Understanding the limitations of shipowners’ liability

Claims against vessel owners arising from recent maritime tragedies have focused greater attention upon the defense raised under the Shipowners’ Limitation of Liability Act (46 U.S.C. §30501 – 30512). Such claims are asserted not only against the owners of large seagoing vessels, but also against owners of smaller craft such as yachts, duck boats and water shuttles.

Recent tragedies in which Limitation of Liability was invoked by owners include the 2018 duck boat accident near Branson, Missouri (17 deaths); the 2010 duck boat accident in Philadelphia (2 deaths); and the 2007 water shuttle accident in Baltimore (5 deaths). Limitation of liability actions have also been filed by the vessel owners in such famous tragedies as the sinking of the Titanic and following the Deepwater Horizon disaster.

The intent of the law was to allow vessel operators, which accept great risks in transporting goods and persons on water, to escape unlimited liability, which can put them out of business or stifle further investment in maritime commerce and shipbuilding. In 1734, the English Parliament passed the forerunner of modern statutes limiting shipowners’ liability. The United States passed its own version of the law in 1851 following the fire and sinking of the Lexington in Long Island Sound.

The Limitation of Liability Act provides that whenever an accident occurs on navigable waters resulting in personal injury, loss of life or damage to property, the shipowner may limit its liability to the value of the vessel and its freights immediately following the accident. However, the shipowner must prove that it does not possess “privity or knowledge” of the negligent acts or unseaworthy conditions that caused or contributed to the accident.

In the event that the shipowner or its supervisory personnel knew, or by reasonable effort should have discovered the unsafe or unseaworthy conditions that gave rise to the accident, the shipowner is deemed to have privity and knowledge and will not be entitled to limit his liability.

Generally speaking, the most common situations in which a shipowner will be entitled to limit its liability include accidents caused by operational negligence (e.g., navigational errors) of the Master and crew, made at times when the ship is beyond the control of the shipowner. Accidents caused by unseaworthy conditions aboard the vessel that arise during the course of a voyage, when the ship is beyond the shipowner’s ability to discover them would also fall into this category. If the shipowner can prove that no act of negligence or unseaworthy condition caused or contributed to the accident, then the shipowner may exonerate itself completely from any liability.

The ability to limit liability is not reserved to owners of the largest vessels (the Act refers to these as “seagoing vessels”). Owners of smaller craft including towboats, pleasure yachts, tugs, fishing vessels, barges and other small craft are also entitled to limit their liability.

The primary difference in applying the Act between owners of smaller vessels and owners of larger “seagoing vessels” is that the knowledge possessed by the Master, superintendent or managing agent of a “seagoing vessel” at the commencement of the voyage is also deemed to be the knowledge of the owner. Therefore, the owner of a “seagoing vessel” cannot claim lack of privity or knowledge of unsafe or unseaworthy conditions known by its Master, superintendent or managing agent at the outset of the voyage.

However, the owner of a smaller vessel such as a towboat, charter fishing vessel and pleasure yacht, will not be deemed to have the knowledge possessed by the hired captain, manager or crew at the beginning of a trip (unless the owner conveyed plenary power to such persons to control all aspects of vessel management, operation and maintenance).

As a practical matter, it is more difficult for the owners of smaller vessels to show that they lacked privity or knowledge of unsafe or unseaworthy conditions that gave rise to an accident.  This is because owners of smaller craft are usually involved in their day-to-day operation and maintenance.

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Asserting limitations of liability

On the other hand, if the owner of a small vessel (such as a charter fishing boat or towboat) hires a captain and crew to operate the boat, and relies upon a boat yard to maintain it, the owner may be able to limit its liability if it can show lack of privity and knowledge of the unsafe or unseaworthy conditions, and that it had not delegated away plenary control over the vessel to others.

Limitation of liability is also available to bareboat charterers and to foreign shipowners.  For example, when the RMS Titanic sank on April 15, 1912, it was owned by a British company and flew the British flag. The U.S. Supreme Court held that the owner was entitled to petition for limitation of its liability under United States law. In that case, the White Star Line sought to limit its liability to $91,805.54 (the value of 14 lifeboats and pending freights). The ability to pursue limitation of liability gave the Titanic’s owners enough leverage to settle all claims without going to trial.

Limitation of liability may be asserted in one of two ways. First, the boat owner may petition for limitation of his liability by filing a lawsuit in Federal Court. If this option is pursued, the boat owner must file suit within six months of his receipt of the first written notice of claim. The boat owner may either file the limitation action preemptively, without waiting for the injured parties to sue him, or he may file the limitation action after being sued by claimants in various courts.

The immediate effect of the filing of a limitation action is to stay all actions currently pending against the boat owner and to cause a notice to issue, forcing all claimants to file their claims in the boat owner’s limitation action. This results in a “concursus,” [a proceeding with multiple conflicting parties and claims] since all claims will be litigated in a single court. The concursus prevents the boat owner from having to defend numerous lawsuits in multiple jurisdictions. Generally, a limitation action is subject to admiralty jurisdiction, and trial by jury is not available.

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Filing a limitation action

When the action is filed, the boat owner will be required to post a bond with the court.  The amount of the bond must be equal to the post-casualty value of the boat owner’s vessel, plus security for costs and six percent interest.

Rather than posting cash with the court, the most common procedure is for the owner or his insurer to file an ad interim stipulation for the appraised value of the boat, along with a Letter of Undertaking issued by the vessel’s insurer. The Letter of Undertaking is an irrevocable promise to pay the amount stipulated when ordered, either into court, or to the claimants in the event a judgment is entered against the boat owner.

The owner must file the limitation action in the federal district where the vessel has been attached or arrested, or if the boat has not been arrested or attached, then in any district in which the owner has been sued. In the event no lawsuits are yet pending, the boat owner may file suit in the district where the vessel is located, or if not located in any district (such as when the boat is lost at sea), the owner may file in any district he chooses. Often, the Limitation of Liability Act provides an opportunity for the boat owner to go “forum shopping” and to preemptively file his limitation action in the district that best favors him or offers him the most convenience.

The second method by which a boat owner may assert limitation of liability is to raise it as an affirmative defense in the answer to a complaint. While this method does not provide for a concursus of all actions, there is some advantage, since a bond need not be posted (unless the claimant forces the issue by filing an appropriate motion).

While limitation of liability may be safely asserted in this fashion in an answer to a complaint filed in state court, there is some peril to this approach in federal court. Some jurisdictions have held that limitation of liability may not be raised as a defense once the six-month period has passed following the boat owner’s receipt of the first written notice of claim.

If the boat owner has not filed a timely limitation action, the wily plaintiff’s lawyer will file suit in federal court. If the boat owner then attempts to raise limitation of liability as a defense in his answer to the complaint, the plaintiff’s lawyer will move to strike the defense, by asserting that it is untimely.

Limitation of liability has many more nuances and peculiarities that are too numerous to be addressed here. In the wake of a serious marine casualty, a boat owner or insurer must quickly consider whether an action should be brought to limit the boat owner’s liability. In some cases it would be advantageous to win the race to the courthouse before the first claimant files suit.

Stephen F. White (swhite@wcslaw.com) has spent his career working on the water or on behalf of those who do. He is a retired United States Navy Commander who since 1982, has co-led the Wright, Constable & Skeen maritime law group. His practice concentrates in the area of Admiralty and Maritime Law, including representation of marine underwriters, marinas, repair yards, marine towers and salvors, recreational boaters, charterers, brokers, marine lenders, contractors, pile drivers, vessel owners and seamen.