What it means
Marine insurance uses two special terms that are easy to confuse. Particular average means a partial loss of insured property, such as cargo damaged by sea water, that falls on its owner alone.
General average means a deliberate sacrifice or expense, such as throwing cargo overboard to save a ship in a storm, which is shared by everyone with an interest in the voyage in proportion to the value of their property. A policy marked free of particular average does not pay for ordinary partial damage.
The insurer remains responsible for total loss of the insured goods and for the insured's share of any general average. This keeps premiums lower because the insurer is not exposed to frequent small claims.
The clause usually carries an important exception. Partial loss may still be paid if it is caused by specified events, traditionally the stranding, sinking, burning or collision of the vessel.
If a ship runs aground and part of the cargo is damaged, an FPA policy would normally respond, even though damage from rough weather alone would not. Businesses chose FPA cover for cargo that was low in value, bulky or unlikely to suffer partial damage, such as some raw materials.
More valuable or delicate goods generally needed broader terms, which pay for partial loss from a wider list of causes. Broader cover costs more, so the choice depends on how much risk the owner can bear.
Today, standard clauses published by industry bodies have replaced much of the older wording, and the cover is described in terms such as limited, intermediate or wide. The FPA label still appears in older contracts and in training materials, and it remains a useful way of understanding how risk is divided in shipping.
Brokers and surveyors play an important part when a claim arises. A surveyor inspects the goods on arrival, records the condition and cause of any damage, and the report decides whether the loss falls within the policy.
In practice
Real-world examples.
Example
An importer of bulk fertiliser buys FPA cover for a shipment valued at $120,000. Rain water damages 5% of the load during unloading, and the insurer declines the claim because no stranding, sinking, fire or collision occurred. The importer bears the $6,000 loss. He now asks his broker for a written summary of what each policy excludes.
Example
A cargo ship runs aground and some containers of machinery parts are damaged. The owner of the parts has FPA cover, and because stranding is a named event, the insurer pays the partial loss. The surveyor's report confirms the grounding date and the extent of the damage.
Example
A captain throws part of a cargo of timber overboard to lighten the ship in a storm. The loss is a general average sacrifice, so the owners of the other cargo and the ship contribute in proportion to their values, and an FPA policy covers the insured's share. Valuations of ship and cargo are agreed by an adjuster, who works out each party's share.
Case study
Seen in the real world.
Tidewell Traders is a fictional company that imported electronic components and bought the cheapest marine insurance available. The policy was written on FPA terms, and the buyer assumed it covered any damage on the way. A shipment worth $90,000 arrived with 15% of the cartons water-damaged after a rough crossing.
The company made a claim, but the insurer declined it because the damage came from heavy weather and the vessel had not stranded, sunk, burned or collided. In this illustrative scenario, the loss of about $13,500 fell on the company. The finance director was upset that nobody had explained the difference.
After the loss, the company asked its broker to compare broader cover. The premium was higher by about $900 per shipment, but the finance director calculated that one uninsured loss of this kind equalled the extra cost of fifteen shipments, and the company switched.
Watch out
Common mistakes.
- Assuming that free of particular average means the cargo is free of all risk, when it means the insurer does not pay for ordinary partial damage.
- Confusing particular average with general average, when one is borne by the owner alone and the other is shared by all parties.
- Buying narrow cover for fragile or high-value goods to save premium, which can leave the owner with large uninsured losses.
Questions
People also ask.
What is particular average?
It is a partial loss of insured property caused by an insured peril, which falls on the owner of the damaged goods alone. An example is a crate of glass that breaks because of rough handling during loading.
What is general average?
It is a deliberate sacrifice or expense made to save the ship and cargo from a common danger, and all interested parties share the cost in proportion to their values. Typical examples include jettisoned cargo or costs of towing a damaged ship to a safe port.
Is FPA cover still used?
The wording appears in older policies and teaching, but modern standard clauses describe cover levels differently, so check the exact terms in the policy. A broker can explain how an older clause translates into current standard wording.
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