The Supreme Court’s February 2024 decision clarifies the choice-law law provisions in marine insurance contracts

In a unanimous 9-0 decision delivered on February 21, 2024, the US Supreme Court in Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC (“Great Lakes”) reinforced the enforceability of choice-of-law clauses in marine insurance contracts. This decision clarifies that under federal maritime law, such provisions are presumptively valid unless they conflict with a federal statute or maritime policy or if the parties cannot provide a reasonable basis for their choice of jurisdiction. The ruling has significant implications and provides guidance for how insurers should draft, interpret, and defend these clauses, especially in states like California, where strong public policy protections exist for policyholders.

Background: The journey to the Supreme Court

The conflict began when Great Lakes Insurance SE denied coverage for a claim after a yacht owned by Raiders Retreat Realty Co., LLC ran aground in Florida. The insurer, citing a New York choice-of-law clause in the policy, filed a declaratory judgment action in Pennsylvania federal court to affirm its decision. Raiders Retreat, in turn, filed counterclaims under Pennsylvania contract law, arguing that the state’s public policy should override the contract’s stipulation.

This dispute reached the US Court of Appeals for the Third Circuit, where the court sided with Raiders Retreat. The Third Circuit held that Pennsylvania’s public policy could override the choice-of-law clause in the insurance policy. This decision caused insurers to be concerned about the uniform enforceability of such clauses and Great Lakes asked for the Supreme Court’s review, with many insurance groups filing amicus briefs. The Supreme Court’s decision to grant certiorari reflected the need for clarity in how federal maritime law interacts with state public policy in these contexts.

The Supreme Court’s reasoning: A unanimous voice for predictability

In an opinion authored by Justice Brett Kavanaugh, the Supreme Court, reversed the Third Circuit’s decision and reasserted the longstanding federal maritime rule: choice-of-law provisions in maritime contracts are to be upheld unless they contravene federal maritime policy or statute, or if the parties fail to demonstrate a reasonable basis for the chosen jurisdiction (such as choosing the law of some foreign jurisdiction without any rational basis). This ruling echoes past decisions, such as The Bremen v. Zapata Off-Shore Co. and Carnival Cruise Lines, Inc. v. Shute, which underscored the importance of honoring forum-selection and choice-of-law clauses to avoid pretrial disputes and ensure stability in commercial maritime contracts.

Justice Kavanaugh emphasized that maritime law, governed by Article III of the Constitution’s grant of admiralty jurisdiction, must maintain uniformity to protect the interests of navigation and commerce. The decision confirmed that federal maritime law takes precedence over conflicting state laws, even if a state has a significant interest or policy in the dispute. Justice Clarence Thomas, concurring, challenged the Supreme Court’s 1955 decision in Wilburn Boat Co. v. Fireman's Fund Insurance Co. which permitted state law as a fallback, highlighting that the Constitution endows federal courts with authority over all maritime cases, reinforcing the need for a uniform legal approach. The Wilburn Boat decision had long been criticized by maritime practitioners.

Why this matters:

This ruling is significant for insurers, maritime employers and policyholders. It reinforces the ability of insurers to draft choice-of-law clauses with more confidence, knowing federal maritime law should be applicable. This clarity helps carriers avoid legal conflicts that might arise due to differing state public policies and eliminates much of the legal ambiguity that has surrounded the enforceability of such clauses. The decision also streamlines litigation, saving time and resources by reducing pre-trial debates over applicable laws, which is especially helpful for insurers working across multiple states.

For states like California, known for strong consumer protection laws, this ruling warns policy holders to carefully review the terms of the policy before committing. While California’s policies often prioritize policyholder rights, the Great Lakes decision makes it clear that valid choice-of-law provisions in maritime contracts should prevail over state-specific regulations. This ruling further signals that choice of law provisions allow maritime shippers to decide “on the front end ‘what precautions to take’ on their boats.” Great Lakes citing American Dredging Co. v. Miller, 510 U.S. 443, 114 S. Ct. 981, 127 L. Ed. 2d 285 (1994).

Comment: Takeaways for insurers

The Supreme Court’s decision in Great Lakes should send a clear message: federal maritime law reigns supreme when it comes to choice-of-law clauses in marine insurance contracts. As historically recognized in maritime law, uniformity and federalism provide a consistent, predictable, and fair legal system that supports seamless domestic and international maritime activities, benefiting commerce and navigation across the board. Ultimately, this ruling promotes a more predictable and uniform environment for maritime insurance.