Average clause

3 Key Takeaways

• The average clause is a key provision in marine insurance policies.
• It determines the insurer’s liability for partial losses of insured cargo.
• There are different types of average clauses, such as the particular average clause and the general average clause.

What is the Average Clause?

The average clause is a contractual term in marine insurance policies that outlines the conditions under which the insurer will cover partial losses. Partial losses refer to situations where the insured cargo is damaged but not completely lost. The average clause specifies a minimum percentage of damage or loss that must occur before the insurer is liable for compensation. This percentage is known as the franchise or deductible.

Importance of the Average Clause

• Risk Allocation: The average clause helps to allocate the risk of partial losses between the insurer and the insured. It incentivizes the insured to take precautions to prevent damage or loss, as they will be responsible for a portion of the loss below the franchise.
• Premium Calculation: The average clause is a factor in determining the premium charged for marine insurance. Policies with lower franchises typically have higher premiums, as they provide more comprehensive coverage for partial losses.
• Claims Settlement: The average clause provides a clear framework for settling claims involving partial losses. It helps to avoid disputes between the insurer and the insured by establishing a predetermined threshold for compensation.

Types of Average Clauses

There are two main types of average clauses in marine insurance:

• Particular Average Clause: This clause covers partial losses caused by specific perils, such as fire, collision, or stranding. It usually has a franchise or deductible, meaning the insurer is only liable for losses exceeding a certain percentage of the insured value.
• General Average Clause: This clause covers partial losses incurred voluntarily to save the ship and cargo from a common peril, such as jettisoning cargo to lighten a ship in distress. In a general average situation, all parties involved in the voyage share the losses proportionately.

Real-World Applications

The average clause is a fundamental aspect of marine insurance policies, shaping the relationship between insurers and insured parties. It influences the risk allocation, premium calculation, and claims settlement process for partial losses. Understanding the different types of average clauses and their implications is crucial for both cargo owners and insurers to make informed decisions and manage their risks effectively in the maritime industry.