there has been any material change. The findings of the
1996 study are summarized in groups of five-year age bands.

Table 5 Age and GA casualties

Age band Percentage of ships

within age band
0 to 4 8.5
5 to 9 23.1
10 to 14 26.7
15 to 19 24.6
20 to 24 12.7
25 to 29 2.3
30 plus 2.1

Cause of GA

The cause of any given GA could be taken back a long way before the development of the actual
incident for example, the loading of contaminated bunker fuel several days before an engine
failure requiring a general average act. However, for the purpose of this study it is the event which
begins the sequence directly leading to the GA which is taken as the cause. Typically, this means
that a loss of engine power leading to a grounding would be classed as an engine failure even
though the GA act itself was to refloat the ship. A collision resulting in a fire would be classed as a
collision even though the main effort under GA was to extinguish the fire. It is also possible to
analyze the data from the point of view of the actual type of loss (i.e. grounding and fire) to study
more closely the expected financial impact of such losses.

The analysis has followed that used in the previous studies:

Engine failure (i.e. failure of the source of propulsion)
Mechanical failure (comprising failure of the systems used to propel and steer the ship rather than
of the source of propulsion)
Engine fire (often difficult to distinguish from engine failure, but may have vastly different financial
consequences)
Other fire (normally fire in the hold, but may also include fire in other areas such as
accommodation)
Collision (with another vessel)
Contact (with a fixed or floating object, mainly fixed as in ports, bridges or energy installations)
Grounding (where the result of navigational error or unexpectedly strong current or fog)
Other navigational difficulties (chiefly fouling of propellers by outside agency such as nets or
cables)
Weather (including ice)

Different types of loss follow very different patterns, and their composition demonstrates that
clearly. The differing ingredients are shown in table 6 below.

Engine failures are more frequent but less costly than other types of GA. Many engine failures are
likely to display very inadequate maintenance, and as a result are more often challenged by cargo
interests despite the small sums that may be involved. They are often accompanied by large PA

11
claims for repair of the machinery whose breakdown led to the GA. What is classed as mechanical
failure here is similar, but with more likelihood of salvage or other external assistance being sought
as the vessel is more likely to be not under control. They are also more concentrated among older
ships.

When engine failure turns into a fire, it is comparatively rare but potentially much more serious.
Most serious of all are the fires that have started in the hold, and collisions that lead directly to fire.

The new cases examined for this report show exactly the same distribution between types of loss as
in the original study, so the table gives the original data.

Table 6 Cause of GA by numbers and amount of loss

Cause of GA Number of Cost of

losses (%) losses (%)
Engine failure 30 8
Mechanical failure 6 4
Other navigational difficulties 3 2
Weather 12 8
Grounding 24 29
Contact 3 2
Collision 8 22
Fire (engine & hold) 13 25
Total 100 100

The ingredients of a GA claim

In the 1996 study losses were analyzed to produce a chart of the ingredients that go towards making
up a complete GA claim.

The table below repeats this data and shows how the current figures are virtually unchanged. It also
gives a breakdown between the different types of loss as found in the 1996 study.

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Table 7 composition of GA claims (percentage of total claims)

1996 2004 1996 study

all All collision contact engine fire Grounding mechanic weather
GAs GAs al (incl.
ice)
Adjusting 10.9 11.5 9.5 15.2 13.8 13.5 9.9 13.5 9.5
expenses

Commission & 11.1 11.3 13.2 9.4 9.8 12.7 9.6 9.7 11.3
interest
Wages & 4.2 4.3 2.0 6.6 15.2 2.5 1.9 8.4 5.5
maintenance
Fuel & 1.2 1.1 0.7 2.0 5.5 0.7 0.5 1.1 1.6
stores
Salvage 40.0 40.3 52.3 47.7 40.8 11.7 51.7 30.2 25.3

Ship sacrifice 12.0 11.4 5.0 7.0 8.4 11.8 15.9 22.1 13.3

Survey 1.2 1.1 1.4 0.5 0.4 2.6 3.3 0.3 1.5

Port of refuge 3.3 3.6 1.9 3.5 6.0 1.6 2.5 7.2 5.9
expenses
Cargo sacrifice 8.4 7.9 8.5 1.9 0.0 36.8 0.1 0.0 2.8

Cargo expenses 7.8 7.5 5.5 6.3 0.0 5.9 7.4 7.3 23.3

Total 100 100 100 100 100 100 100 100 100

The table is perhaps not so easy to grasp on its own, but pie charts within the visual presentation
should display the position more clearly.

Although the table gives percentages to one decimal point, this does not mean that small differences
between columns particularly between the 1996 and 2004 totals are of any real significance. For
example, it would be dangerous to attribute the 0.2% increase in the share of interest within the
commission and interest category to the longer period of interest in the 1994 Rules, since individual
cases can vary so much. (Over half of the new sample are perhaps surprisingly settled under the
1994 Rules, with a few awkward cases settled under both the 1974 and 1994 Rules.)

