In the world of marine insurance, reliability and predictability are paramount. Marine insurers need to ensure their own financial stability while protecting their policyholders against the unique risks of the maritime world. To serve the goals of reliability and predictability, many marine insurance policies contain “choice of law” clauses. A choice-of-law clause specifies which laws will apply in the event of a dispute relating to the policy. In the event of a dispute, both the insurer and the policyholder know which law will apply, allowing both parties to reasonably predict the outcome of any potential dispute.
For example, a number of marine insurance policies specify New York law as the choice of law in marine insurance policies. New York law is a common choice among marine insurers because New York is a populous state with a robust economy, including a significant maritime industry. New York’s laws are well established and reliable in the context of maritime contracts and disputes, and New York’s maritime jurisprudence is generally more developed than that of other states.
Earlier this month, the US Supreme Court heard oral arguments in the case of Great Lakes Insurance SE v Raiders Retreat Realty Co., LLC. In this case, the insured yacht owner, a Pennsylvania corporation, purchased an insurance policy on its yacht from Great Lakes Insurance SE, a UK-based company. The yacht subsequently ran aground and sustained damage. The yacht owner submitted a claim to Great Lakes. Great Lakes denied coverage on the basis that the yacht owner had failed to recertify or inspect the yacht’s firefighting equipment, even though the yacht owner had falsely represented that he had recertified and inspected the firefighting equipment. Great Lakes denied coverage on this basis, even though the grounding and damage to the yacht had nothing to do with a fire or fire extinguishing equipment.
After denying coverage, Great Lakes filed suit in the U.S. District Court for the Eastern District of Pennsylvania, asking the court to declare the policy void based on the yacht owner’s omissions and misrepresentations regarding the fire suppression system. The yacht owner then filed counterclaims under Pennsylvania law. Pennsylvania law provided additional avenues for the yacht owner to attack Great Lakes’ denial of coverage.
However, the policy contained a choice of law clause which provided that if there was no applicable federal maritime law, New York law would govern the dispute. The District Court held that choice of law clauses in marine insurance policies are “presumptively valid” and that the public policy of a state where the action is brought, such as Pennsylvania, cannot override the presumptive validity of the choice of law. Accordingly, New York law did not recognise the Pennsylvania counterclaims. Therefore, the yacht owner could not bring the claims under Pennsylvania law, and it would be much more difficult for the yacht owner to contest Great Lakes’ denial of coverage.
The yacht owner appealed to the Third Circuit Court of Appeals, and the Third Circuit reversed the District Court, finding that a “strong public policy” of the forum state, such as Pennsylvania, could override the choice of New York law in the marine insurance policy. The case is now before the U.S. Supreme Court, which must decide whether a choice-of-law clause in a marine insurance contract can be deemed unenforceable if its enforcement is contrary to the “strong public policy” of the forum state.
The Supreme Court’s decision will have an enormous impact on the marine insurance industry. If the Third Circuit’s decision is upheld, a choice of law clause in a marine insurance policy could be invalidated if the choice of law would contravene a “strong public policy” of the state where the suit is brought. Such a decision would allow the different laws and public policies of all 50 states to override the contractual choices of insurers and policyholders where there is a “strong public policy”. This would create great uncertainty and unpredictability in the marine insurance industry. It would lead to forum shopping based on state law. It would also likely lead to increased risks and costs for insurers, which would in turn lead to increased premiums for policyholders and a general unwillingness to write certain policies at all.
Oral arguments were held before the Supreme Court on 10 October. Overall, a majority of the Justices appeared to be in favour of Great Lakes’ position and in favour of upholding choice of law clauses in marine insurance policies. Justices Kavanaugh, Gorsuch, Sotomayor and Jackson appeared to support the enforceability of choice of law clauses, and their questions/comments to counsel largely focused on the concerns of reliability and predictability in maritime law. Justices Kavanaugh and Gorsuch expressed scepticism about distinguishing this case from others, given that this case was based on a marine insurance contract, while other Supreme Court cases have simply been based on non-insurance maritime contracts. Justices Kavanaugh and Gorsuch seemed to suggest that enforcing choice-of-law clauses in every maritime contract ensures legal predictability. Justice Sotomayor emphasised the consensus among the lower courts and the importance of uniform maritime interpretation, and Justice Jackson echoed this sentiment, seemingly warning against allowing state-specific exceptions as this would undermine legal predictability. Justice Alito acknowledged the harsh result of the case if New York law applied; that the yacht owner would be denied coverage for something unrelated to the event causing the damage. Nevertheless, Justice Alito acknowledged the unique nature of maritime law, noting that what might be considered harsh in “land-based” applications reflects traditional maritime principles.
Justice Kagan, however, seemed firmly in favour of applying Pennsylvania law, stating that “everything about this case screams Pennsylvania” and noting the importance of Pennsylvania’s consumer protection laws and policies. Justice Kagan suggested that the case’s Pennsylvania connection made the application of New York law inappropriate, and seemed to suggest that state law and policy should play a significant role in maritime insurance disputes.
Overall, the Supreme Court appears to be leaning towards upholding choice of law clauses in marine insurance contracts. While the Court’s decision has yet to be announced, it will either reinforce the goals of predictability and reliability that have underpinned the marine insurance industry, or create an environment where the nuances of individual state laws exert significant influence. The latter outcome would undoubtedly change the risk calculus for insurers and insureds alike. Either way, the Court’s decision will shape the future of maritime law and the marine insurance industry.
