Ninth Circuit Enforces Marine Insurance Arbitration Clause in Yacht Policy

by Lane Powell PC
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Maritime law is a federal body of substantive law that governs many aspects of disputes falling under the admiralty jurisdiction of the federal courts. But maritime law does not address all issues that could arise in the operation of maritime insurance contracts, and it is therefore necessary to apply substantive state law to resolve certain issues. What happens when a maritime insurance contract contains an arbitration provision, while “gap-filling” state law precludes the enforcement of that provision? The Ninth Circuit recently resolved that question in favor of enforcing marine insurance arbitration clauses in Galilea, LLC v. AGCS Marine Ins. Co., 879 F.3d 1052 (2018). 

Galilea, an entity solely owned by two Montana residents, purchased a 60-foot yacht in 2014. In 2015, Galilea requested a quote from an insurance broker to obtain insurance for the yacht. After some initial information was exchanged, Galilea decided to apply for a policy. The broker required Galilea submit a hand-signed application for insurance, which it did from Puerto Rico as the yacht was cruising the Caribbean. Galilea alleged that during the application process it informed the broker that the yacht was in the Caribbean bound for San Diego via the Panama Canal. The application included an arbitration clause requiring the resolution of disputes through binding arbitration under American Arbitration Association rules, and selecting the law of New York to apply to all disputes.

The day after Galilea submitted the application, the broker issued an insurance binder providing preliminary coverage for two weeks. The binder established a “cruising area” limited to waters north of 30.5 degrees north latitude. The next day, the broker issued a formal insurance policy underwritten by three companies (“the insurers”). The policy provided that it would only be effective “within the ‘cruising area’ specified.” The policy included arbitration and choice-of law provisions that differed from the application, providing:

This insurance policy shall be governed by and construed in accordance with well established and entrenched principles and precedents of substantive United States Federal Maritime Law, but where no such established and entrenched principles and precedents exist, the policy shall be governed and construed in accordance with the substantive laws of the State of New York, without giving effect to its conflict of laws principles, and the parties hereto agree that any and all disputes arising under this policy shall be resolved exclusively by binding arbitration to take place within New York County, in the State of New York, and to be conducted pursuant to the Rules of the American Arbitration Association.

About a month after the policy issued, Galilea’s yacht ran aground near Colón, Panama.  Galilea submitted a claim for coverage, which its insurers denied because the yacht was outside of the “cruising area” when the incident occurred. Ultimately, Galilea’s insurers initiated arbitration proceedings in New York, while Galilea filed suit in Montana federal district court asserting twelve causes of action. As summarized by the Ninth Circuit:

The [district] court held: (1) the arbitration provision in Galilea’s original insurance application was not relevant, because it was not included in the Underwriters’ demand for arbitration; (2) claims arising under the insurance policy come within admiralty jurisdiction, and under relevant choice-of-law principles, federal maritime law governs the contract; (3) the [Federal Arbitration Act] applies and requires enforcing the policy’s arbitration provision; (4) questions relating to the enforceability and scope of the arbitration provision are properly determined by the court, not an arbitrator; and (5) the scope of the policy’s arbitration clause did not extend to cover ten of Galilea’s twelve claims. The district court thus granted the [insurers’] motion to compel arbitration as to two of Galilea's claims but denied it as to the others.

Id. at 1056. Galilea and the insurers filed interlocutory cross-appeals.

On review, the Ninth Circuit first determined that Galilea’s insurance application was not incorporated into the policy and the policy’s provisions governed. The Court then turned to the enforceability and scope of the arbitration clause. Insurers asserted the clause was enforceable pursuant to the Federal Arbitration Act, while Galilea asserted the clause unenforceable under Montana law. 

The court held that the Federal Arbitration Act is a “well-established” component of maritime law and thus governed the enforceability of the policy’s arbitration clause. The court acknowledged the rule established in Wilburn Boat Co. v. Fireman’s Fund Ins. Co. that because “insurance is traditionally an area of state regulation, federal maritime law leaves room for state insurance regulation if there is no established federal maritime law rule or need for federal uniformity.” Id. at 1058 (citing 348 U.S. 310, 316, 321 (1955)). But the court concluded that the Federal Arbitration Act, which specifically applies to “maritime transactions” including “agreements relating to . . . repairs to vessels [and] collisions,” constituted an “established maritime law rule” rendering the arbitration provision enforceable. Id.