Instead, we should simply recognize them as good indicators that the make-up of a general average
claim has not changed substantially.

In 1996 it was possible to analyze different types of loss and point to clear differences between
them. Unfortunately there are not yet enough cases to perform the same exercise for the new
sample, though individual breakdowns have been calculated for most claims and so far they fall
well within the patterns found in the earlier study. In broad terms, cargo expense and sacrifice only
occurs to a significant degree if there has been a fire or collision with fire following, while salvage
(including both lump-sum/hire treatment and no cure no pay) amounts are at their highest in a
grounding. These are hardly surprising findings!

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The question of fault

It is often possible to have a reasonable idea of the factors which have led to the need to declare
general average. A few adjustments remain as silent as possible on the issue, but most contain
enough information on the cause of the casualty for us to work out whether negligence is a factor.
Apart from data about the parts to be repaired or a description of the manner of grounding, there is
often an explicit statement about negligence. Indeed, the adjustment may serve both for the GA
claim and the accompanying hull PA claim, where crew negligence becomes the reason for insurers
to accept liability. As the table below shows, the position has not changed in the latest sample
compared with the original study.

Table 8 Degree of fault in general average (as % of all cases)

Category of fault 1996 study current batch

associated with GA
latent defect 1 0
port workers 1 3
repairer's negligence 1 3
fault absent 5 7
fault likely 26 15
fault acknowledged 52 59
lack of due diligence 14 12
total 100 100

It appears that if maritime trade moves to adopt a Hamburg-type approach to carriage of goods,
with no exemptions for fault in management or navigation, a large number of cases currently treated
as GA would become ineligible for such treatment.

It is worth commenting on the inclusion of lack of due diligence as a factor leading to GA.
Technically the GA should be invalid, but in practice claims continue to be made and often escape
challenge. This may be caused by misunderstanding on the part of the insurers claims adjuster, or
by a belief that the contribution at issue is too small to fight over.

More worrying is the practice of some average adjusters to send extracts of adjustments which
conveniently omit significant details about the casualty. I have been lucky enough to receive some
full adjustments and the corresponding extracts from different sources. The is no way of telling
from the extract what is obvious after reading just a few pages of the adjustment itself. The only
answer is to insist on the full adjustment and then, if that too skimps on detail, to ask for further
information. The extra time involved for the insurer is minimal but may pay real dividends in
screening out unjustifiable claims.

Time taken to adjust GA claims

From the evidence of the latest sample the time taken to adjust claims has improved somewhat.

The following table compares the time taken to complete adjustments in the original study (1996
version) with the present batch. Figures are shown as percentages of the total.

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Table 9 preparation times for GA number of cases

Time taken 1996 study 1996 current batch current batch

cumulative cumulative
Under one year 25.7 25.7 32.1 32.7
< 2 years 39.1 64.9 34.0 66.0
< 3 years 18.1 82.9 22.6 88.7
< 4 years 8.7 91.6 3.8 92.5
< 5 years 3.7 95.3 5.7 98.1
< 6 years 2.0 97.3 0 98.1
< 7 years 1.2 98.5 1.9 100
Over 7 years 1.5 100 0 100

As regards adjustment by amount of loss the figures are appreciably slower in the early years. At the
same time, I should prefer not to read too much into these apparent changes until I have a much
larger group of current GAs to analyze.

Table 10 preparation times for GA by total value of cases

Time taken 1996 study 1996 current batch current batch

cumulative cumulative
Under one year 6.2 6.2 16.1 16.1
< 2 years 23.2 29.4 25.5 41.7
< 3 years 33.3 62.7 38.5 80.2
< 4 years 7.7 70.4 12.9 93.2
< 5 years 19.7 90.1 6.5 99.6
< 6 years 2.0 92.1 0 99.6
< 7 years 2.6 94.7 0.4 100
Over 7 years 5.3 100 0 100

C - The 2004 Rules and their impact on GA

This is a difficult subject to tackle. Firstly, there is the political dimension. To understate the case,
the new Rules do not have a ringing endorsement from all quarters. Some shipowners have not been
pleased to see changes which they expect to reduce the amount they can recover in GA. This is
hardly surprising when one of the main thrusts of IUMIs push for reform has been to do precisely
that. We have even seen opposing voices raised within a couple of IUMI markets. If the forecast is
that a switch to the new Rules will lead to drastic reductions in the amount recoverable in GA, it
could provoke the opposition to redouble its efforts to prevent them from being implemented. On
the other hand, if the conclusion is that there will be only a slight change in the financial impact, the
same forces are likely to join forces with others to say there is no need to disturb the status quo.

