Why Ditching the Limitation of Liability Act is a Bad Idea
Apr 24, 2020
In the early morning of September 2, 2019 a fire ignited in the below decks area of the dive boat Conception. Before the captain and crew, who were themselves sleeping above decks, could do anything, the fire had blocked their pathway to the below decks area and they were forced to abandon the vessel. All 33 passengers and one crew perished, likely as a result of smoke inhalation. The Conception disaster was one of the worst maritime disasters in California’s history. The incident and subsequent investigation were the focus of intense media scrutiny in California and across the country. Only three days after the fire, the Conception’s owners, Truth Aquatics, filed an action in United States federal district court seeking to limit their liability under the Limitation of Liability Act of 1851 (46 U.SC. § 30501-30512). The Act allows Truth Aquatics to limit their liability to the value of the vessel, now a burnt hulk assessed at $0 by Truth Aquatic’s insurance provider. The public response to this course of action has been a mix of outrage and confusion. Pundits and the general public questioned how and why such an old and arcane law could still operate today to completely deny recovery to the families of the Conception’s victims.
In spite of this perceived unfairness, efforts to repeal the Limitation of Liability Act should be resisted because doing so would cause massive disruption to the shipping industry. Given the importance of ocean shipping to the United States economy, a full repeal of the Limitation of Liability Act would also have a broader negative impact on economic performance and job growth in the United States. This article will address why the United States Congress should maintain the Limitation of Liability Act and what negative effects would result from a complete repeal of the law.
The current furor over the Limitation of Liability Act in the wake of the Conception disaster is not the first time the law has been the target of public outrage. Most famously, in 1912, White Star Lines, owners of the ill-fated Titanic, invoked the Limitation of Liability Act to limit their liability to the value of the surviving lifeboats, or $92,000. In 2010, Transocean sought to invoke the Limitation of Liability Act in the wake of the Deepwater Horizon Disaster, claiming that its liability should be limited to $26,764,083, the estimated post-accident value of the Deepwater Horizon drilling rig. In that case, federal courts denied the action and Transocean has since pled guilty and agreed to pay over $1.4 billion in fines. In both cases, as in the case of the Conception, the public reaction to the vessel owner’s attempts to invoke the Limitation of Liability Act was highly critical for obvious reasons.
The United States Congress enacted the Limitation of Liability Act to spur the growth of the nascent shipping industry in the United States. Congress believed that the limitation on liability would encourage ship building and boost the shipping industry by attracting investment from outside owners who would not be directly involved in the operation of the vessel. A limitation on liability would allow investors to invest their resources in ship building and shipping projects without financial exposure to unlimited liability as a result of their involvement. Shipping industries in competing maritime nations such as the United Kingdom already benefitted from similar laws, giving them a distinct advantage over their competitors in the United States.
Under the Limitation of Liability Act a vessel owner can limit their liability for losses to property and for personal injury or death. With respect to property loss, pursuant to 46 U.S.C. § 30505, vessel owners can limit their liability to an amount equal to the post-accident value of the vessel and its pending freight. The rules applicable to personal injury and death are slightly different. Under 46 U.S.C. § 30506, if claims against the owner for personal injury or death exceed the post-accident value of the vessel and pending freight, courts calculate the owner’s liability by multiplying the tonnage of the vessel by $420. This limitation of liability for personal injury or death does not apply to certain vessels. Under 46 U.S.C. § 30506, owners of pleasure yachts, tugs, towboats, towing vessels, tank vessels, fishing vessels, fish tender vessels, canal boats, scows, car floats, barges, lighters and non-descript vessels cannot limit their liability under the Limitation of Liability Act.
Furthermore, under 46 U.S.C. § 30505(b) vessel owners can only limit their liability under the Limitation on Liability Act if the incident occurred without their “privity” or “knowledge.” The privity and knowledge of the vessel’s master and the owner’s superintendent or managing agent on the vessel will be imputed to the owner, meaning that if any of these individuals were at fault for the incident the owner will be prevented from claiming any limitation of liability under the Limitation of Liability Act.
The Limitation of Liability Act is a valuable legal tool for vessel owners for two main reasons. First, the law allows vessel owners to consolidate all claims arising from a single incident; once the owner files a limitation action in federal court, the court issues a stay of proceedings until the court comes to a decision on the limitation action. Furthermore, once the vessel owner files, the federal court in which the owner files becomes the only venue for litigation on the issue of liability. All claims against the vessel owner must be submitted to the same court and all claims must be made within a set period of time after the vessel owner files the initial action. This procedural mechanism is referred to as a “concursus.” This allows vessel owners to avoid the need to deal with multiple lawsuits in different jurisdictions in the event of a mass casualty event such as the Conception disaster. The second major benefit to vessel owners under the Limitation of Liability Act is that, because it must be filed in federal court as a case arising under the admiralty jurisdiction of the federal courts, there is no right to a jury trial and vessel owners can avoid trial by jury, at least during the limitation proceedings.
Naturally, a law that provides such sweeping limitation of liability is controversial, especially when used to avoid liability for serious injury or death. Many people feel that the law has outlived its usefulness and that Congress should fully repeal it. Opponents of the law argue that the modern marine insurance industry and liability shields afforded by corporations or limited liability entities provide ample liability protection to vessel owners and thereby render such a law obsolete. Following the Deepwater Horizon disaster in 2010, the United States House of Representatives passed H.R. 5503, a bill that would entirely repeal the Limitation of Liability Act. A related bill has not made any progress in the Senate since its introduction as Senate Bill 3600 in the same year.
Those opposed to the Limitation of Liability Act fail to account for the importance of the law to the global shipping industry. Though cargo vessel owners may be insured against losses, including for personal injury or death occurring on their vessels, the insurance industry has based its rates and premiums on the assumption that owners can limit their liability under the Limitation of Liability Act. If this were not the case, insurance premiums for vessel owners would increase dramatically because insurance underwriters assess premiums based in part on the ability of the owner to limit their liability. If owner liability was unlimited, insurance providers would need to account for this risk exposure by requiring massive premiums for vessel owners operating in the navigable waters of the United States.
The possibility of unlimited liability and the resulting increase in insurance costs would encourage many cargo vessel owners to simply avoid the United States and divert their vessel traffic to other ports in Mexico and Canada. This would potentially devastate major cargo offload ports in the United States and increase the cost of goods for United States consumers. It would also disadvantage domestic businesses that operate internationally by forcing them to raise prices for their goods to account for their increased shipping costs and would thereby limit their ability to compete on pricing with foreign competitors.
The importance of the Limitation of Liability Act to the United States cargo shipping industry makes a complete repeal of the law, as envisioned by H.R. 5503 or S. 3600 highly problematic. However, a middle ground solution may exist whereby Congress amends portions of the Limitation of Liability Act but does not go so far as to completely repeal it. Notably, the act already excludes many types of vessels. Congress could broaden the scope of these exclusions without effecting the liability limitations afforded to cargo vessel owners. For example, Congress could amend the act so that it no longer applies to commercial vessels used primarily for recreational activities. This would have no effect on international shipping to and from the United States but would provide an avenue of relief for victims of incidents such as the fire and sinking of the Conception.
About the author
Isaak’s current list of clients includes shipowners, charterers, shipyards, seafood companies, importers, exporters, freight forwarders, carriers, offshore oil and gas companies, mining companies, construction companies, and other entities and persons engaged in the maritime and transportation industry.