United States Supreme Court Enforces Choice-of-Law Provision in Maritime Insurance Contract

On February 21, 2024, the United States Supreme Court unanimously held that choice-of-law provisions in maritime insurance contracts are presumptively enforceable under federal maritime law.

Great Lakes Ins. SE v. Raiders Retreat Realty Co. – Background

In Great Lakes Ins. SE v. Raiders Retreat Realty Co., when a yacht ran aground, the yacht owner submitted a claim with the marine insurer under its policy.[1] The marine insurer denied coverage on the grounds that the owner misrepresented the yacht’s fire-suppression system’s ability, although the vessel’s damage was not caused by fire.

The marine insurer filed suit in federal court, seeking declaratory judgment that the owner’s failure to recertify or inspect its fire extinguishing equipment rendered the policy void. In response, the yacht-owner filed five counterclaims, including three extra-contractual claims arising under Pennsylvania law, even though the yacht-owner’s policy with the marine insurer contained a choice-of-law provision stipulating that all disputes arising under the policy were to be adjudicated under New York law.

The district court reasoned that it did not need to consider Pennsylvania public policy in evaluating the validity of the choice-of-law provision and dismissed the yacht owner’s counterclaims, thereby enforcing the policy’s choice-of-law provision. On appeal, the United States Court of Appeal for the Third Circuit reversed the district court’s decision. In a ruling on which we previously reported, the appellate court held that the strong public policy of the state in which suit is brought could render unenforceable a choice of state law provision in a marine insurance contract.

Supreme Court Ruling

The Supreme Court reversed the Third Circuit’s decision, holding that choice-of-law provisions in maritime contracts are presumptively enforceable, with certain narrow exceptions. In the unanimous opinion delivered by Justice Kavanaugh, the Court highlighted the importance of maintaining uniformity in federal maritime law. To maintain this uniformity, federal courts follow established maritime rules. The Supreme Court determined that there is an established federal maritime rule regarding the enforceability of choice-of-law provisions: choice-of-law provisions in maritime contracts are presumptively enforceable.

The Court noted that the traditional enforcement of choice-of-law provisions in maritime contracts goes hand in hand with Supreme Court precedent in the forum-selection context. In The Bremen and Carnival Cruise, the Court ruled that forum-selection clauses in maritime contracts are “prima facie valid” under federal maritime law and “should be enforced” unless enforcement is unreasonable under the circumstances.[2] The Court explained that, like forum-selection clauses, choice-of-law provisions promote freedom of contract and effectively eliminate confusion for future disputes, thus reducing time and expense in litigation. The Court reasoned that its decisions in The Bremen and Carnival Cruise regarding enforceability of forum-selection clauses “dictate the same conclusion for choice-of-law provisions.”

Raiders argued that the Court’s decision in Wilburn Boat Co. precluded a presumption of enforceability of choice-of-law provisions in maritime contracts.[3] The Court rejected this argument, finding Wilburn inapplicable to the case at bar. The Court noted that Wilburn, which did not involve a choice-of-law provision, determined what substantive rule applied when a party breached a warranty in a marine insurance contract and held that state law applied only as a “gap-filler” in the absence of an applicable uniform federal maritime rule on warranties. In a concurring opinion, Justice Thomas highlighted the “universal criticism” received by Wilburn by pointing out its flawed rationale and reiterating its deficient failure to consider the uniformity principle central to federal maritime law. The Court determined that Raiders’ reliance on Wilburn was misplaced, given that a uniform rule of federal maritime law governs the enforceability of choice-of-law provisions in maritime contracts. Thus, no such “gap-filler” is required under this inquiry.

The Court acknowledged that there are limited exceptions to the presumptive enforceability of choice-of-law provisions in maritime contracts, none of which applied here. These exceptions include situations when the chosen law would contravene a controlling federal statute or conflict with an established federal maritime policy and where the parties cannot furnish a reasonable basis for the chosen jurisdiction. The Court rejected Raiders’ argument that an additional exception should be recognized under federal maritime law when enforcing the law of the state designated by contract would contravene the fundamental public policy of the state with the greatest interest in the dispute. The Court reasoned that it has never disregarded a choice-of-law provision in a maritime contract on the basis that the provision’s enforcement would violate state law. In fact, the Court noted that it historically enforced such choice-of-law provisions without regard to state law.

The Court determined that, by decreasing legal uncertainty and costs for maritime actors, the presumptive enforceability of choice-of-law provisions in maritime contracts advances maritime commerce. The Court explained that “choice-of-law provisions allow parties to avoid later disputes, as well as ensuing litigation and its attendant costs,” by establishing the governing law in advance. The Court also praised choice-of-law provisions for discouraging forum shopping, which further cuts litigation costs.

Ultimately, the Supreme Court ruled that choice-of-law provisions are presumptively enforceable in maritime contracts as a matter of federal maritime law, reversing the Third Circuit’s judgment.

Benefits to the Marine Employer

The Supreme Court’s ruling poses many potential benefits to maritime employers. In addition to reducing the potential for litigation and cutting associated costs, the Court specifically noted that “by supplying some advance assurance about the governing law, choice-of-law provisions help maritime shippers decide on the front end ‘what precautions to take’ on their boats.”[4]

Further, the Court stated that choice-of-law provisions help marine insurers better assess risk, which can lower the price and expand the availability of marine insurance.[5] The Court determined that through these benefits, choice-of-law provisions advance of fundamental purpose of federal maritime law – the protection of maritime commerce.

Conclusion

The Supreme Court’s holding that choice-of-law provisions are presumptively enforceable in maritime contracts upholds the uniformity of federal maritime law.

At the heart of the Court’s holding is the promotion of maritime commerce. As Justice Kavanaugh succinctly stated, “the uniformity and predictability resulting from choice-of-law provisions are especially important for marine insurance contracts given that marine insurance is ‘an integral part of virtually every maritime transaction, and maritime commerce is a vital part of the nation’s economy.’”

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[1] Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, No. 22-500 (U.S. Feb. 21, 2024).

[2]  The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S. Ct. 1907, 32 L. Ed. 2d 513 (1972); Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 588, 111 S. Ct. 1522, 113 L. E. 2d 622 (1991).

[3] Wilburn Boat Co. v. Fireman’s Fund Insurance Co., 348 U.S. 310, 75 S. Ct. 368, 99 L. Ed. 337 (1995).

[4] American Dredging Co. v. Miller, 510 U.S. 443, 114 S. Ct. 981, 127 L. Ed. 2d 285 (1994).

[5] See Brief for American Institute of Marine Underwriters et al.. as Amici Curiae.