The idea first caught on during the Middle Ages, that when a sea voyage ended in disaster, the shipowner should not be liable for damage to persons or property beyond the value of his own vessel. Sending ships to sea was one of the most risky ventures of the era. It was thought that limiting the shipowner’s liability to the value of his own vessel would compensate for the unfairness of imposing unlimited liability upon the shipowner, who was often thousands of miles away from the disaster, and who had very little, if any, control over the causes of the loss, or the perils of the sea. To impose unlimited liability for damages arising from the doomed venture would discourage the shipowner from ever putting a ship to sea again, and would stifle future commerce. The English Parliament passed the forerunner of modern statutes limiting shipowners’ liability into law in 1734. The new statute provided that a shipowner who lacked “privity or knowledge” could limit his liability for the negligent acts and omissions of his Captain and crew to the value of the ship and freights to be earned during the voyage (although current laws include any act of negligence or unseaworthiness, the 1734 law included only fire, robbery, embezzlement and piracy).

The United States did not adopt a similar statute until 1851 when Congress passed the Limitation of Shipowners’ Liability Act [currently 46 U.S.C. Sections 181-189]. The incident that provided momentum for adoption of the American statute, was the disastrous fire and sinking of the steamship LEXINGTON in Long Island Sound in 1840. The ship caught fire due to improper stowage of its flammable cargo of cotton, adjacent to the boiler exhaust pipes. The sole survivor among the hundreds of persons aboard the vessel when it burned and sank within sight of land, was its pilot, who burrowed into a floating bale of cotton, and survived a wintry night drifting in Long Island Sound. In addition to the shipowner’s liability for the great loss of life, the courts held the owners of the LEXINGTON liable for the loss of a shipment of gold and silver coins (specie) totaling over $18,000 (a huge fortune in 1840). In the wake of the LEXINGTON disaster, Congress decided to act to protect shipowners from unlimited liability, and from being financially driven from the high seas. It passed the Limitation of Shipowners’ Liability Act in 1851, and with a few modifications, it is still in force today.

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 will not be liable to persons injured or for property damaged by the accident beyond the value of the vessel and its freights immediately following the accident, if he can prove that he does not possess “privity or knowledge” of the negligent acts or unseaworthy conditions that caused or contributed to the accident. However, 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; and 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. Of course, if the shipowner is able to prove that no act of negligence or unseaworthy condition aboard the vessel 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 (these are called “seagoing vessels” in the Act). Owners of smaller craft including towboats, pleasure yachts, tugs, fishing vessels, barges, and other small craft are also entitled to limit liability. The primary difference in application of the Act between owners of the smaller vessels and owners of the 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 commencement of the voyage, and which may later lead to disaster. 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 it is found that the owner has conveyed plenary power upon 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 due to the fact that owners of smaller craft are usually involved in their day-to-day operation. The owner himself may also be the Captain or mechanic, who made the navigational error or who caused the unseaworthy condition that resulted in the accident. Any such involvement in the unsafe or unseaworthy conditions that caused the accident will prevent the owner from limiting its liability to the value of the vessel. 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 if it can show 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, even though the RMS TITANIC was owned by a British company, and flew the British flag, the owner was entitled to seek limitation of liability under United States law. In that case, the owner sought to limit its liability to the claimants who filed suit in the United States, to the value of a few life boats, which were all that remained of the great ship following the disaster.

As is stated above, one of the most likely scenarios in which the owner of a towboat might successfully limit his liability following an accident, would be when the accident occurred while the owner was ashore, and when the boat was being operated by a hired Captain, whose negligent operation caused the accident, but who had not been granted complete plenary control over the towboat. For example, assume the situation in which a towboat, with a hired Captain in control, provides a tow to the Yacht SEQUOIA with 100 politicians aboard. If the SEQUOIA is negligently towed into the path of the USS ENTERPRISE and all of the politicians drown, the owner of the towboat, who was ashore watching T.V. at the time, should be entitled to limit his liability to the value of his $30,000 towboat, since he lacked privity or knowledge of the hired Captain’s negligent actions. The insurer of the towboat will be entitled to take advantage of the owner’s limitation of liability, and cap its own financial responsibility to $30,000, since most marine insurance policies provide that the insurer’s liability cannot exceed the legal liability of its assured.