Great Lakes in Action

Image by Herbert Aust from Pixabay

On February 21, 2024, the U.S. Supreme Court decided Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC. Loyal readers will remember (see here and here and here and here) that this case presented the question of what test to apply to determine the enforceability of a choice-of-law clause governed by federal maritime law. The Court held that such clauses were “presumptively enforceable” and should be given effect except when (1) applying the chosen law would contravene a controlling federal statute, (2) applying the chosen law would conflict with an established federal maritime policy, or (3) the parties could furnish no reasonable basis for choosing the law the jurisdiction selected. In articulating this test, the Court specifically rejected the argument that the policies of individual U.S. states were relevant to the inquiry.

The U.S. District Court for the Southern District of Florida (Judge Kathryn Kimball Mizelle) recently had occasion to apply this test in Accelerant Specialty Insurance Company v. Z & G Boat & Jet Ski Rentals, Inc. The case arose out of a dispute between a policyholder and an insurance company. The policyholder had purchased a commercial insurance policy in connection with its boat and jet-ski rental business. After a rental customer injured her hand, she sued the policyholder. The policyholder filed a claim with the insurance company. The company responded by seeking a declaratory judgment that (a) the policy did not cover the incident, and (b) it had no duty to defend or indemnify the policyholder. The policyholder brought a counterclaim against the insurance company for breach of contract. It also sought to recover its attorney’s fees under a Florida statute authorizing payment of these fees in certain insurance disputes.

The insurance company argued that the policyholder’s request for attorney’s fees should be denied for two reasons. First, it pointed out that the statute in question had recently been repealed by the Florida legislature. Second, it argued that the issue was governed by New York law—not the law of Florida—because the insurance policy contained the following provision:

It is hereby agreed that any dispute or claim arising hereunder (including non-contractual disputes or claims), or in connection with this Insuring Agreement, shall be adjudicated according to well established, entrenched principles and precedents of substantive United States Federal Admiralty law and practice but where no such well established, entrenched precedent exists, any dispute or claim arising hereunder (including non-contractual disputes or claims), or in connection with this Insuring Agreement, is subject to the substantive laws of the State of New York.

The court assumed (without deciding) that the Florida statute was applicable notwithstanding its recent repeal. It also assumed (without discussion) that the issue of attorney’s fees was substantive rather than procedural and hence covered by the choice-of-law clause. The court then turned its attention to the clause.

The policyholder argued that the clause was not enforceable because New York had no “substantial relationship” with the parties or the transaction. It pointed out that neither it nor the insurance company was based in New York. Accordingly, it took the position that the clause should not be given effect. The court rejected this argument. It observed that lack of a substantial relationship to the chosen jurisdiction was no longer a valid basis for declining to enforce a choice-of-law clause in a maritime contract. While this may provide a valid reason for not enforcing choice-of-law clauses in non-maritime contracts, per Section 187(2) of the Restatement (Second) of Conflict of Laws, it is not part of the test laid down by the Supreme Court in Great Lakes.

The policyholder also argued that the clause was unenforceable because there was no “reasonable basis” for choosing the law of New York. This is a valid basis for declining to enforce a choice-of-law clause in a maritime contract after Great Lakes. Nevertheless, the court declined to invalidate the clause on the facts presented:

The “no reasonable basis” exception must be applied with substantial deference to the contracting parties, recognizing that maritime actors may sometimes choose the law of a specific jurisdiction because, for example, that jurisdiction’s law is well developed, well known, and well regarded . . . That the contracting parties to a maritime insurance contract would seek the benefit of New York’s well-known and highly elaborated commercial law is anything but irrational.

Because the court concluded that there was a reasonable basis for choosing New York law, the Florida statute allowing for attorney’s fees was deemed not to apply.

While Accelerant Specialty Insurance Company v. Z & G Boat & Jet Ski Rentals, Inc. marks the first time that a federal court has applied the test in Great Lakes to enforce a New York choice-of-law clause, it won’t be the last; a version of this choice-of-law clause appears in countless other marine insurance contracts prepared by domestic and foreign insurers. If and when a court ever applies this test to invalidate a choice-of-law clause in a maritime contract, we will cover it here at TLB. We may, however, be in for a long wait.