U.S. Supreme Court Decision May Nullify Choice-of-Law Provisions Under Admiralty Law

It is rare for the U.S. Supreme Court to grant certiorari in cases involving issues of insurance. However, the Court’s decision to grant certiorari in Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, 143 S. Ct. 999 (2023), may substantially alter the use of choice-of-law provisions in maritime insurance policies, and possibly, insurance policies in general. The Court will decide whether, under federal admiralty law, a choice-of-law provision in a maritime insurance policy can be rendered unenforceable if enforcement conflicts with the “strong public policy” of the state whose law is displaced.

Factual and Procedural Background

Great Lakes is an insurance coverage case under federal admiralty law that arose when a yacht owned by Raiders Realty Co., LLC (“Raiders”) ran aground. Subsequently, Raiders submitted a claim to its marine insurance carrier, Great Lakes Insurance SE (“GLI”), for coverage. GLI denied the claim because the yacht’s fire-extinguishing equipment had not been timely recertified or inspected, violating the policy’s terms.
GLI filed suit in the U.S. District Court for the Eastern District of Pennsylvania seeking declaratory judgment that the policy was void because Raiders allegedly failed to recertify or inspect its fire-suppression equipment, thus violating the policy’s terms. Raiders counterclaimed on five counts, of which three were Pennsylvania-specific causes of action.1 In response, GLI contended the policy’s choice-of-law provision designated federal admiralty law and, in its absence, New York law as the applicable law for the case.2 Therefore, Raiders’ Pennsylvania-specific causes of action were precluded. Raiders argued the choice-of-law provision was unenforceable because it contravened Pennsylvania public policy.

The District Court and Circuit Court’s Analyses

Essentially, the two courts differed on whether the framework of The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) applied to choice-of-law provisions within maritime insurance policies under federal admiralty law. In The Bremen, the U.S. Supreme Court addressed a choice-of-forum issue between an American and a German company. The Supreme Court held that the policy’s forum selection was facially valid and should be honored unless a compelling and countervailing reason rendered enforcement unreasonable or unjust, such as contravening the public policy of the forum where the suit is initially brought.

The District Court Upheld the Choice-of-Law Provision

The District Court agreed with GLI, emphasizing that contractual choice-of-law provisions are generally valid and enforceable under federal admiralty law. The District Court concluded that the public policy of a state where a case was filed cannot override the presumptive validity, under federal admiralty choice-of-law principles, of a provision in a maritime insurance policy where the chosen forum has a substantial relationship to the parties or the transaction.
The District Court rejected Raiders’ application of The Bremen, holding that The Bremen’s framework only applied to choice-of-forum clauses. In doing so, the District Court emphasized that the term “forum” is not a synonym for “state.” Further, the District Court agreed with the Ninth Circuit’s rationale in Galilea, LLC v. AGCS Marine Ins. Co., 879 F.3d 1052, 1060 (9th Cir. 2018), where the Ninth Circuit held that within “federal admiralty jurisdiction, conflicting state policy cannot override squarely applicable federal maritime law.” Thus, the District Court held that there was established federal admiralty law that answered the choice-of-law question raised, and since The Bremen’s framework did not apply to choice-of-law provisions, there was no need to address any issues of “strong public policy.”

The Third Circuit Held The Bremen’s Framework Applied to Choice-of-Law Provisions

On appeal, the Third Circuit disagreed, holding that a “strong public policy” of a state can render a choice-of-law provision unenforceable under federal admiralty law.3 The Third Circuit held that The Bremen’s framework applied to choice-of-law provisions as well, and that while choice-of-law provisions are generally enforced under federal law, they can be rendered unenforceable if enforcement would be “unreasonable or unjust.”4 The Third Circuit agreed with Raiders that enforcing New York law, in the absence of federal admiralty law, would be “unreasonable or unjust” because it would contravene Pennsylvania’s “strong public policy,” which aims to protect insureds from, among other things, bad faith and unfair trade practices by insurance companies.
Moreover, the Third Circuit disagreed with the District Court’s assertion that the issue turns on whether well-established federal choice-of-law principles yield to states’ public policies. The Third Circuit found that the District Court was wrong to limit The Bremen and its progeny to just choice-of-forum provisions, and not extend the framework to choice-of-law provisions. Specifically, the Third Circuit pointed to the U.S. Supreme Court’s reasoning in Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), where the U.S. Supreme Court extended The Bremen’s framework beyond disputes over which nation is the appropriate forum, to disputes over which state is the appropriate forum.
Accordingly, the Third Circuit held that enforcement of choice-of-law provisions in marine insurance policies under federal admiralty law is “not altogether separate from choice-of-forum/choice-of-law regime set out in The Bremen.” The Third Circuit reversed and remanded to the District Court to determine “whether Pennsylvania has a strong public policy that would be thwarted by applying New York law.”

Potential Impact of U.S. Supreme Court Decision

The U.S. Supreme Court will decide whether choice-of-law provisions in maritime insurance policies under federal admiralty law can be rendered unenforceable if enforcement conflicts with the “strong public policy” of the state whose law is displaced. While, facially, the Court’s decision only affects maritime insurance policies under federal admiralty law, it is plausible that lower courts may extend the decision to insurance policies, in general. Hence, the Court’s decision may have a significant impact on choice-of-law provisions in maritime insurance policies going forward, and possibly insurance policies in general.
Notwithstanding, whether the Court’s decision will only extend to choice-of-law provisions within maritime insurance policies under federal admiralty law is yet to be seen. The Court most often resolves issues in the narrowest scope possible, so likely only a small subset of insurance policies, namely maritime insurance policies under federal admiralty law, will be impacted by the Court’s holding.
For more information, contact Kyle A. Rudolph at KRudolph@sdvlaw.com.
*Special thanks to Ali Jamwal for contributing to this case alert.

1Raiders alleged breach of contract (Count 1); breach of the implied covenant of good faith and fair dealing (Count 2); breach of fiduciary duty (Count 3); insurance bad faith, in violation of 42 Pa. Stat. and Cons. Stat. Ann. § 8371 (Count 4); and violation of Pennsylvania’s Unfair Trade Practices Law (Count 5).

2GLI moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) as to Counts 3 through 5, which sought relief available against insurance companies under Pennsylvania law.

3Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, 521 F. Supp. 3d 580 (E.D. Pa. 2021).

4Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, 47 F.4th 225 (3d Cir. 2022).