Secondly, having taken into account the political aspects we are still faced with the dilemma of how
to base our forecasts. We must start by making a few assumptions which may restrict our ability to
cover the complete picture, but which will help us be more realistic in focusing on the likely
options.

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Those assumptions centre on the following.

Marine casualties are largely independent of the method of claiming, so any change to GA will not
in itself change the frequency of casualties. This come with a caveat I have seen several GAs
which seem inspired by a desire to claim for the consequences of poor maintenance, and where the
real and immediate peril was questionable. Nevertheless, the great majority of emergencies are real
enough, even if the negligence which gave rise to the casualty may make us question why any of
the cost should be passed on to others.

Moreover, the nature of those emergencies and the expenses that result from them will not change
either. Even if it is no longer possible to claim for some elements currently included in GA, the
likelihood is that most of those elements will not disappear. There may be a degree of choice in the
course of action open to an owner after a casualty, but only a few circumstances would permit a
different decision to be made and alternative recoverable expenditure incurred instead.

So what are the possibilities for saving?

The simplest answer is to turn to the breakdown already given above (Table 4) of the different
categories of sacrifice and expense. On the face of it we are not likely to save more than the total for
any category that is abolished. However, if the main purpose of the GA is to recover for a specific
category of expense typically salvage or wages and maintenance the elimination of this category
may lead to a decision not to go through the process of adjusting GA, because it would not be
economical to do so for the small amount left.

Salvage

Let us examine the case of salvage in groundings. As a whole, it accounts for just over half of all
costs associated with this type of casualty. However, in half of the cases analyzed it did not feature
at all, meaning that all the salvage expenses were concentrated in the remainder.

Table 11 Salvage expenses in grounding GAs

Salvage (charges and Proportion of total

legal fees) as proportion grounding GAs by
of total GA claim number
0% 49%
1 25% 0%
24 50% 9%
51 60% 3%
61 70% 12%
71 80% 10%
81 90% 15%
91 100% 2%

The implication must be that many such GAs would fall away under the new Rules, leading to
significant savings for marine insurers. Salvage remains payable under other headings, so we should
not fall into the trap of assuming it vanishes entirely. Moreover, salvage charges and legal fees will
continue to be split between hull and cargo. However, it is likely that many of the administrative
costs associated with GA, notably the double collection and handling of security, the preparation of
the adjustment, and the preparation of the extra tasks which have to be carried out by others,

16
including the owners themselves, will disappear. Among the groups of casualties where salvage
plays a prominent role (collision and contact, grounding and loss of propulsion/steering) I can see a
reduction through administrative savings of up to 10% of current payments by underwriters.

It would be interesting to see how much money is actually reallocated on current adjustments
between hull and cargo after both sides payments to salvors are put back into the GA pot.
Information on the actual payments due from separate interests is rather sparse in the GA
adjustment, so I have only been able to examine a few cases. In none of these cases was the total
amount redistributed more than marginally significant. That may not always be the case, but it
seems fair to say that given the expense inherent in the GA procedure it makes sense to leave the
loss where it falls in this instance and remove salvage from GA adjustments.

Wages and maintenance at port of refuge

The case of wages is less clear-cut. Wages and maintenance are particularly significant when GAs
are triggered by engine problems. Here on average they amount to 15% of total GA costs as against
4% for all types of GA. As with salvage, though, in a proportion (over 40%) the wages and
maintenance element is so high that the GA is clearly built around it. Without the wages element the
rest of the claim would lose its raison dtre. Wages GAs are not dominated by wage costs to the
extent we have seen in salvage, as can be seen in the table below. It is most common to find
between a third and a half of the total claim consisting of wages and maintenance, with a further
20% for salvage and the remainder split between several different categories.

Table 12 Wages & maintenance expenses in engine GAs

Wages & maintenance Proportion of total

as proportion of total engine GAs by
GA claim number
0 9%
1 10% 16%
11 20% 20%
21 30% 11%
31 40% 16%
41 50% 13%
51 60% 9%
61 70% 2%
71 80% 4%
Above 80% 0%

Thus it is not as likely as with salvage that the entire GA would be eliminated, but there is a strong
chance that at least those with the highest proportions of wages to total claim would cease to
become viable.

While the 2004 reform only eliminates wages and maintenance in a port of refuge, in the study the
lions share of wages is accrued while the ship is in port waiting for spares and repairs to allow her
to continue her voyage. This can be seen by analyzing the sequence of events in the ships log,
though unfortunately there is rarely enough detail in the cost itemizations to provide a split between
time in port and at sea while deviating.

If the new Rules gain widespread acceptance, they will bring good news on this item, because it is
likely to lead to the abandonment of many GAs which currently have little more than nuisance

17
value. They are characterized by a high degree of negligence sometimes even lack of due
diligence and are often small and disproportionately expensive to handle. They are not even
profitable for average adjusters, several of whom have said to me that they would be happy to see
them disappear.

