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 their 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? The issue is now before the Supreme Court.
The United States Court of Appeals for the Third Circuit in Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, considered the choice of law provision to a marine insurance policy. In Great Lakes Insurance, Raiders Retreat Realty held a $550,000 policy from Great Lakes Insurance (“Great Lakes”) for one of its yachts. When the yacht ran aground in 2019, Raiders filed a claim under its policy with Great Lakes, who denied the claim, on the basis that that Raider’s had not properly certified the yacht’s fire suppression system, thereby voiding coverage pursuant to the terms of the policy. Note that it was undisputed that this failure was irrelevant to the loss.
Great Lakes sought a declaratory judgment that the policy was indeed void in the U.S. District Court for the Eastern District of Pennsylvania. Raiders responded with five 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, pointing 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.
On appeal, Raiders argued that the United States Supreme Court precedent pertaining to forum selection clauses also extends to choice-of-law provisions. Specifically, the Supreme Court has 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: (1) that these cases were irrelevant as they pertained to forum selection clauses, not choice of law; and (2) that this principal 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.
Ultimately, the Third Circuit agreed with Raiders, finding that “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.
Nevertheless, the Supreme Court has agreed to revisit the issue and granted certiorari to decide 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. The Court will hear oral argument in late 2023.