Thoughts on the Petitioner’s Brief in Great Lakes
July 13, 2023
In a prior post, I surveyed the facts, procedural history, and potential significance of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, an upcoming Supreme Court case about the enforceability of choice-of-law clauses in maritime insurance contracts. In this post, I offer some thoughts on the brief filed by the petitioner, Great Lakes Insurance SE (GLI).
GLI is a corporation organized under the laws of the Germany that is headquartered in the United Kingdom. Raiders Retreat Realty Co., LLC (Raiders) is a company organized under the laws of Pennsylvania. GLI insured a yacht owned by Raiders. The marine insurance contract signed by the parties contained the following choice-of-law clause:
It is hereby agreed that any dispute arising hereunder 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, this insuring agreement is subject to the substantive laws of the State of New York.
The yacht ran aground in Florida. Raiders filed a claim. GLI denied the claim because the yacht’s fire-extinguishing equipment had not been recertified or inspected, an issue unrelated to the damage to the yacht. GLI argues that Raiders had misrepresented the vessel’s fire suppression system’s operating ability, thereby voiding the policy.
GLI sued in federal court in Pennsylvania asking the court to declare the policy void. Raiders asserted counterclaims under Pennsylvania law. GLI argued that Pennsylvania law did not apply by operation of the choice-of-law clause. Raiders responded that the choice-of-law clause was unenforceable because it was contrary to Pennsylvania’s strong public policy of punishing insurers who deny coverage in bad faith. The district court ruled in favor of GLI. The Third Circuit vacated and remanded. The Supreme Court granted certiorari.
Petitioner’s Argument in a Nutshell
GLI wants the Supreme Court to adopt a rule stating that choice-of-law clauses in maritime contracts should generally be enforced unless applying the chosen law would violate federal public policy. It argues that the courts should not consider state public policy as part of the enforceability inquiry.
If this rule were adopted by the Court, it would lead to the immediate dismissal of three of the counterclaims asserted against GLI in this suit — breach of fiduciary duty, bad faith liability under 42 Pa. Const. Stat. §8371, and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. If the New York choice-of-law clause is enforceable, these claims must be dismissed because none of them are viable as a matter of New York law. GLI is arguing, in a nutshell, that Pennsylvania’s strong public policy of punishing insurers who deny coverage in bad faith is irrelevant to whether to enforce a choice-of-law clause in a maritime contract.
The rule proposed by GLI, if adopted by the Court, would provide a significant advantage to marine insurers in future dealings with policyholders. The practical effect of this rule would be to make it a virtual certainty that any choice-of-law clause selecting New York in a maritime insurance contract is enforced. It is an article of faith among policyholders that New York insurance law favors insurers at the expense of the insured. If the Supreme Court were to hold that state public policy is irrelevant to the enforceability inquiry, one can expect insurers to gain a tactical advantage in litigation with policyholders.
GLI advances three arguments in support of its proposed rule. The first sounds in history and precedent. The second rests on presumptive congressional intent. The third focuses on the core values of maritime law.
History and Precedent
GLI’s strongest argument in support of its proposed rule is its pedigree. Setting aside the Third Circuit’s decision in this case, there do not appear to be many cases where the lower federal courts have invalidated a choice-of-law clause in a maritime contract because it was contrary to the public policy of an individual state. As one court put it: “The critical inquiry focuses not upon Texas law and policy, but upon maritime law and policy.” The notion that federal policy – not state policy – is the only one relevant to the enforcement inquiry derives support from several decisions by other federal circuit courts of appeal. Although none of these decisions clearly and unequivocally hold that state public policy is irrelevant, they express skepticism that state policy may be used to invalidate a choice-of-law clause in a maritime contract. In light of these decisions, GLI argues that the “strong historical consensus remains that federal policy should govern the enforceability of choice-of-law clauses in this federal enclave.”
GLI also argues that Congress has “adopted a general federal policy of permitting” choice-of-law clauses in maritime contracts. In support of this argument, it points out that Congress has enacted a statute – 46 U.S.C. 30527 – that invalidates any contractual provision in a cruise contract that seeks to limit “the right . . . to a trial by court of competent jurisdiction” for personal injury or death. In GLI’s view, this statute carries a “strong negative implication” that, in all other circumstances, the “parties to maritime contracts may choose the forum and substantive law that will govern their disputes.”
This argument is weak. The statutory language in Section 30527 refers only to contractual provisions limiting “the right to trial by court.” While there are contractual provisions that may affect this right – arbitration clauses, for example – the choice-of-law clause is not one of them. Nothing in a choice-of-law clause affects the right to trial by court. A federal statute invalidating a different type of contract provision (an arbitration clause) in a different type of agreement (cruise passenger contracts) covering a different set of claims (those for personal injury or death) cannot be said to express any sort of congressional policy preference with respect to the enforcement of choice-of-law clauses in maritime insurance policies.
