Chaos v. Predictability: The Enforceability of Choice of Law Provisions

When a new claim is made or a lawsuit is filed, one of the first questions asked is whether the policy at issue contains a choice of law provision.  These provisions dictate the law that should govern the parties’ dispute and the interpretation of the policy. They also provide uniformity and predictability.  However, when a court finds a choice of law provisions unenforceable and/or against the public policy of the forum state—as one insurer put it—“chaos” ensues.

On March 6, 2023, the United States Supreme Court granted certiorari to decide whether, “[u]nder federal admiralty law, can a choice of law clause in a maritime contract be rendered unenforceable if enforcement is contrary to the ‘strong public policy’ of the state whose law is displaced?”  See Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC (“Raiders III”), No. 22-500, 2023 WL 2357327 (Mar. 6, 2023).  While this question is tied directly to federal admiralty law and maritime contracts, the broader issue before the United States Supreme Court could ultimately impact the enforceability of choice of law provisions in all insurance contracts. 

Raiders Realty Co., LLC (“Raiders”) owned a yacht insured by Great Lakes Insurance SE (“Great Lakes”) that “ran aground” in June 2019, incurring roughly $300,000 in damage. See Great Lakes SE v. Raiders Retreat Realty Co., LLC (“Raiders I”), 521 F. Supp. 3d 580 (E.D. Pa. 2021).  Raiders submitted a claim to Great Lakes, which, after investigation, denied coverage on the grounds that the yacht’s fire extinguishers had not been inspected or recertified, contrary to Raiders’ prior representations.  

Great Lakes ultimately filed a declaratory judgment action in the United States District Court for the Eastern District of Pennsylvania seeking a declaration that the policy itself was void due to Raiders’ misrepresentations.  In response, Raiders asserted various counterclaims, including three for extra-contractual relief under Pennsylvania law—breach of fiduciary duty (Count III), insurance bad faith (Count IV), and a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (Count V).  Great Lakes moved for judgment on the pleadings on those counterclaims, arguing that New York law should apply to the parties’ dispute, relying on a choice of law provision in the insurance policy that provided:

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.

Raiders disagreed, arguing that the application of New York law would be unreasonable and unjust because it would “frustrate Pennsylvania’s strong public policy of punishing insurers who deny coverage in bad faith,” relying on the United States Supreme Court’s decision in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), which addressed the enforceability of forum selection clauses.

The Eastern District of Pennsylvania agreed with Great Lakes.  Under federal maritime choice of law rules, contractual choice of law provisions are valid and enforceable, in the absence “of evidence that its enforcement would be unreasonable or unjust.”  Raiders I, 521 F. Supp. 3d at 585.  While acknowledging that some federal courts have applied The Bremen’s principles to choice of law provisions, the Eastern District of Pennsylvania declined to follow those cases, stating that it was “not persuaded” that The Bremen was applicable here:

Here, the Court concludes that the public policy of a state where a case was filed cannot override the presumptive validity, under federal maritime choice-of-law principles, of a provision in a marine insurance contract where the chosen forum has a substantial relationship to the parties or the transaction. The issue is not, as Raiders contends, whether New York law conflicts with Pennsylvania public policy; the issue is whether the well-established principle that choice-of-law provisions in maritime contracts are presumptively valid must yield to the public policy preferences of the particular state in which the case happens to have been brought.

Raiders I, 521 F. Supp. 3d at 588 (internal citations omitted).  As such, the court held that permitting “state public policy to override presumptively valid contractual choice-of-law provisions in marine insurance contracts would frustrate uniformity and, with it, the central purpose of maritime law.”  Id.

Raiders appealed to the Third Circuit which vacated the Eastern District of Pennsylvania’s judgment and remanded for further proceedings.   See Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC (“Raiders II”), 45 F.4th 225 (3d Cir. 2022).  In doing so, the Third Circuit explained that it “consider[s] it altogether reasonable that a strong public policy of the forum [state] in which suit is brought could, as to that policy specifically, render unenforceable the choice of state law in a marine insurance contract.”  Id. at 233. As such, the Third Circuit instruct the Eastern District of Pennsylvania to “consider whether Pennsylvania has a strong public policy that would be thwarted by applying New York law.” Id.

Great Lakes filed a petition for a writ of certiorari to the United States Supreme Court arguing the importance of choice of law clauses in the marine insurance industry, because without predictability surrounding such clauses, there would be “chaos.”  Petition for Writ of Certiorari at * 8, No. 22-500 (Nov. 23, 2022). Great Lakes further argued that the Third Circuit’s ruling will “inject massive uncertainty into an insurance industry that depends on predictability.”  Reply Brief for the Petitioner at * 1, No. 22-500 (Jan. 24, 2023).  On March 6, 2023, the Supreme Court granted that petition, Raiders III, 2023 WL 2357327, and argument is expected in late 2023.

Regardless of the Supreme Court’s holding, this decision will have broad implications with respect to maritime insurance contracts and hopefully provide some clarity to all parties involved.  While it is impossible to predict which way the Supreme Court will decide this matter, it is also possible that the decision could have a broader impact on the enforceability of choice of law provisions in all insurance contracts, particularly as it relates to extra-contractual claims.  The Third Circuit did not address two additional arguments raised for the first time on appeal (except by mention in a footnote)—whether the language of the choice of law provision mandated the application of New York law to its extra-contractual claims arising under Pennsylvania law or, “the more intriguing argument that the provision is ambiguous and therefore should be construed against [Great Lakes] as the drafting party”—but the Supreme Court may very well offer some commentary on those issues (as the First Circuit recently did in Great Lakes Insurance SE v. Andersson, No. 21-1648, 2023 WL 2998992 (1st Cir. Apr. 19, 2023)).