The court next addressed Galilea’s argument that the McCarran–Ferguson Act required the application of Montana law in favor of maritime law (and consequently the Federal Arbitration Act). The McCarran-Ferguson Act “precludes the application of federal statutes if (1) a state law is ‘enacted . . . for the purpose of regulating the business of insurance;’ (2) the federal law does not ‘specifically relat[e] to the business of insurance;’ and (3) the federal statute’s application would ‘invalidate, impair, or supersede’ state insurance law.” Id. (quoting Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999) (internal quotation marks omitted).) Galilea asserted that Montana’s Uniform Arbitration Act met these requirements, superseded the common-law rule in Wilburn Boat, and precluded enforceability of the arbitration provision.

The court disagreed. It held that:

Under Wilburn Boat, Galilea's maritime insurance policy is within federal admiralty jurisdiction and governed by applicable maritime law if such law exists. Applying an established federal maritime law rule—such as the provision of the FAA directly mandating the enforcement of arbitration clauses in maritime transactions—thus does not “invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance.” 15 U.S.C. § 1012(b). Rather, given Wilburn Boat and its progeny, any applicable maritime law rule is primary, and state law applies only if maritime law does not. Given the interstitial, contingent nature of state law in this setting, state insurance law is not “invalidate[d], impair[ed], or supersede[d],” id., by applying a maritime law rule when, as here, there is one.

Id. at 1059.  The court also held that even if Wilburn Boat did not already provide the answer, the policy’s choice of law provision would require the application of New York law to the enforceability issue. The court held that under maritime choice-of-law principles, courts would enforce a parties’ choice of law so long as there was no other “state which has a materially greater interest than the chosen state . . . and which . . . would be the state of the applicable law in the absence of an effective choice of law.” Id. (quoting Flores v. Am. Seafoods Co., 335 F.3d 904, 917 (9th Cir. 2003). Landlocked Montana, the court concluded, “has relatively weak interests in maritime insurance law,” and New York law would therefore apply. Id.

Finally, the court rejected Galilea’s argument that the Supreme Court’s decision in The Breman rendered the choice-of-law provision unenforceable. Id. (citing M/S Breman v. Zapata Off-Shore Co., 407 U.S. 1). That case held maritime forum selection clauses presumptively enforceable, but would render a forum selection clause unenforceable where it contravened “a strong public policy of the forum in which suit is brought.” Id. (citing Doe 1 v. AOL LLC, 552 F.3d 1077, 1083 (9th Cir. 2009) (per curiam)). The court rejected that argument, holding that The Breman’s rule as to forum selection clauses did not control as to choice-of-law provisions and that

It does not make sense to apply the federal maritime choice-of-forum rule of The Bremen to invalidate another established federal maritime rule specifically addressing the appropriate forum—here, arbitration—because of a conflict with a forum state's public policy.  Within federal admiralty jurisdiction, conflicting state policy cannot override squarely applicable federal maritime law.  Applying The Bremen in the way Galilea requests would distort the basic, gap-filling principles underlying federal maritime law's limited recognition of state insurance law.  “[S]ince the effect of the application of [state] law here would be to invalidate the contract, this case can hardly be analogized to cases * * * where state law had the effect of supplementing the remedies available in admiralty for the vindication of maritime rights.” Kossick v. United Fruit Co., 365 U.S. 731, 741–42, 81 S.Ct. 886, 6 L.Ed.2d 56 (1961) (citations omitted).  We thus conclude that Galilea's reliance on Montana law under The Bremen is misplaced.

The Ninth Circuit’s opinion in Galilea went out of its way to resolve Galilea’s numerous arguments and provide a generally-applicable principle of maritime insurance law. When a marine insurance contract includes both an arbitration provision and a choice-of-law provision designating maritime law as applicable, state anti-arbitration laws will not preclude the enforcement of arbitration, providing predictability and uniformity to marine insurers and insureds alike.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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