Supreme Court’s marine choice-of-law ruling is a win for insurers, with a silver lining for policyholders

Last month, in a rare admiralty decision regarding maritime contracts — and specifically involving a marine insurance policy — the U.S. Supreme Court unanimously ruled that choice-of-law provisions in marine insurance policies are presumptively enforceable. While underwriters should consider this a clear win, the ruling also offers marine policyholders greater contract certainty.

Choice-of-law provisions presumptively enforceable

The case at hand— Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC — involved a dispute between Raiders Retreat Realty, a Pennsylvania-based company, and Great Lakes Insurance, a subsidiary of Munich Re, based in Germany. Raiders had purchased a marine insurance policy from Great Lakes that included a choice-of-law provision specifying that U.S. admiralty law, or New York law where admiralty law is silent, would apply in the event of any litigation related to the policy.

After a boat insured under the policy ran aground in Florida, Raiders submitted a claim. Great Lakes, however, denied the claim and sued Raiders in in the U.S. District Court for the Eastern District of Pennsylvania, applying New York law pursuant to the policy. The insurer alleged that Raiders’ failure to maintain the boat’s fire suppression system was a breach of a policy warranty that allowed for denial of the claim.

Raiders argued that Pennsylvania law should apply in the dispute. The company argued that Great Lakes’ position violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law, and that Pennsylvania law should therefore apply.

The U.S. Supreme Court took up the matter to clarify the question of whether a maritime contract’s choice-of-law provision could be overridden in exceptional circumstances. One such exception, Raiders argued, applies in situations where enforcing the law of the state chosen in the policy — here, New York — would conflict with the public policy of the state that has the “greatest interest in the dispute,” which Raiders said should be Pennsylvania, where the company is based.

In its unanimous Feb. 21, 2024, decision (opens a new window), the Supreme Court held that “Choice-of-law provisions in maritime contracts are presumptively enforceable under federal maritime law, with narrow exceptions.” None of those exceptions apply in Great Lakes, the court said.

Noting that choice-of-law provisions “allow parties to avoid later disputes” and “discourage forum shopping” — both of which help reduce the cost of litigation — the court further held that “A federal presumption of enforceability would not be much of a presumption if it could be routinely swept aside based on 50 States’ public policy determinations. The ensuing disuniformity and uncertainty caused by such an approach would undermine the fundamental purpose of choice-of-law clauses in maritime contracts: uniform and stable rules for maritime actors.”

Insurers that filed briefs in this case argued that the insurance industry needs predictability and consistency in jurisdiction and choice of law matters. They have praised the court’s ruling as supporting these commercial interests.

Implications for marine policyholders

With choice-of-law provisions presumptively enforceable, policyholders should expect underwriters to seek more frequently to add such language to policies during renewal negotiations.

While insurers and insureds are free to negotiate jurisdiction and choice-of-law provisions in these policies, the Supreme Court’s decision will likely cause insurers to insist on choice of law/jurisdiction provisions such as those considered here. Policyholders should expect this language to usually specify that New York law should apply in the event of any disputes, as New York is seen as a favorable jurisdiction for insurers, with years of established case law.

Because policyholders may have little leverage with which to push back on such language, the ruling may be seen as a clear win for insurers. The introduction of choice-of-law provisions into policies, however, may present a positive aspect for buyers of marine insurance coverages — including hull & machinery, cargo, liability insurance, among others — in the form of greater contract and claims certainty. This is because all parties will know what to expect well before any potential claim arises.

The ruling should serve as a reminder for maritime companies that choice-of-law provisions are presumptively enforceable in U.S. maritime contracts generally, and in marine insurance contracts specifically, including policies related to vessel operations, shipbuilding, charter operations, port and terminal operations, cargo transportation and handling and many other matters.

Moreover, under U.S. admiralty and New York law, warranties in insurance policies have significant coverage implications. There does not need to be a causal connection between an alleged breached warranty and the cause of a loss for such a breach to void policy coverage.

It’s vital that insureds identify actual warranties in a policy, as opposed to weaker suggestions or loss prevention observations. During the placement process, an insured and its brokers should ask the insurer to explicitly identify the provisions it actually considers to be warranties.