By Markus E. ApelisOn February 21, 2024, the Supreme Court of the United States decided Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, 601 U.S. ___ (2024). In a 9-0 decision, the Supreme Court unanimously reversed the U.S. Third Circuit Court of Appeals and held that choice of law provisions in marine insurance policies are presumptively enforceable as a matter of federal admiralty law.
Raiders Retreat Realty (“Raiders”) is a Pennsylvania business that owned a yacht. Raiders insured the yacht through a marine insurance policy with Great Lakes Insurance. Great Lakes Insurance is a specialty marine insurance provider based in Germany with headquarters in the United Kingdom. The Raiders yacht ran aground, and Raiders presented a claim to Great Lakes Insurance for the loss of the vessel. After an investigation, Great Lakes Insurance determined that Raiders had violated certain warranties of the marine insurance policy by failing to maintain the yacht’s fire suppression system. The fire suppression system did not contribute to the accident. Great Lakes Insurance denied the claim and contended that the breach of warranty voided the insurance contract in its entirety.
Great Lakes Insurance commenced a declaratory judgment action in a Pennsylvania federal court, seeking a declaration that Raiders’ breach of warranty justified the denial of coverage. Raiders asserted counterclaims for breach of contract under Pennsylvania state law. Great Lakes opposed those claims because the policy’s choice of law provision did not allow for the application of Pennsylvania state law. Instead, the choice of law provision called for the application of the general maritime law of the United States, or, in the event there was no controlling admiralty rule, the application of New York state law. New York had no connection to the dispute.
The District Court agreed with Great Lakes Insurance and held that federal maritime law governs the enforceability of the policy’s choice of law provision. Under the maritime law, such provisions are presumptively enforceable. Because New York law did not recognize Raiders’ state law claims, the District Court rejected Raiders’ claims. On appeal, the U.S. Third Circuit Court of Appeals reversed. The appellate court agreed that choice of law provisions are presumptively enforceable under the federal maritime law, but also found that those provisions must give way to the public policy of the state in which a lawsuit is pending. Here, the appellate court determined that Pennsylvania had a strong public policy that overrides the choice of law provision, and so Pennsylvania state law should govern Raiders’ claims.
The Supreme Court took up the case to resolve conflicts amongst federal appellate courts.
In its unanimous decision, the Supreme Court determined that longstanding precedent established a federal maritime rule that choice of law provisions in maritime contracts, including contracts of marine insurance, are presumptively enforceable. Such a rule promotes uniformity of the admiralty law. When maritime disputes arise, they tend to arise because of situations that, by their nature, are inter-state or international in character. By identifying which law applies before a dispute arises, legal uncertainty about that dispute is reduced. The admiralty law would not be very uniform if it would give way to the various public policy determinations of fifty different states. This protects maritime commerce, both operationally and financially. The Supreme Court reasoned that this approach to choice of law provisions was no different from recognizing that forum selection clauses in maritime contracts were also presumptively enforceable.
The Supreme Court recognized that exceptions to choice of law provisions could exist when there is no reasonable basis for the law chosen. For instance, the Supreme Court considered it unreasonable for parties to pick the law of a distant foreign country without some rational basis for the choice. But, that was not the situation in Raiders. The Supreme Court also cautioned that courts should invoke such an exception sparingly, giving deference to the parties’ choice, especially when the choice calls for the application of a well developed, well known, and well regarded law like that of New York.
The Supreme Court also rejected the idea that its nearly 75-year old precedent in Wilburn Boat commanded a different result. Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955). The Supreme Court in Wilburn Boat had determined that state insurance law governed the narrow question of the enforceability of a breach of various warranties in a marine insurance policy. Whether a choice of law provision controlled was not at issue in Wilburn Boat. Because of that, the Supreme Court in Raiders shied away from confronting questions about the substantive applicability of Wilburn Boat. Instead, the Court simply determined that Wilburn Boat provided only limited guidance in the case at hand.
Justice Kavanaugh authored the unanimous opinion of the Court.
Justice Thomas wrote a concurring opinion in which he specifically criticized the Wilburn Boat decision. Justice Thomas noted that this decision “rests on flawed premises” and “is at odds with the fundamental precept of admiralty law.” Justice Thomas wrote that Wilburn Boat had upset more than 150 years of precedent that marine insurance disputes fell within the scope of admiralty jurisdiction. If anything remains of Wilburn Boat, according to Justice Thomas, it is that state law may apply in maritime contract disputes when the disputes “so implicate local interests” as to require the application of state law. He essentially encouraged litigants and courts to continue to challenge the fundamental applicability of Wilburn Boat, signaling at least his willingness to revisit Wilburn Boat as good precedent, or perhaps overrule it entirely.
Marine insurers and the admiralty bar have been closely following the Raiders Realty case because of the impact the decision was likely to have on the enforceability of certain provisions of marine insurance policies. To be sure, today’s decision affords marine insurers an opportunity to revisit the choice of law provisions set forth in marine insurance policies. Marine insurers may well choose to revise those provisions to call for the application of a more favorable set of state law in the absence of an established federal maritime rule.
The Raiders Realty decisions are available from the Supreme Court of the United States here.
For questions about the decision or to discuss how this decision may impact your cases or your business, please contact the head of the firm’s Admiralty & Maritime practice, Markus Apelis.