An insurance company told the Supreme Court on Oct. 10 in a so-called choice-of-law case that under New York law it shouldn’t have to honor a claim involving a yacht that ran aground, because the inspection for the vessel’s fire suppression equipment had expired.
The company that owns the yacht argues that the dispute should be adjudicated under the laws of Pennsylvania, where it’s based, regardless of what the insurance contract stipulates.
In contracts, the parties can decide which state’s laws are to be used to interpret a contract.
The insurance industry is closely watching the case, Great Lakes Insurance SE v. Raiders Retreat Realty Co. LLC (court file 20-500), because it has the potential to change how federal courts look at the enforceability of such choice-of-law provisions in contracts.
The petitioner, Great Lakes Insurance SE, a German corporation, is a wholly owned subsidiary of Munich Reinsurance Company.
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 yacht’s fire suppression equipment hadn’t been inspected or recertified on time, as required by New York law. Great Lakes sought a declaration in federal district court in Philadelphia that the insurance policy was invalid, and Raiders filed five counterclaims against Great Lakes, according to a SCOTUSblog summary.
The insurance policy contained a choice-of-law provision requiring the policy to be interpreted according to New York law. This led the federal district court to dismiss three of the counterclaims that were based on the laws of Pennsylvania.
But the U.S. Court of Appeals for the 3rd Circuit went in a different direction, finding 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.” Admiralty law, also known as maritime law, is the body of law that governs shipping and navigation.
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 needs to address the case to bring clarity to a specific area of the law that lacks it.
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.”
During oral arguments on Oct. 10, Justice Samuel Alito addressed Great Lakes attorney Jeffrey Wall.
The justice referred to “a wonderful line” in the lawyer’s brief in which the client denies the claim because it says that “they didn’t do what they were supposed to do regarding fire extinguishers,” even though there was no fire and “the absence of fire extinguishers up to ... standards had nothing whatsoever to do with this.”
Then Justice Alito quoted a passage from the brief: “Although that denial may seem harsh to the land-bound, it reflects traditional maritime principles.”
Mr. Wall replied: “I’ve always been worried about this because it struck me as harsh, too, when I approached the case. There is a different tradition that grew up around the admiralty system and Lloyd’s of London.”
Justice Alito said, “There are a lot of things about old-time maritime law that are very harsh.”
There was “a sailor who got a fractured skull shortly after leaving port, and then the captain ... refused to put the person ... ashore at any port to get medical treatment, waited until the person came home.”
Mr. Wall said there were “no punitive damages” allowed in the unidentified case and that the case came in the context of “international insurers located overseas who had no way of monitoring these vessels or incentivizing compliance.”
Great Lakes is “a surplus lines insurer,” the lawyer said. “You go to them when your other insurers won’t take you.”
The insurer has to price policy premiums “by taking into account that you will have to comply with the warranties, which is why, here, you can get a million dollars of coverage on a half-million-dollar yacht for a premium of about $9,000 a year,” Mr. Wall said.
Raiders Retreat attorney Howard Bashman told the justices that the 3rd Circuit reached the correct result.
Under the Wilburn Boat ruling, “state law applies,” and as a result, “the fundamental public policy of the state with the greatest connection to the dispute can override the contractual choice-of-law provision, selecting the law of another state,” according to him.
The rule that the insurance company wants to follow elevates “the state law they preferred” over “applicable substantive federal admiralty law.”
“Both sides agree that substantive federal admiralty law does not preclude Raiders’ Pennsylvania law counterclaims.
“So why should federal public policy impact or restrict the choice-of-law analysis in any way?” the lawyer said.
Justice Neil Gorsuch asked Mr. Bashman why forum-selection clauses would be considered in all areas except for maritime insurance.
The attorney replied: “I think the point is ... there is no established federal rule applying in the maritime insurance context to forum-selection clauses.”
“So the argument would be open,” he added.
The justice said, “Everybody agrees ... it’s open.”
“Why would we say that state law would control there?” Justice Gorsuch said.
Mr. Bashman said state law should control because there is a “need for states to protect insurance policyholders in the insurance context from sharp practices involving choice-of-forum clauses.”
The Supreme Court is expected to rule on the case by June 2024.
