Effects of Insurance on Maritime Liability Law: A Legal and Economic Analysis

222 Pages·2014·2.01 MB·English

by  Muhammad Masum Billah (auth.)

Muhammad Masum Billah
Eff ects of Insurance
on Maritime
Liability Law
A Legal and Economic Analysis
Effects of Insurance on Maritime Liability Law
ThiSisaFMBlankPage
Muhammad Masum Billah
Effects of Insurance on
Maritime Liability Law
A Legal and Economic Analysis
MuhammadMasumBillah
CollegeofLaw
SultanQaboosUniversity
Al-Khod,Muscat
Oman
ISBN978-3-319-03487-4 ISBN978-3-319-03488-1(eBook)
DOI10.1007/978-3-319-03488-1
SpringerChamHeidelbergNewYorkDordrechtLondon
LibraryofCongressControlNumber:2013957905
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Preface
The book examines how the absence of insurance in the past led to some unique
maritimeliabilitylawprinciplessuchas‘generalaverage’(i.e.,lossesorexpenses
sharedbyallthepartiestoamaritimeadventure)andthelimitationofshipowners’
liability. In the absence of insurance, these principles served the function of
insurancemostlyforshipowners.Ascommercialmarineinsuranceisnowwidely
available,theseprincipleshavelosttheirjustificationandmayinfactinterferewith
themostimportantgoalofliabilitylaw,i.e.,deterrencefromnegligence.Thebook
thusrecommendstheirabolition.
When insurance is easily available and affordable to both parties to a liability
claim, the main goal of liability law should be deterrence as opposed to compen-
sation. This is the case with maritime cargo liability claims where both cargo
owners and ship owners are invariably insured. As a result, the main focus of the
cargoliabilitylawshouldbeand,toagreatextent,isdeterrence.Ontheotherhand,
inthevessel-sourceoilpollutionliabilitysetting,pollutionvictimsarenotusually
insured.Therefore,oilpollutionliabilitylawhastocaterforbothcompensationand
deterrence,thetwotraditionalgoalsofliabilitylaw.
Thefinalissueaddressedinthebookiswhetherthedeterrenteffectofliability
law is compromised by the availability of liability insurance. Contrary to popular
belief, the book argues that the presence of liability insurance is not necessarily a
hindrance but can be a complementary force towards the realization of deterrent
goalofliabilitylaw.
Asthebookisthemodifiedversionofmydoctoralthesis,Iamverygratefulto
mysupervisor,ProfessorAndre´ Brae¨nofUniversityofOttawa,Canada,andtothe
members of thesis defense committee, Professor Martin Davies of Tulane Law
School, Professor Donald McRae, Professor Denis Boivin and Professor Jamie
BenidicksonofUniversityofOttawa,fortheirvaluablecommentsandsuggestions.
v
vi Preface
I express my sincere gratitude to my parents, Muhammad Mostafa Kamal and
Rokeya Begum, for their unconditional love and prayers. Finally, my wife,
Tahmina Anzum, and our daughters, Tanisha Billah and Taqiya Billah, are my
sourceofloveandinspiration.
Muscat,OMAN Dr.MuhammadMasumBillah
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2 LackofInsuranceandItsEffectonMaritimeLiabilityLaw:
AHistoricalEvaluation. . . . .. . . . . .. . . . . .. . . . .. . . . . .. . . . . . 11
2.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 AlternativeRiskManagementStrategiesintheAbsenceof
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.1 Risk-Avoidance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.2 Risk-Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2.3 Risk-Retention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2.4 Risk-Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3 LackofInsuranceandUnder-DevelopmentofLiabilityLaw. . . . 19
2.3.1 IncreasingNeedforMarineLiabilityInsurance. . . . . . . . . 20
2.3.2 P&IClubstoMeettheIncreasingNeedforLiability
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.3.3 HistoryofCargoandOilPollutionLiabilityRegimes. . . . 27
2.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3 InsuranceandLimitationofShipOwners’Liability:
AnEconomicAnalysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2 NatureoftheProblem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.1 TruePurposeofLiabilityLaw:Deterrence. . . . . . . . . . . . 37
3.2.2 LimitationofLiabilityAffectsDeterrence. . . . . . . . . . . . 41
3.3 EconomicAnalysisoftheProblem. . . . . . . . . . . . . . . . . . . . . . . 41
3.3.1 NatureofEconomicAnalysis. . .. . . . . . . . . .. . . . . . . . . 41
3.3.2 DescriptiveAnalysisofLimitationofLiability. . . . . . . . . 42
3.3.3 NormativeAnalysisofLimitationofLiability. . . . . . . . . . 44
vii
viii Contents
3.4 LimitationofLiabilityandInsuranceArguments. . . . . . . . . . . . . 49
3.4.1 InsuranceArgumentsinSpecificMaritimeLiability
Conventions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.4.2 RebuttalofInsuranceArguments. . . . . . . . . . . . . . . . . . . 68
3.4.3 TheRealityofMarineLiabilityInsuranceMarket. . . . . . . 71