Core Values of Maritime Law
GLI also argues that allowing “individual State’s policies to override freely negotiated maritime contracts would conflict with well-recognized maritime values, including uniformity, predictability, and international comity. It would also encourage gamesmanship and forum-shopping.” Although this argument is stronger than the one discussed immediately above, it is not as compelling as it may appear at first glance.
There can be no question that uniformity is an important value in maritime law and, indeed, in the law more generally. If a choice-of-law clause may be invalidated based on state policy, GLI argues, the result would be “a supposed federal presumption of enforceability that is subject to 50 sets of exceptions.” This would not, however, represent a significant shift in the status quo. In 1955, the Supreme Court held in Wilburn Boat Co. v. Fireman’s Fund Insurance Company, that state law should be used to fill gaps in maritime cases where there was no controlling federal statute or rule of federal common law. In this respect, maritime law has long been subject to 50 sets of exceptions.
GLI argues that the parties to maritime contracts frequently select New York law to govern their agreements precisely to avoid this multitude-of-exceptions problem. If state policy provides a basis for invalidating these New York choice-of-law clauses, it argues, the uniformity afforded by these clauses will truly be lost because these provisions will no longer be reliably enforced. It is the unusual case, however, where a clause is invalidated on the basis of a state’s fundamental policy. In most instances, New York choice-of-law clauses would continue to be given effect in maritime contracts, thereby enabling marine insurers such as GLI to obtain a substantial measure of uniformity.
Choice-of-law clauses bring a degree of predictability to what can be a fraught choice-of-law analysis. U.S. law has, however, long imposed limits on the ability of the parties to choose the law to govern their agreement. Among other things, that law posits that a clause is not enforceable it is contrary to a fundamental policy of the jurisdiction whose law would otherwise apply. While predictability is important, it is not the only factor to consider in crafting a rule to govern the enforceability of these provisions. Protecting policyholders against bad faith behavior on the part of insurance companies is likewise important and must be balanced against the need for predictability.
GLI also argues that allowing the courts to consider state policy would undercut international comity in cases where the choice-of-law clause selects the law of a foreign country. It contends that “[a]llowing an individual State’s policies to override a foreign country’s laws risks disparaging the authority or competence of international forums for dispute resolution, which is out of keeping with . . . contemporary principles of international comity and commercial practice.” This argument fails to acknowledge that the states sometimes invoke state public policy as a basis for declining to enforce choice-of-law clauses in non-maritime insurance contracts with foreign entities with minimal impact on international comity.
In Wingard v. Lansforsakringar AB, for example, a federal district court in Alabama refused to enforce a clause selecting the laws of Sweden in a general liability policy because enforcement would violate a fundamental Alabama policy barring insurers from excluding punitive damages from coverage. In Maritz Holdings v. Certain Underwriters at Lloyd’s London, a federal district court in Missouri refused to enforce a clause selecting the laws of New York in a cyber-security policy issued by an English insurer because enforcement would violate a fundamental Missouri policy allowing policyholders to sue insurers for vexatious refusal to pay claims. These decisions have not had a discernable impact on U.S. relations with Sweden or England.
It is also worth noting that virtually every national legal system reserves the right to refuse to enforce choice-of-law clauses in international commercial agreements on public policy grounds. Since this practice is widespread, it is unclear why refusing to declining to enforce a clause on the basis of state public policy — as opposed to federal public policy — would “disparag[e] the authority or competence of international forums.”
Gamesmanship and Forum Shopping
Finally, GLI argues that considering state policy as part of the analysis will lead to gamesmanship and forum-shopping. This may well be true. On the facts of this case, however, it was not Raiders who engaged in forum shopping. It was GLI. Instead of waiting for Raiders to initiate a lawsuit for failing to pay its claim, GLI preemptively sought a declaratory judgment in federal court in Pennsylvania declaring the policy void. There is nothing nefarious about this. Policyholders and insurers routinely shop for the best forum in insurance litigation. While allowing the court to consider state policy as part of the enforcement inquiry may lead policyholders to file suit in certain states in an attempt to invalidate the choice-of-law clause, it is just as likely to lead insurers to file actions for declaratory judgments in other states in an attempt to avoid this outcome, as happened here. It is not at all clear, in summary, that adopting GLI’s proposed rule will result in a net increase in gamesmanship and forum-shopping.
Great Lakes is a case about federal maritime law. That law values predictability and uniformity. It is also, however, a case about state contract law and choice of law. That body of law has long recognized the ability of states to protect their residents against attempts by out-of-state companies to deprive them of fundamental rights via choice-of-law clauses. The petitioner’s brief makes the case for viewing the case through the first lens. We will see how the respondent chooses to frame the case when its brief is filed on or about July 31, 2023.