The Supreme Court unanimously overturned a federal appeals court, finding that under U.S. admiralty law, a forum selection provision in an insurance policy must be followed.
Admiralty law, also known as maritime law, is the body of law that governs shipping and navigation. An insurance policy is a kind of contract, and in contracts, the parties can decide which state’s laws are to be used to interpret the contract.
The case goes back to 2019, when a yacht owned by Raiders Retreat Realty Co. ran aground in Florida, suffering extensive damage. Although the damage wasn’t caused by fire, the insurer refused to cover the damage because the inspection certification for the yacht’s fire suppression equipment had lapsed.
Great Lakes Insurance SE, a German corporation that is a wholly-owned subsidiary of Munich Reinsurance Company, sought a declaration in federal district court in Philadelphia that the insurance policy was invalid, and Raiders launched five counterclaims against Great Lakes.
The insurance policy contained a choice-of-law provision requiring the policy to be interpreted according to New York law, which is considered to favor insurance companies.
Normally, courts may decline to enforce a provision if it violates public policy.
This led the U.S. district court to dismiss three of the counterclaims that were based on the laws of Pennsylvania, whose laws are considered to favor the insured.
But the U.S. Court of Appeals for the 3rd Circuit found that under U.S. admiralty law, the forum selection provision in the policy cannot be enforced if doing so “would contravene a strong public policy of the forum in which suit is brought.”
The district court should have considered whether Pennsylvania “has a strong public policy that would be thwarted by applying New York law,” the 3rd Circuit ruled. The case was remanded to the district court.
Great Lakes argued in its petition that the Supreme Court needed to address the case to bring clarity to a specific area of the law.
The company said this legal uncertainty has followed the Supreme Court’s 1955 decision in Wilburn Boat Co. v. Fireman’s Fund Insurance Co. that “threw the law of marine insurance into chaos.”
“Although Wilburn Boat clearly establishes that federal admiralty law is supreme, as it must be under the Supremacy Clause, the practical result has been that venerable marine insurance doctrines … have suffered constant erosion, with federal law constantly ceding ground to encroaching state law,” the petition stated.
“The uncertainty caused by Wilburn Boat means that every case turns into a choice of law battle as the marine insurer attempts to defend these venerable doctrines, which it has relied upon when evaluating risk and setting premium[s], and the disgruntled insured, with the active assistance of encroaching state law [and] attempts to undermine them and to replace them with more favorable state law.”
In the newly published opinion, the Supreme Court overturned the 3rd Circuit ruling, which held that Pennsylvania’s public policy goal of favoring insured parties prevents insurance carriers from implementing the choice-of-law provision in the disputed insurance policy.
Justice Kavanaugh wrote that Article III of the U.S. Constitution gives federal courts authority to create and apply maritime law uniformly throughout the United States.
And maritime contracts often contain choice-of-law clauses that point to the law of a specific jurisdiction to control future disputes, he wrote.
“Applying federal maritime law in this case, we conclude that choice-of-law provisions in maritime contracts are presumptively enforceable, with certain narrow exceptions not applicable here,” he wrote.
“A federal presumption of enforceability would not be much of a presumption if it could be routinely swept aside based on 50 States’ public policy determinations. The ensuing disuniformity and uncertainty caused by such an approach would undermine the fundamental purpose of choice-of-law clauses in maritime contracts: uniform and stable rules for maritime actors.”
The exception proposed by Raiders “lacks historical roots” and “finds no footing in the decisions of the Courts of Appeals.”
“The lack of case law supporting Raiders’ state-law argument comes as no surprise given that Raiders’ position would merely allow the substitution of one body of state law (the law of the State with the purported greatest interest in the matter) for another (the law of the State designated by a choice-of-law provision),” the justice wrote.
“As Raiders seems to acknowledge, federal maritime law offers no reason to categorically prefer the law of one State over another State,” he continued.
“This Court has never discarded a choice-of-law provision in a maritime contract on the ground that enforcement of the choice-of-law provision would violate state law. On the contrary, the Court has enforced those clauses without so much as mentioning state law,” Justice Kavanaugh wrote.
