Peracomo v. Telus: Stupid Act Voids Insurance, Liability is Limited

Canada’s top court, the Supreme Court of Canada, recently decided the case of Peracomo v. Telus Communications Co., which is an interesting example of how a mariner, depending on the nature of their conduct, might lose the right to limit their liability for actions causing property damage, or lose the protection of their own insurance, or even both.  The Peracomo case is nicely summarized by the Supreme Court of Canada’s statement:

While in his boat, [the fisherman] took an electric saw and cut a fibre-optic submarine cable that he raised to the surface after it had become entangled with his fishing gear.  [He] knew he was cutting a cable and had [considered] the risk that it could be in use. However, he formed the belief that it was not. His belief was based on a handwritten note on some sort of map that he had seen for a few seconds the year before on a museum wall. This belief was wrong. The cable was live.  The result was almost $1 million in damage. As the trial judge put it, [he] is a good man who did a very stupid thing.

The Peracomo trial decision (which was upheld on appeal) found the mariner was unable to limit his liability because he intentionally caused damage to property when he cut the cable.  The courts also found that because his conduct was wilful, his insurance did not have to respond to defend him from the lawsuit brought by the owner of the cable.

This was the first Canadian case where a mariner’s limitation of liability had been broken.  As described in the October 2012 issue of Legal Net, the Marine Liability Act gives the force of law in Canada to various international conventions, including the International Convention on the Limitation of Liability for Maritime Claims 1976 (the “Liability Convention”). The Liability Convention is important because it puts a cap, or limit, on what can be claimed for a marine loss, such as: damage to property, or injury or death of a person. People entitled to limit liability under the Liability Convention are vessel owners, charterers, managers and operators (masters), and any person with an interest in the ship, as well the ship itself. The limitation covers accidents involving not just seagoing commercial vessels, but inland and recreational vessels as well.

In the case of damage to property, the limit of liability under the Liability Convention and the Marine Liability Act is $500,000 for loss caused by a vessel under 300 gross tonnes. For vessels over 300 tonnes, the limit increases according to their tonnage. In Peracomo, where the vessel was a 44 gross tonne fishing vessel and the master should have been able to limit his liability to $500,000, the trial judge had found the master had intentionally cut the fibre optic cable, and as a result was not entitled to limit his liability.

Faced with a million dollar debt, the fisherman appealed to the Supreme Court of Canada, which stated:

Both the limitation of liability and the insurance issues turn on [the fisherman’s] degree of fault. He is not entitled to the limited liability if the loss resulted from his act “committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result”; furthermore, the loss is excluded from his insurance coverage if it is attributable to his “wilful misconduct”.

The Supreme Court disagreed with the Federal Court trial judge, and Federal Court of Appeal, and found that, for the purposes of limiting his liability, “such loss” did not refer to the property damage itself, but rather what loss flowed from the property damage.  The court found the fisherman surely knew his action would sever the cable, but did not appreciate that such action would cause loss (the cost to repair the cable) because he believed the cable was abandoned and hence not to be repaired.  The Court said:

 It is insufficient to break the limit on liability under [the Convention] that [the fisherman] intended to cut the cable.  Rather, in order to break that limit, it must be proven that he intended to cause the loss that actually resulted or that he acted recklessly and with knowledge that the loss would probably occur.  The trial judge found that [the fisherman] thought the cable was useless.  In cutting the cable, he did not intend to cause the loss incurred by the respondents or know that it was a probable consequence of his actions.  It was therefore an error of law for the lower courts to conclude that [the fisherman] intended to cause a loss, or was reckless knowing that such loss would probably occur, within the meaning of art. 4 of the Convention.

In finding the fisherman did not lose his right to limit his liability, the court justified the higher burden of proving the fisherman needed to intend the loss that actually occurred (the cost to repair the cable):

The contracting states to the Convention intended the fault requirement to be a high one — the limitation on liability was designed to be difficult to break. In my respectful view, the Federal Court of Appeal’s approach to breaking the limit on liability lowered the intended fault element and thereby undermined the Convention’s purpose to establish a virtually unbreakable right to limit liability. I conclude that the appellants did not intentionally or recklessly cause the loss in question within the meaning of art. 4 of the Convention. They are therefore entitled to its limitation on liability.

While this was good news for the fisherman, the Supreme Court went on to consider whether he was entitled to the benefit of his vessel’s liability insurance, which ordinarily would pay the costs to defend him and any award of damages against him.  The Court summarized their decision as follows:

Although [the fisherman’s] conduct does not meet the very high level of fault so that he loses the benefit of the Convention’s limit on liability, it does constitute wilful misconduct for insurance purposes.  [The fisherman] had a duty to be aware of the cable and he failed miserably in that regard.  His acts were so far outside the range of conduct to be expected of him in the circumstances as to constitute misconduct.  The trial judge’s findings make clear that his misconduct was willful.  For insurance purposes, the fact that [the fisherman] believed that the cable was not in use is beside the point.  [The fisherman] knew that what he was cutting was a submarine cable.  He adverted to the risk that it could be in use but failed to make further inquiries in order to confirm or dispel his belief that the cable was abandoned and useless.  His conduct exhibited a reckless indifference to the possible consequences of his actions of which he was actually aware.  He thus committed an act of wilful misconduct: he ran an unreasonable risk with subjective knowledge of that risk and indifference as to the consequences.

The lesson for mariners in this case is that, while you may retain the benefit of a limitation of your liability under Canadian maritime law where you do not appreciate the full extent of damage that your actions may cause, if you are not careful in making inquiries as to what damage might occur, or if you show indifference to the consequences, you may lose the protection of your insurance.

Darren Williams is a marine lawyer with League and Williams (“LaW”) in Victoria and can be reached for question or comment at dwilliams@leaguelaw.com or by phone at 250-888-0002.  His toll-free number can be reached at 1-866-765-7777.