3.5 AbolitionofLimitationofLiabilityandItsConsequences. . . . . . 74
3.5.1 ConfusionBetweenInsurabilityandUnpredictability. . . . 75
3.5.2 UnlimitedLiabilityandtheCostofLitigation. . . . . . . . . . 76
3.5.3 UnlimitedLiabilityandthePriceofConsumerGoods. . . . 77
3.5.4 SocialDesirabilityofMaritimeLiabilityLaws. . . . . . . . . 77
3.5.5 TheImpossibleTesttoBreakLimitation. . . . . . . . . . . . . 78
3.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4 InsuranceThroughGeneralAverage:ItsJustificationsand
EffectsonOptimalCareandonSocialCosts. . . . . . . . . . . . . . . . . 83
4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4.2 NatureandPracticeofGeneralAverage. . . . . . . . . . . . . . . . . . . 84
4.2.1 MeaningandNature. . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.2.2 ModernPracticeofGeneralAverage. . . . . . . . . . . . . . . . 85
4.2.3 FunctionofGeneralAverageasInsurance. . . . . . . . . . . . 86
4.3 JustificationsofGeneralAverage. . . . . . . . . . . . . . . . . . . . . . . . 87
4.3.1 JustificationofGeneralAverageinthePast. . . . . . . . . . . 87
4.3.2 PossibleJustificationofGeneralAverageToday. . . . . . . . 88
4.4 EffectsofGeneralAverageonOptimalCareandon
SocialCost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.4.1 PossibleDistortionofIncentivesTowards
OptimalCare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.4.2 PossibleSocialCostsArisingfromGeneralAverage. . . . . 95
4.4.3 AbolitionofGeneralAverage. . . . . . . . . . . . . . . . . . . . . 98
4.5 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5 MaritimeCargoLiabilityLawinLightofInsuranceRealities. . . . 103
5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5.2 CargoLiabilityRegimesinBrief. . . . . . . . . . . . . . . . . . . . . . . . 104
5.3 EconomicAnalysisofLiabilityRules. . . . . . . . . . . . . . . . . . . . . 106
5.4 EconomicAnalysisofCargoLiabilityRegimes. . . . . . . . . . . . . . 107
5.4.1 FunctionofLiabilityRules:Deterrence. . . . . . . . . . . . . . 107
5.4.2 FunctionofLiabilityRules:Compensation
orInsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
5.5 EvidenceofWidespreadInsurancePractice. . . . . . . . . . . . . . . . . 127
5.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Contents ix
6 RoleofInsuranceinProvidingAdequateCompensationforOil
PollutionDamageandinReducingOilPollutionIncidents. . . . . . . 131
6.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
6.2 OilPollutionLiabilityRegimeinBrief. . . . . . . . . . . . . . . . . . . . 133
6.3 AdequateCompensationbyVariousInsuranceArrangements. . . . 136
6.3.1 CompulsoryInsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 136
6.3.2 DirectActionAgainstInsurers. . . . . . . . . . . . . . . . . . . . . 140
6.3.3 ArgumentsforDirectActionandCompulsory
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
6.3.4 CapacityofInsuranceMarket. . . . . . . . . . . . . . . . . . . . . 143
6.3.5 CertificateofInsurance. . . . . . . . . . . . . . . . . . . . . . . . . . 143
6.3.6 InsuranceThroughtheIOPCFund. . . . . . . . . . . . . . . . . . 144
6.3.7 InsuranceThroughtheSupplementaryFund. . . . . . . . . . . 148
6.3.8 InsurancefromNationalOilPollutionFunds. . . . . . . . . . 150
6.4 LimitationofLiability:AnImpedimenttoDeterrence. . . . . . . . . 152
6.5 DecreaseofAccidentalOilSpills:PossibleReasons. . . . . . . . . . 153
6.5.1 TheRoleofInsuranceintheDecreaseofOil
Pollution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.5.2 HigherLimitofLiability. . . . . . . . . . . . . . . . . . . . . . . . . 157
6.5.3 StrictLiabilityforOilPollutionDamage. . . . . . . . . . . . . 157
6.5.4 ImprovedDesignandConstructionofTankers. . . . . . . . . 159
6.5.5 StrongPort-StateControl. . . . . . . . . . . . . . . . . . . . . . . . . 163
6.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
7 IncentiveEffectofLiabilityRulesinthePresenceofLiability
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
7.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
7.2 LiabilityLawandLiabilityInsurance. . . . . . . . . . . . . . . . . . . . . 173
7.2.1 NoLiabilityorLiabilityInsuranceinaPerfectWorld. . . . 173
7.2.2 LiabilityandLiabilityInsuranceintheRealWorld. . . . . . 174
7.2.3 FailureofLiabilityLawtoInduceOptimalCare. . . . . . . . 175
7.3 WhyLiabilityInsuranceMayLeadtoBetterCare?. . . . . . . . . . . 176
7.3.1 InsurersPossessBetterInformationonOptimalCare. . . . 176
7.3.2 VariousLegalMechanismsattheDisposalof
Insurers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
7.3.3 InsuranceMechanismstoCreateStrongIncentives. . . . . . 184
7.3.4 NegligenceinthePresenceofInsuranceMayBe
MoreCostly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
7.3.5 AdditionalReasonsInsuranceMayLeadto
BetterCare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197