Pending Supreme Court Decision Could Deeply Affect Marine Insurance

In the world of marine insurance, reliability and predictability are a top priority. Marine insurers must safeguard their own financial stability, while protecting against unique maritime risks for their policyholders. To serve the goals of reliability and predictability, many marine insurance policies include “choice-of-law” clauses. A choice of law clause specifies which laws will apply if there is a dispute involving the policy. If there is a dispute, the insurer and policyholder know which laws apply, allowing both parties to reasonably predict the outcome of any potential disputes.  

For example, a number of marine insurance policies point to 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 U.S. Supreme Court heard oral arguments in Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC. In this case, the insured yacht owner, a Pennsylvania company, purchased an insurance policy for its yacht through Great Lakes Insurance SE, a UK-based company. Thereafter, the yacht ran aground and sustained damage. The yacht owner filed a claim with Great Lakes. Great Lakes denied coverage due to the yacht owner’s failure to recertify or inspect the yacht’s fire-extinguishing equipment despite the fact that the yacht owner had misrepresented that it had recertified and inspected the fire-extinguishing equipment. Great Lakes denied coverage on this basis even though the yacht grounding and damage had nothing to do with a fire or fire-extinguishing equipment.

Upon denying coverage, Great Lakes brought an action in the U.S. District Court for the Eastern District of Pennsylvania asking the court to hold the policy void based on the yacht owner’s failures and misrepresentations regarding the fire-extinguishing equipment. The yacht owner thereafter brought counterclaims under Pennsylvania law. Pennsylvania law provided additional avenues for the yacht owner to attack Great Lakes’ denial of coverage.

However, the insurance policy contained a choice of law clause which stated that, if there was no applicable federal maritime law, New York law would govern the dispute. The District Court found that choice of law clauses in marine insurance policies are “presumptively valid” and that the public policy of a state where the action was filed, like Pennsylvania, cannot override the presumptive validity of the choice of law. Accordingly, New York law did not recognize 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 fight 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, and the Court must decide whether a choice-of-law clause in a maritime contract can be deemed unenforceable if its enforcement conflicts with the “strong public policy” of the state where the lawsuit is brought.

The Supreme Court’s decision will carry huge implications for 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 go against a “strong public policy” of the state where the suit was brought. Such a holding would allow different laws and public policies from all 50 states to override insurers and policyholder’s contractually agreed-upon choices if there is a “strong public policy.” This would lead to great uncertainty and unpredictability in the marine insurance industry. It would result in forum shopping based on state law. It would also likely result in increased risks and costs to the insurers, which would in turn result in increased premiums to policyholders and a general unwillingness to even write certain policies in the first place.

Oral argument took place before the Supreme Court on October 10, 2023. Overall, the majority of justices appeared to be in favor of Great Lakes’ position, and in favor of upholding choice of law provisions in marine insurance policies. Justices Kavanaugh, Gorsuch, Sotomayor, and Jackson appeared to support the enforceability of choice-of-law clauses, and their questions/comments for the attorneys largely centered around the concerns of reliability and predictability in maritime law. Justices Kavanaugh and Gorsuch expressed skepticism towards distinguishing this case from others due to the fact that this case was based on a marine insurance contract, whereas other Supreme Court cases were simply based on non-insurance maritime contracts. Justices Kavanaugh and Gorsuch seemed to suggest that enforcing choice-of-law clauses in any marine contract ensures legal predictability. Justice Sotomayor emphasized the consensus among lower courts and the importance of uniform maritime interpretation, and Justice Jackson echoed that sentiment, seemingly warning against allowing state-specific exceptions, as it would undermine legal predictability. Justice Alito appreciated the harsh result of the case if New York law applied; that the yacht owner would be denied coverage for something totally unrelated to the damage?causing event. Notwithstanding, Justice Alito acknowledged the unique nature of maritime law, and noted that what may be seen as harsh in “land-bound” applications reflects traditional maritime principles.

However, Justice Kagan appeared to stand firmly in favor 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 the case’s connections to Pennsylvania make the application of New York law inappropriate, and appeared to suggest that state law and policy should play significant role in maritime insurance disputes.

The Supreme Court’s overall sentiment seems to lean towards upholding choice of law clauses in marine insurance contracts. While the Court’s decision has not yet been 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 result would undoubtedly alter the risk calculus for insurers and insureds alike. No matter the decision, the Court’s ruling will shape the trajectory of maritime law and the marine insurance industry.

Kevin G. Gallagher is a litigation associate at Hamilton Miller & Birthisel's Miami office. He focuses his practice on admiralty and maritime claims, commercial litigation, insurance claims and products liability.