Thoughts on the Respondent’s Brief in Great Lakes
August 22, 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 a subsequent post, I shared some thoughts about the brief filed by the petitioner, Great Lakes Insurance SE (GLI). In this post, I offer some thoughts on the brief filed by the respondent, Raiders Retreat Realty LLC.
GLI is a corporation organized under the laws of 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 argued 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 maritime insurance 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 applying New York law would be contrary to Pennsylvania public policy. The district court ruled in favor of GLI. The Third Circuit vacated and remanded. The Supreme Court granted certiorari.
Respondent’s Argument in a Nutshell
Raiders argues that ordinary state law choice-of law principles govern the question of whether a choice-of-law clause in a maritime insurance contract is enforceable. Since this suit was brought in Pennsylvania, it argues, one must look to that state’s choice-of-law rules to evaluate the effectiveness of the clause.
Pennsylvania follows Section 187 of the Restatement (Second) of Conflict of Laws. Section 187 states that a choice-of-law clause should be enforced so long as (1) the chosen jurisdiction has a substantial relationship to the parties or the transaction or there is a reasonable basis for the choice, and (2) enforcing the clause would not be contrary to a fundamental policy of the state with a materially greater interest in the suit whose law would otherwise apply. Raiders argues that applying New York law on these facts would be contrary to Pennsylvania’s strong public policy of punishing insurers who deny coverage in bad faith. It also argues that Pennsylvania has a materially greater interest in the litigation than New York due to the fact that Raiders purchased, paid for, and received the policy in Pennsylvania from a Pennsylvania-licensed insurance agent whose corporate home office is in Pennsylvania. Accordingly, it argues that the clause is unenforceable under Section 187.
Raiders’ argument proceeds in three parts. First, it contends that Supreme Court precedent compels the conclusion that this issue is governed by state law rather than federal law. Second, it argues that even if the issue is governed by federal law, the Court should adopt Section 187 as a matter of federal common law. Third, Raiders argues that its position represents good policy.
In Wilburn Boat Company v. Fireman’s Fund Insurance Company, a case decided in 1955, the U.S. Supreme Court observed that the “whole judicial and legislative history of insurance regulation in the United States warns us against the judicial creation of admiralty rules to govern marine policy terms and warranties.” After discussing the history of marine insurance regulation in the United States, the Court stated that:
Under our present system of diverse state regulations, which is as old as the Union, the insurance business has become one of the great enterprises of the Nation. Congress has been exceedingly cautious about disturbing this system, even as to marine insurance where congressional power is undoubted. We, like Congress, leave the regulation of marine insurance where it has been—with the States.
In Raiders’ view, the holding in Wilburn Boat resolves this case. It argues that GLI has failed to prove the existence of an established federal choice-of-law rule relating to choice-of-law clauses in maritime insurance contracts. Absent such a rule, it argues, state law must necessarily control the outcome. And under Pennsylvania’s choice-of-law rules, it maintains, the clause is unenforceable.
In Cassirer v. Thyssen Bornemisza Collection Foundation, a case decided in 2022, the Supreme Court was asked to decide whether to use state or federal choice-of-law rules in Foreign Sovereign Immunities Act (FSIA) cases involving non-federal claims. The Court unanimously held that state choice-of-law rules should be applied.
In the present case, Raiders argues that the Court’s reasoning in Cassirer compels the conclusion that state choice-of-law rules must likewise be used to determine whether a choice-of-law clause in a maritime insurance contract should be given effect. As Raiders explains:
Maritime law, like foreign affairs, implicates unique federal interests. But it is undisputed that, exactly as in Cassirer, state law governs this dispute. The parties merely dispute which state law applies—Great Lakes claims New York law should apply, while Raiders claims Pennsylvania law should apply. As Cassirer persuasively explains, given that federal law does not displace “the substantive rule of decision in those suits,” there is “no greater warrant for federal law to supplant the otherwise applicable choice-of-law rule.”
If state choice-of-law rules apply to non-federal claims arising under the FSIA, in other words, they should similarly apply to non-federal claims arising under federal maritime law. Since the suit was brought in Pennsylvania, it logically follows that that state’s choice-of-law rules should be applied on these facts. And under Pennsylvania choice-of-law rules, Raiders argues, the clause is unenforceable.
