Opinion ID: 583906
Heading Depth: 2
Heading Rank: 2

Heading: preservation of shipowner's insurance coverage

Text: 26 Although Congress intended the Limitation Act to benefit the shipping industry, it declined to extend protection to many categories of industry actors. Cushing, 347 U.S. at 421-22, 433, 74 S.Ct. at 615, 621. See also 3 Benedict on Admiralty § 45 (Act does not protect time charterers, ship agents, masters, seamen, etc.). In fact, the Act does not promise shipowners freedom from liability, but only limited liability. Lake Tankers, 354 U.S. at 152-53, 77 S.Ct. at 1272-73. 27 Magnolia argues that it may contract for freedom from liability by purchasing insurance, and therefore insurance policy interpretation is necessarily related to limitation. Indeed, a majority of the Cushing court recognized that a shipowner is entitled to insure its investment, and that depriving the shipowner of its insurance would conflict with the policy of limited liability. See Cushing, 347 U.S. at 418-19, 74 S.Ct. at 613 (Frankfurter, J.); Id. at 424, 74 S.Ct. at 616 (Clark, J., concurring). We recognize that Magnolia might lose insurance protection if Louisiana furnishes Frye a direct action. 5 Assuming that the underwriters somehow are unable to limit their liability contractually, and assuming that Magnolia is entitled to limitation, then a judgment in the direct action for damages against the underwriters, for an amount exceeding both the limitation fund and the policy coverage, could encroach upon the coverage available to Magnolia. 6 If this judgment is entered before the limitation action, the judgment could effectively deplete Magnolia's coverage below the amount of the limitation fund. Cushing, 347 U.S. at 418-19, 74 S.Ct. at 613; Guillot, 366 F.2d at 904. 28 Recognizing the problem, this court has safeguarded shipowners' policy rights in a direct action case by following Justice Clark's recommended procedure. 7 To avoid depletion of the owner's coverage, this court has required the limitation action to precede the direct action. Guillot, 366 F.2d at 905. Structuring the litigation according to Cushing and Guillot avoids potential unfairness by giving the limitation court the first opportunity to allocate insurance proceeds to cover as much risk as the shipowner contracted to shift to insurers. And this approach avoids expanding the Limitation Act's coverage beyond what Congress has stated and our authorities have sanctioned. 29 Consequently, we require the district court to continue the stay of Frye's state court suit against Magnolia and its underwriters, until the court has taken such steps as it deems necessary to protect Magnolia's contractual rights. We recognize that Justice Clark's Cushing chronology is not the only possible strategy, and that other methods may achieve an equivalent result. For example, the court might permit claimants to stipulate Magnolia's priority claim to insurance proceeds in the event that Magnolia is entitled to limitation and the insurers are subject to direct action.