Economic Analysis of Limitation of Shipowners’ Liability

Limitation of liability is a feature common to all areas of shipowners’ liability. Historically, its justification has been the encouragement of investment in the national shipping sector. The modern-day justification its supporters rely upon is either the lack of capacity or the prohibitively high cost of insurance for unlimited liability. Its most criticized consequence is the deprivation of adequate compensation to victims of maritime accidents. As a result, recent changes in maritime liability laws focus on increasing compensation, sometimes from sources other than liable parties. This approach fails to consider the main goal of a liability system: to deter potentially liable parties from engaging in careless activities. By controlling the magnitude of liability, limitation of liability reduces the expected liability of shipowners and consequently their optimal precaution. It encourages negligent navigation.