Choosing a Federal Rule
In the event that the Supreme Court should conclude that it is appropriate to apply federal choice-of-law rules—not state choice-of-law rules—to resolve the issue presented, Raiders argues that the Court should adopt Section 187 of the Restatement (Second) of Conflict of Laws as a matter of federal common law.
This is a good argument. It is, in fact, the one that Kim Roosevelt and I made in our amicus brief. A majority of U.S. states have adopted Section 187 as a matter of state law. It is also routinely applied by the federal circuit courts of appeal. If the Supreme Court wants to adopt a federal rule to determine when choice-of-law clauses should be given effect, then Section 187 is the logical place to look. Significantly, Raiders does not seriously argue that the Court should apply the test laid down in The Bremen—a case involving a forum selection clause—to determine whether the choice-of-law clause at issue here is enforceable.
Raiders also criticizes the test proposed by GLI as incoherent. GLI argues that a choice-of-law clause in a maritime contract should be given effect if (1) the chosen jurisdiction has a substantial relationship to the parties or the transaction or there is a reasonable basis for the choice, and (2) enforcing the clause would not be contrary to a federal policy. The first half of this test tracks Section 187. The second half instructs courts to consider federal policy instead of the policy of the state whose law would otherwise apply in determining whether to enforce the clause. Raiders argues that this test “mangles” Section 187 and cannot withstand sustained scrutiny. In its words:
Great Lakes’ position works like this: “Apply New York law unless New York law conflicts with federal policy, in which case apply Pennsylvania law.” This is an extremely strange rule. If there is a sufficiently strong federal policy at stake to override New York law, that federal policy would dictate the applicable legal standard. Federal law would not enforce federal admiralty policy by applying Pennsylvania law.
More generally, federal admiralty law always preempts state law if the state law conflicts with federal policy, with or without a choice-of-law provision. If New York insurance law conflicted with federal admiralty law, it would never apply—even if the contract was negotiated in New York and sold to a New York resident, New York law would be displaced. The enforceability of a choice-of-law provision does not become relevant unless we assume that either state’s law complies with federal policy—in which case it makes no sense to look at federal policy in deciding whether to enforce the choice-of-law provision.
If federal policy is implicated, Raiders argues, then the choice-of-law clause is irrelevant because federal law trumps state law. If federal policy is not implicated, then there is no reason to consider federal law as part of the inquiry into whether the choice-of-law clause is enforceable.
Raiders argues that applying state law to protect policyholders against opportunistic behavior on the part of maritime insurance companies represents good policy in a world where Congress has chosen not to regulate that industry. It points out that allowing insurance companies doing business in Pennsylvania to contract out of that state’s rules barring insurers from acting in bad faith via a choice-of-law clause would undermine the ability of states to regulate their local insurance markets.
It argues that GLI’s policy arguments about the need for federal uniformity in this area are undermined by the fact that insurers in other industries that operate across multiple states—including trucking and rail—seem to operate perfectly well despite the absence of a unified federal regime governing the enforceability of choice-of-law clauses in insurance contracts.
It argues that GLI’s policy arguments about the need for uniformity are flawed because there is no guarantee that every insurance company will choose the law of the same state in their choice-of-law clause.
Finally, Raiders rejects GLI’s argument that applying Section 187 will open the door to forum shopping, thereby subjecting insurers to the policy whims of whatever state happens to be the forum. It points out that the test in Section 187 is not keyed to the identity of the forum. It is keyed to the state whose laws would apply in the absence of the choice-of-law clause. In this case, that state is Pennsylvania because Raiders purchased, paid for, and received the policy in Pennsylvania from a Pennsylvania-licensed insurance agent whose corporate home office is in Pennsylvania. The test’s focus on the law of the most interested state — rather than the forum — makes the choice of forum less relevant and, accordingly, reduces the incentives for forum shopping.
The litigants in Great Lakes frame the case through very different lenses. GLI argues that this is a case about federal admiralty law. It emphasizes the need for uniformity and predictability across the United States. Raiders argues that this is a case about maritime insurance law. It emphasizes the long history of state regulation in this area and the need to protect policyholders against opportunistic behavior on the part of insurers. Oral argument is set for October 10, 2023.