Under Federal Admiralty Law, Choice-of-Law Provisions in Maritime Contracts are Presumptively Enforceable

Read the full Supreme Court Opinion

A battle between federal maritime law and state insurance rules was decided today by the highest court when the United States Supreme Court unanimously reversed an appellate court ruling in Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, holding that under federal admiralty law, choice-of-law provisions in maritime contracts are “presumptively enforceable.”

Great Lakes Insurance and Raiders Retreat Realty Co. entered a maritime insurance contract, in which Raiders held a $550,000 policy for one of its yachts. Great Lakes was organized in Germany and headquartered in the United Kingdom, and Raiders is headquartered in Pennsylvania. The parties’ contract selected New York law to govern any future disputes.

The Raiders’ yacht ran aground in Florida in 2019, and Raiders filed a claim under its policy with Great Lakes. Great Lakes denied coverage for the accident and based this denial on the fact that Raiders had not properly certified the yacht’s fire suppression system, thereby voiding coverage pursuant to the terms of the policy.

Justice Kavanaugh delivered the opinion of the Court in the 9-0 decision, writing “Maritime contracts often contain choice-of-law provisions that designate the law of a particular jurisdiction to control future disputes. The enforceability of those choice-of-law provisions is governed by federal maritime law. 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.”

Great Lakes Case Revisits “Choice-of-Law” Clauses

This case revisits an important choice-of-law issue regarding marine insurance policies, and whether, under federal admiralty law, its holdings in forum selection clause cases extend to choice-of-law cases, such that a choice-of-law clause to a maritime insurance policy can be rendered unenforceable if its enforcement is contrary to the “strong public policy” of the forum state.

Choice-of-law clauses are a valuable tool for parties to preemptively decide which jurisdiction’s laws should apply to the enforcement and interpretation of insurance policies. Typically, these contracts stipulate that the substantive laws of a specified jurisdiction should apply, regardless of where a dispute arises or is filed. This allows for parties insuring across multiple jurisdictions to establish uniformity and predictability to their policies. More importantly, it allows the insurer to select the laws most favorable to its interests.

But can a marine insurer select the law of a state that has only tenuous (or even no) connections to the insured, insurer, and vessel insurer? In April 2023, SCOTUS granted certiorari following a United States Court of Appeals for the Third Circuit decision in favor of Raiders.

Courts’ Prior Decisions Go Back and Forth

Great Lakes sought a declaratory judgment that the policy was void in the U.S. District Court for the Eastern District of Pennsylvania. Raiders responded with counter-claims, including three claims available against insurers pursuant to Pennsylvania law. Great Lakes moved for a judgment on the pleadings that these Pennsylvania law-based claims were precluded under the policy, citing the policy’s New York choice-of-law provision. The District Court agreed with Great Lakes, dismissing the Pennsylvania-law based claims, and Raiders appealed.

Raiders argued that the United States Supreme Court precedent pertaining to forum selection clauses must also extend to choice-of-law provisions. Specifically, the Supreme Court has historically held that forum selection clauses are unenforceable if they are “unreasonable or unjust,” including where enforcement would “contravene a strong public policy of the forum state.” However, Great Lakes argued that these cases were irrelevant as they pertained to forum selection clauses, not choice-of-law; and that this principle does not extend to choice-of-law provisions because of the presumption of validity and enforceability of choice-of-law clauses in federal admiralty cases.

At the appellate level, the United States Court of Appeals for the Third Circuit agreed with Raiders, finding that the “unreasonable and unjust standard” and public policy interest analysis established by the Supreme Court in forum selection clause enforceability cases, equally applied in choice-of-law cases.

SCOTUS reversed the appeals court ruling, disagreeing with Raiders, and held that “choice-of-law provisions in maritime contracts are presumptively enforceable under federal maritime law, with narrow exceptions not applicable here.”

The Court reasoned that, due to longstanding precedent across federal courts, and in the interest of uniformity in maritime law, such choice-of-law provisions should be enforceable. The Court analogized choice-of-law provisions in maritime insurance agreements to forum selection clauses, which are “prima facie valid,” because the two have the same effect of reducing legal uncertainty, saving time and expense for litigants and courts alike from unnecessary pretrial motions and potential future litigation.

Also noting that courts have historically been more skeptical of forum-selection clauses than choice-of-law provisions, the Court explained that marine insurers can better assess risk by having advance assurance about the governing law. A choice-of-law provision in the marine insurance context can therefore lower the price and increase the availability of insurance.

The Court stated that the “protection of maritime commerce” is a fundamental purpose of federal maritime law, and choice-of-law provisions advance that by also producing an “equitable result.”

The applicability of such choice-of-law provisions is, however, not without exceptions.

As the parties conceded, and the Court noted, courts should disregard a choice-of-law clause in an otherwise valid maritime contract where the chosen law would contravene a controlling federal statute or conflict with established federal maritime policy.

For example, a choice-of-law clause that would release a carrier from liability for negligence would not be enforced, as such a result is forbidden by federal maritime law. Another exception to the presumption of enforceability is when the parties cannot furnish a reasonable basis for the chosen jurisdiction, though courts must apply this exception with substantial deference to the parties.

The Court expressly rejected Raiders’ argument that courts should recognize another exception when enforcing the law of the State designated in the contract would contravene the State’s public policy with the greatest interest, as it would result in uncertainty and lack of uniformity.