The Supreme Court has an affinity for admiralty cases. Why else would the Court agree to take on a seemingly simple marine insurance dispute involving a yacht owner and his United Kingdom-based marine insurance company? Because the Supreme Court recognizes what is at stake is fundamental to the foundation of federal maritime law.
The Supreme Court has entertained a wide variety of maritime cases with such issues including a Limitation of Liability defense brought by the owners of the TITANIC; a cargo dispute in a “maritime case about a train wreck”; Norfolk Southern Ry. V. James N. Kirby, Pty Ltd., 543 U.S. 14 (2004); and cases involving the scope of marine terms such as “vessel”, “seamen” and “safe berth”. See, James E. Mercante, Supreme Court Dips into Admiralty, New York Law Journal, Admiralty Law, Volume 261 (June 27, 2019).
Perhaps admiralty is a welcome deviation from the rocks, reefs, and shoals the Supreme Court must navigate in hard-core and politicized cases involving civil rights, abortion, gun control, criminal law, and politics. But the Court obviously recognizes that deciding admiralty cases, like the instant marine insurance dispute, is of absolute necessity to resolve the tension between the application of federal admiralty law versus state law in maritime disputes.
With a New York choice-of-law clause in a marine insurance policy at issue, admiralty is underway to the United States Supreme Court. This is a marine insurance dispute, the likes of which the Supreme Court has not seen in over six decades since Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955).
On March 6, 2023, the Supreme Court granted the petition for a writ of certiorari filed by Great Lakes Insurance in a coverage dispute with its insured Raiders Realty Co. Raiders Realty owned a yacht insured with Great Lakes for $550,000. The yacht ran aground resulting in extensive hull and machinery damage. Grounding is a peril of the sea covered in any marine insurance policy. But, due to an alleged misrepresentation in statements prior to binding coverage and an alleged breach of express warranties that only came to light after the loss, the insurer rejected the claim and elected to void the policy from its inception. The insured had failed to timely recertify or inspect the yacht’s fire-extinguishing equipment contrary to the insured’s statement that it had been done. Misrepresentation of material information in the process of applying for a policy permits a marine insurer to rescind the contract pursuant to the policy terms in addition to the breaches of warranty.
Great Lakes then filed a declaratory judgment action in the Eastern District of Pennsylvania where the insured resides, invoking federal admiralty jurisdiction, and sought a declaration that the policy should be voided. This would nullify the grounding damage claim. The insured swung back with three extra-contractual liability claims arising under Pennsylvania state law for breach of fiduciary duty, insurance bad faith, and breach of Pennsylvania’s Unfair Trade Practices Law. The District Court enforced the policy’s choice of law clause calling for the application of New York law and dismissed the insured’s Pennsylvania law-based counterclaims. The clause states that It is hereby agreed that any dispute arising hereunder shall be adjudicated according to the well-established, entrenched principles and precedents of substantive United States Federal Admiralty law and practice, but where no such well-established entrenched precedent exists, this insuring agreement is subject to the substantive laws of the State of New York.
Great Lakes’ motion to dismiss the insured’s extra-contractual claims (with their roots in Pennsylvania state law) was based on the fact that (i) a marine insurance policy’s choice-of-law provision is enforceable under maritime law; (ii) the clause expressly calls for the application of ‘entrenched’ principals of federal admiralty law and where there is none, then substantive laws of the State of New York are to apply; and (iii) New York’s substantive law precludes ‘bad faith’ claims against a marine insurer.
The District Court did not take the bait that it should decide whether or not applying New York law would contravene some public policy of Pennsylvania law. Great Lakes Insurance SE v. Raiders Retreat Realty Co., 521 F. Supp.3d 580 (E.D. Pa. 2021). The appeal to the Third Circuit ensued.
The Third Circuit vacated and remanded the decision stating that the District Court should have considered whether Pennsylvania state law has a “strong public policy” to protect citizens insured in its state and by its state laws. Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC 47 F.4th 225 (3rd Cir.2022). If such public policy exists in Pennsylvania, then it would be “thwarted” by applying New York law. The Third Circuit’s reference to a “strong public policy” test, with not one word that federal admiralty law might have any countervailing interest, would give the states an unconditional veto over the choice of law clauses. It appears that the Third Circuit’s mistake was also in its reliance upon case law applicable to forum selection clauses. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). On the other hand, choices of law clauses are routinely enforced in maritime law.
The Supreme Court wisely stepped in because any answer the District Court would give on remand would necessarily implicate an analysis of what ‘state’ law should apply, i.e., Pennsylvania or New York. This analysis would butt up against the overwhelming precedent that choice of law clauses are enforceable under maritime law and subject to federal choice of law rules. Since the Court’s 1955 decision in Wilburn Boat, choice of law clauses have enabled the marine insurance industry to reliably judge risk (and premium to charge) based upon the application of law chosen by the parties to govern their relationship before any conflict has arisen. Great Lakes Reinsurance (UK) PLC v. Durham Auctions, Inc., 585 F.3d 236 (5th Cir. 2009).
Thus, the central issue for the Supreme Court to decide is whether the law of the forum state should be considered at all in the analysis. The writ speaks to this and suggests that the Third Circuit must be reversed because ‘no state government can ever express a strong public policy which tells the federal government which clauses are or are not, enforceable in a maritime contract. See Petition for Writ of Certiorari, Great Lakes Insurance SE v. Raiders Retreat Realty Co., 2022 WL 17361673, *6 (2022) (No. 22-500). Without a choice of law clause in a maritime contract, chaos prevails because neither the courts nor the litigants have any idea what law will eventually be applied. The marine insurance industry has employed the choice of law clause to affect some modicum of predictability. Id
To use boxing as an analogy, when the contestants entered the ring in the “Thrilla in Manilla” or “Rumble in the Jungle”to dispute the heavyweight championship, the parties had agreed and knew well in advance what rules would govern, and the foreign location of the bouts had no bearing on it.
The majority of the federal courts, including in New York, enforce such clauses so long as the chosen law has a sufficient connection to the parties or transaction and the chosen law does not conflict with the fundamental purpose of maritime law. See, American S.S. Owners Mut. Protection and Indem. Ass’n v. Henderson, 2013 WL 1245451 (SDNY 2013); Farrell Lines Inc., v. Columbus Cello-Poly Corp., 32 F. Supp.2d 118 (SDNY 1997).
Importantly, the mission of the U.S. Maritime Law Association, founded in 1899, has been to “facilitate justice” in the administration of maritime law and to “promote uniformity in its enactment and interpretation”. This will avoid a patchwork of inconsistent results arising from a state-by-state approach. Yet it appears the Third Circuit’s decision cedes control of choice of law clause in maritime contracts to the states.
This is the Supreme Court’s opportunity to salvage a bright-line federal rule permitting parties to a maritime contract to rely upon choice of law clauses that will be enforced by the courts. This is the only way to avoid parties running aground in mostly unchartered waters and laws of the 50 states. Moreover, a federal maritime rule adopted by the Supreme Court will have the desired impact of promoting uniformity of laws in this maritime nation. Say no more!
JAMES E. MERCANTE, is a partner at Rubin, Fiorella, Friedman & Mercante and is president of the Board of Commissioners of Pilots of the State of New York. KRISTINE POLING, an associate with the firm, assisted in the preparation of this article.