Limiting liability

   The loss of the cargo ship El Faro and its crew of 33 in Hurricane Joaquin on Oct. 1 is the biggest tragedy for the U.S.-flag merchant marine in decades.
   An investigation by the National Transportation Safety Board will likely take 12-18 months to complete and litigation growing out of the sinking is expected to take many more years.
   Several lawsuits have been filed against the owners of El Faro and its deceased captain by the families of crew members and more are expected. Among other things, they allege the ship was unseaworthy, and opportunities to reroute the ship away from the storm were disregarded.
   At the end of October, Sea Star Lines LLC (doing business as TOTE Maritime Puerto Rico) and its sister TOTE Services Inc. filed an action in federal court to be exonerated from liability, or limit it to $15.3 million using the Shipowners Limitation of Liability Act of 1851.
   Contrary to allegations by family members, TOTE said it exercised due diligence to supply the ship with “suitable engines, machinery, apparel, appliances, personnel, and other appropriate and necessary equipment, all in good order and condition and suitable for their intended operations.” It said the captain of the ship monitored Joaquin and altered course to account for the storm’s expected track.
   One advantage of the limitation of liability proceedings is that the court sets a period of time for claims to be filed and forces all claims into a single proceeding in federal court rather than making the owner subject to litigation in multiple jurisdictions.
   The size of the $15.3 million limitation fund was calculated by adding the value of the ship—zero as it is at the bottom of the sea; $2.1 million in pending freight paid by shippers for the doomed voyage from Jacksonville, Fla., to San Juan, Puerto Rico; and a $13.2 million supplemental limitation fund to be used exclusively for death claims that is based on the gross tonnage of the El Faro.
   TOTE noted the $15.3 million “is expected to be substantially less than the amount which will be claimed for losses and damages.”
   Attorneys for the 28 regular crew members on the ship and five Polish shipyard workers who were on the ship preparing it for a drydocking are expected to attempt to “break” the limitation, but to do so they will have to prove TOTE was negligent or the ship was unseaworthy, and that the shipowner had “knowledge or privity” of the negligence or unseaworthiness.
   A 2006 paper, authored by Miami-based attorneys Keith Brias and Richard Rusak, said courts have held that “privity or knowledge means the shipowner’s personal participation in, or actual knowledge of, the specific acts of negligence or unseaworthiness which caused or contributed to the casualty.”
   Because “limitation proceedings are considered admiralty proceedings, there is no right to a jury trial,” though if limitation is broken, a jury may determine damages.
   The size of damages are based on a mariner’s lifetime earnings had they lived, as well as damages for pain or suffering and fear of death, said James Ryan of the New York law firm Dougherty Ryan
   Brias and Rusak said, “When examining privity or knowledge in the corporate owner context, one must determine whether the person with knowledge of the negligence or unseaworthy condition ranks high enough in the corporate structure to make his awareness that of the corporation.”
   Shore-based managers who oversee a vessel’s operations usually have sufficient ranking in the corporation to create privity or knowledge. For example, Ryan said New York City was unsuccessful in limiting losses from a 2003 ferry accident that killed 11 people and injured 75, when it was shown management knew the crew was not complying with a requirement for two pilots in the ferry’s pilothouse.
   “Captains and crewmembers, on the other hand, generally do not have a high enough position within a corporation to impute privity or knowledge to the vessel owner,” wrote Brias and Rusak, adding “However, if the vessel’s master exerts almost exclusive control over the vessel’s business activities, he would be of a sufficient rank in the corporation to impute his knowledge to the corporation.”
   If claimants are able to break limitation, TOTE’s exposure would be limited to their self-retention.
   El Faro is insured by Steamship Mutual Underwriting Association, a protection and indemnity club, or mutual insurance pool, that provides an initial layer of protection of $9 million. Steamship Mutual is a member of the International Group of P&I Clubs, and through pooling and reinsurance members, it has a mechanism for sharing claims in excess of $9 million and up to about $7.5 billion.

   This column was published in the December 2015 issue of American Shipper.