In a 9-0 decision, the U.S. Supreme Court held on February 21, 2024, that choice-of-law clauses in marine insurance contracts are presumptively enforceable under federal maritime law. These clauses should be enforced unless 1) the chosen law contravenes a controlling federal statute or federal maritime policy, or 2) upon giving "substantial deference to the contracting parties," the parties can furnish no reasonable basis for the chosen jurisdiction. Federal maritime law takes precedence over state law, regardless of any public policy of the forum state or another state with a strong relationship to the parties or the dispute.

Background

In Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, Case No. 22-500 (U.S. Feb. 21, 2024), a marine insurer denied a claim filed after the insured's yacht ran aground in South Florida. The insurer filed a declaratory judgment action in federal court in Pennsylvania; the insured responded with Pennsylvania contract law counterclaims, even though the policy contained a New York choice-of-law clause. The U.S. Court of Appeals for the Third Circuit, reversing the district court, held that choice-of-law clauses in marine insurance contracts must yield to the strong public policy of the state in which the suit is brought – in this case, Pennsylvania's public policy regarding insurance contracts.

Unanimous Supreme Court Opinion

In a unanimous opinion authored by Justice Brett Kavanaugh, the Supreme Court reversed the Third Circuit. The Court first identified the relevant test: In cases within their admiralty and maritime jurisdiction, federal courts are to apply established general maritime law rules as part of the federal common law. Where no such rules exist, federal courts must either create new common law rules or, if they decline, apply state law to fill the gap in the law. The Court explained that there is an established federal maritime rule that presumptively enforces choice-of-law provisions in marine insurance contracts. The Court reached this conclusion in part by analogizing to its precedent on forum-selection clauses in maritime contracts.

The Court rejected the insured's reliance on its – now much-maligned – 1955 decision in Wilburn Boat Co. v. Fireman's Fund Insurance Co. In that case (involving no choice-of-law clause), the Court used state law as a gap-filler to govern a warranty issue in a marine-insurance dispute because there was no federal maritime law governing the issue, and the Court declined to create one. But there was no such gap to fill in Great Lakes, given federal maritime law's policy of enforcing choice-of-law clauses. In a concurring opinion noting that the U.S. Constitution extends federal judicial power to all cases of admiralty and maritime jurisdiction, Justice Clarence Thomas questioned altogether the rationale of Wilburn Boat, which has been criticized by a plethora of authorities. The Court also rejected the insured's attempts to create new exceptions to enforceability (beyond the two identified above) for marine insurance contracts only or for instances where the selected law would frustrate the public policy of the state with the "greatest interest" in the dispute. The Court concluded that "no federal maritime interest favors injecting that kind of disuniformity and unpredictability into maritime commerce." Slip Op. at 13.

The Court explained that enforcing choice-of-law clauses promotes freedom of contract, prevents parties from the expense of pre-trial motions and reduces commercial and legal uncertainty over what law governs maritime actors' conduct. The Court's decision also harmonizes choice-of-law doctrine in the marine-insurance context with earlier Court opinions approving forum-selection clauses and underscores the preeminence of federal maritime law over state law. Finally, the opinion promotes "the uniformity and predictability resulting from choice-of-law provisions, [which] are especially important for marine insurance contracts given that marine insurance is 'an integral part of virtually every maritime transaction, and maritime commerce is a vital part of the nation's economy.'" Slip Op. at 9 (quoting M. Sturley, Restating the Law of Marine Insurance: A Workable Solution to the Wilburn Boat Problem, 29 J. Mar. L. & Com. 41, 45 (1998)).