What Is Free of Particular Average (FPA)?
Free of Particular Average (FPA) is an insurance contract clause that eliminates an insurer’s liability for partial losses. FPA clauses are most commonly found in marine insurance policies.
- Typically FPA is used in marine insurance policies, often regarding cargo.
- There are two common FPA conditions used—English and American.
- The FPA clause takes away an insurer's liability for partial losses.
How Free of Particular Average (FPA) Works
In shipping parlance, the word “average” is associated with losses, and “general average” refers to a loss associated with cargo or the ship itself. The expense of protecting the ship and its cargo is typically shared between the shipowner, the cargo owner, and other interested parties on a pro rata basis.
Because the interests of the different parties do not always overlap (e.g., the shipowner may care less about the cargo than the cargo owner), maritime transportation expenses are shared so that all parties have an incentive to cooperate. The parties will purchase a marine cargo policy, also known as a voyage policy, to protect themselves from certain perils.
How cargo losses are covered depends on how the policy addresses coverage of the “average,” with broader coverage carrying a higher premium. Free of Particular Average (FPA) clauses in maritime insurance policies specifically address cargo coverage.
FPA use is considered to create one of the more restrictive types of marine cargo insurance because only general losses are guaranteed to be covered for specific perils.
The FPA clause limits coverage against partial losses, with insurers only maintaining liability in certain cases.
American FPA Provisions vs. English FPA Provisions
In some cases, insurance companies are liable for partial losses. The conditions in which FPA clauses no longer apply vary. There are two types of conditions generally used, American and English.
In American FPA provisions, the insurer’s liability for partial cargo loss is eliminated unless stranding, sinking, fire, or collision caused the loss.
In English FPA provisions, the insurer’s liability for partial cargo loss is eliminated except in the case that a stranding, sinking, fire, or collision event occurred.
The difference is subtle but important. In the American version, the policyholder must prove that stranding, sinking, fire, or collision caused the partial loss, whereas the English version only requires a stranding, sinking, fire, or collision to have occurred at all. It is much harder to claim a partial loss in the American version because the insured must prove one of the events caused the damage in order to retain coverage.
Examples of FPA Clauses
Policies with FPA clauses are considered to have Institute Cargo Clauses (C), simply known as “C” clauses. They differ from policies using “with average,” or “B” clauses, and “all risks,” or “A” clauses.
“With average” policies provide broader coverage. The coverage extends to partial losses if the partial losses reach a certain percentage of the policy’s insured value.
“All risks” policies provide coverage against transportation perils but generally restrict coverage of specific risks, such as those associated with political turmoil.
Because maritime insurance policies with FPA clauses do not typically cover risks associated with wars, strikes, and riots, obtaining such coverage will require the payment of an additional premium.