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U.S. Supreme Court to Decide Whether State’s Public Policy Interest Could Sink Insurance Policy’s Choice-of-Law Provision

GettyImages-108352405-300x200The rare insurance dispute has appeared on the horizon for the nation’s highest court. Last month, the U.S. Supreme Court granted certiorari and agreed to take up the case of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, on appeal from the Third Circuit. The key issue: whether a choice-of-law provision in a marine insurance policy can be rendered unenforceable if its enforcement would conflict with the “strong public policy” of the forum state.

The policyholder, Raiders Retreat Realty Co., owned a yacht and insured it pursuant to a policy issued by Great Lakes Insurance SE. After the yacht ran aground in June 2019, incurring significant damage, Raiders submitted a claim to Great Lakes for its losses. Great Lakes denied the claim, however, on the grounds that the policy was void because Raiders misrepresented the operating ability of the yacht’s fire-suppression systems—despite the fact that none of the damage to the yacht was due to fire.

Great Lakes filed a declaratory judgment action in the U.S. District Court for the Eastern District of Pennsylvania, seeking a determination that there was indeed no coverage. Raiders responded with five counterclaims, including claims for breach of fiduciary duty, bad faith, and unfair trade practices based on Pennsylvania law. The bad faith and unfair trade practices claims, specifically, were filed with reference to Pennsylvania statute, which permits insureds to recover interest, court fees, and punitive damages with respect to bad faith claims, and which prohibits unfair and deceptive trade practices by insurers, such as “deceptive” conduct that may create a likelihood of confusion or of misunderstanding” on the part of the insured.

However, the policy issued to Raiders included a choice-of-law provision, which stated that New York law would apply in the absence of a “well-established” coverage law principle under U.S. federal admiralty law. Federal admiralty law did not address the issues Raiders had raised under Pennsylvania law. Accordingly, Great Lakes moved for judgment on the pleadings, arguing that the New York choice-of-law clause governed and precluded the insured’s Pennsylvania law claims. In response, Raiders argued that the choice-of-law provision was unenforceable.

Application of the choice-of-law clause turned on competing interpretations of the Supreme Court’s 1972 decision in The Bremen v. Zapata Off-Shore Co. In The Bremen, the Supreme Court held that, under federal admiralty law, a contractual forum-selection provision is unenforceable “if enforcement would contravene a strong public policy of the forum in which suit is brought.” Raiders argued that, under The Bremen, the New York choice-of-law provision was similarly unenforceable, because it conflicted with Pennsylvania’s public policy to protect insureds from, among other things, an insurer’s bad faith or unfair trade practices. Great Lakes argued that The Bremen was inapplicable because it applied to a forum-selection clause, not a choice-of-law provision, and regardless, the Supreme Court’s decision in Wilburn Boat Co. v. Fireman’s Fund Ins. Co. dictated that under federal admiralty law, “choice of law clauses in policies of marine insurance are presumptively valid and enforceable.”

The District Court agreed with Great Lakes, applying the New York choice-of-law clause to dismiss Raiders’ Pennsylvania law claims without considering public policy arguments. On appeal, the Third Circuit reached the opposite conclusion, remanding the case to the District Court to apply The Bremen’s rule and consider whether enforcement of the choice-of-law provision would conflict with the “strong public policy” of Pennsylvania. In granting certiorari, the Supreme Court agreed to hear the case only to determine whether the choice-of-law clause in a maritime contract could be held unenforceable if its enforcement would conflict with the forum state’s “strong public policy.”

The Supreme Court’s decision in Great Lakes could have wide-ranging implications—not only as to the application of choice-of-law provisions in marine insurance policies and other contracts under federal maritime law, but to the interpretation of choice-of-law clauses more broadly. For example, a number of state courts have adopted the Supreme Court’s test for enforcement of forum-selection clauses in The Bremen, even outside the marine context. Consequently, if the Supreme Court fashions a new test for determining the enforceability of choice-of-law provisions in Great Lakes, such decision could make waves more broadly for the interpretation of these types of provisions, which are common features in many types of insurance policies. Moreover, where some states have approached both choice-of-law and forum-selection clauses with skepticism in recent years, the Supreme Court’s decision could either accelerate or arrest this trend.

Policyholders should keep a sharp eye on how the Supreme Court resolves this case, and be sure to engage experienced coverage counsel when navigating the application of choice-of-law issues in an insurance coverage dispute.


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