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US Supreme Court Grants Certification To Review Choice Of Law Clause In Admiralty Case Could Open Insurers To Bad Faith Actions

March 10, 2023

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The Supreme Court granted review in <em><a href="">Great Lakes Insurance SE v. Raiders Retreat Realty Co.</a>,</em> agreeing to consider whether, under federal admiralty law, a choice of law clause in a maritime contract can be rendered unenforceable if its enforcement is found to be contrary to the “strong public policy” of the state whose law is displaced.  <em>Raiders </em>stems from a declaratory judgment action brought by Great Lakes Insurance SE (“GLI”). GLI had insured a vessel owned by Raiders Retreat Realty Co. (“Raiders”) that ran aground in June 2019. GLI sought a declaration that Raiders’ alleged failure to recertify or inspect its fire extinguishing equipment, which GLI allegedly violated a warranty in the policy, and rendered the policy void from its inception, meaning GLI owed Raiders no coverage with respect to the incident.

Raiders responded to GLI’s declaratory judgment action with several counterclaims, including three counterclaims arising under Pennsylvania law, two of which—for bad faith and unfair trade practices—would not be available under New York law. The United States District Court for the Eastern District of Pennsylvania held that the policy’s choice-of-law provision mandated the application of New York law. As such, the District Court dismissed the Pennsylvania-based counterclaims.

In its dismissal, the District Court rejected Raiders’ argument that because applying New York law would contravene Pennsylvania public policy, the policy’s choice-of-law provision was unenforceable under a Supreme Court case, <em>The Bremen v. Zapata Off-Shore Co.</em>, which held that a forum-selection provision is unenforceable under federal admiralty law “if enforcement would contravene a strong public policy of the forum in which suit is brought.”

The United States Court of Appeals for the Third Circuit reversed the District Court’s holding, finding that the District Court should have considered whether applying New York law would contravene Pennsylvania’s “strong public policy.” The Third Circuit noted that under Supreme Court jurisprudence, “maritime contracts are governed by federal admiralty law when there is an established federal rule, but absent such a rule, state law applies.” GLI had argued that there is an established federal rule—namely, that a choice of law provision in a marine insurance contract will be upheld in the absence of evidence that its enforcement would be unreasonable or unjust. Accordingly, GLI argued, federal admiralty law should apply.

The Third Circuit found that the principle noted by GLI, of generally enforcing choice-of-law provisions in marine insurance contracts, is not altogether separate from the choice-of-forum regime set out in <em>The Bremen</em>. As such, the Third Circuit remanded the case for further proceedings, instructing the District Court to consider whether applying New York law would contravene Pennsylvania public policy.

The disposition of this case could have a large impact on maritime insurance contracts that are governed by federal admiralty law. If the Third Circuit’s decision is upheld by the Supreme Court, courts would be required to consider whether enforcement of a policy’s choice-of-law provision would contravene a strong public policy of the displaced state. In conflicts between New York and Pennsylvania law, like the one at issue in <em>Raiders</em>, this would mean that insurers could be subject to claims for bad faith and unfair trade practices even if their policy contains a New York choice of law provision. The Supreme Court will likely hear oral argument in <em>Raiders </em>in Fall 2023.

Thanks to Erin Gallagher for her assistance in this post.  Should you have any questions, please contact <a href="">Tom Bracken</a>.


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