For these reasons I would estimate the potential savings to GA claims by value as between 3 and 4
per cent. I would also expect that in terms of numbers of claims the reduction could be higher.

Temporary repairs

Temporary repairs have been a source of more ill-feeling between the parties to the GA debate than
I would have thought possible, perhaps stimulated by one or two prominent disputes which ended in
court during the past 15 years. However, in terms of their impact on GA as a whole they are
marginal. For engine failures the combined cost of removal and temporary repairs reaches 6% of
total claims, but across the board they only amount to about 2%. Given the restricted circumstances
in which the reform to Rules XIV will operate I do not think the total impact would be more than
about 1%.

This is not to detract from the value of the reform. In some individual claims there will be
significant reductions of up to 40% and it could help remove what is at present a real bone of
contention.

Commission and interest

With a maximum of 2% commission on moneys advanced in GA the total share of costs taken by
commission is about 1.2% of claims. This, then, may be expected as the saving.

Interest currently amounts to 10% of total claims. Since we do not know what rate the CMI will set,
it is difficult to quantify the saving. Seen in the context of current rates set by the Federal Reserve
Bank and its European counterpart, it is probably safe to say that the interest amount due will fall by
up to a third.

We must remember, though, that this is not a one-way benefit to underwriters, who are themselves
responsible for many of the payments to which interest is attributed, and who will therefore see the
current return to them diminish in this respect.

Savings in total

How, then, to add up the various savings to underwriters who bear the costs of GA before passing
them back, insurance cycles permitting, to assureds and reach a total? I hope it will be clear from
the forgoing that we can make several realistic guesses while having to recognize that there are
many imponderables which could throw these calculations off course.

While the amounts handled in GA could shrink substantially as a result of the removal of salvage,
perhaps by 40%, the total savings to insurers from all elements of the reform would be unlikely to
exceed 15%. Salvage and some other expenses would still arrive in the market via other routes. As
already noted earlier, most of that net saving would be in the shape of administrative costs partly

18
adjusters fees, but also partly the many other costs incurred by many different players to fulfil the
requirements of the GA process including the owner, surveyors and ships agents.

It would not mean that owners were 15% worse off. Having revisited all my original calculations,
and having dissected many new cases, I was interested to see just how small owners own expenses
included in the GA actually were. I had remembered that there appeared to be many such items,
which comprise mainly internal office costs, travel to the GA location, accommodation etc., but had
forgotten how small were their values (about 0.7% of total amounts claimed). So even if these were
to be removed entirely, which is unlikely, the effect on owners would be slight.

There is a further dimension to these savings which we should not forget. As well as reducing the
total amount of GA claims, the reforms should lead to smaller numbers of claims. This should in
turn produce savings to insurers from reduced internal handling costs. These costs scarcely ever
show up in the GA adjustment, but from previous calculations they represent a heavy burden to
insurers. With multiple-interest voyages in the container and general cargo trades the extra expense
incurred by insurers worldwide can sometime amount to as much as the cost of the claim itself.

Typically, a straightforward GA claim that is, where there is no challenge to any aspect of its
validity generates between five and ten items of correspondence from any insurer involved
regardless of the size of GA contribution at issue, with obvious implications for running expenses.
If, as expected, the reforms lead to a drop in the number of small claims, the benefits will be
substantial compared with the amounts involved.

Unfortunately this will not automatically see the elimination of all small GAs involving container
ships and larger breakbulk general cargo carriers. This latter class of ship perhaps has not many
more years to run and is dwindling steadily, but it will be a part of maritime transport for several
years to come. By no means all large container and breakbulk operators have realistically large
levels of absorption clause, and in consequence there are still many smallish GAs which tie in
dozens of insurers worldwide. The collective cost to the market is considerable, yet here is one area
where the solution is in the markets own hands.

As a whole, then, I would see the prospect of significant administrative and other savings from the
2004 Rules. I dont think they will unduly hit shipowners, so I dont think they have anything much
to fear from them. At the same time, the savings involved for insurance markets would be well
worth pursuing by every means available.

I should like to thank you for your forbearance in listening to me talk about what to many must
seem on the face of it a rather dry field. I spent my first years at the ILU trying to escape looking
into what seemed to be one of the most obscure areas of the entire subject of marine insurance, and
this then caught up with me when I found that I had to go into it in depth. However, it was
worthwhile for it helped me discover that GA can be a fascinating subject to explore, and provides
the clues to understand the rest of marine insurance in real depth.

I should also like to thank again those of you whose markets provided adjustments and ensured that
the current analysis was representative of trade throughout the world. Lastly, I must also thank my
friends on the platform for their support for my work on analysis, something that gives rewards at
the end, but which during the preparatory work has often been like climbing a mountain where the
peak is out of sight.

Matthew Marshall
14 September 2004

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