Earlier this month, the U.S. Supreme Court granted cert in the case of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC. The question before the Court is whether, under federal admiralty law, a choice-of-law clause in a marine insurance policy can be rendered unenforceable if enforcement is contrary to a strong public policy of the state whose law is displaced.

The Supreme Court’s resolution of this rather hair-splitting dispute is likely to have significant implications for the marine insurance industry in particular, and could even extend to non-maritime insurers as well. The Court is poised either to expose a chink in the armor of choice-of-law clauses and their presumed enforceability under maritime law, or to shore up the defense that such clauses afford to insurers. And depending on how broad the Court’s ruling is, litigants in non-maritime contexts are sure to take their cue accordingly.

The Great Lakes case arose in 2019, when a yacht owned by Raiders Retreat Realty Co., LLC ran aground near Fort Lauderdale, Florida, sustaining at least $300,000 in damage. Raiders had insured the yacht with hull coverage through a policy from marine insurer Great Lakes Insurance SE. Raiders submitted a claim to Great Lakes, which rejected it. The insurer claimed that the yacht’s fire-extinguishing equipment was not timely recertified or inspected and that Raiders had misrepresented the state of this equipment in the past, thereby voiding the policy.

Great Lakes then filed suit in the U.S. District Court for the Eastern District of Pennsylvania to determine whether the policy was in fact void. Raiders denied any misrepresentation and brought five counterclaims, including breach of fiduciary duty, bad faith, and a violation of Pennsylvania’s Unfair Trade Practices Law.

Great Lakes moved for judgment on the pleadings on these three counterclaims on the grounds that each arose under Pennsylvania law and therefore contravened the insurance policy’s choice-of-law provision. That clause stated:

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 argued that the choice-of-law clause was unenforceable because applying New York law would frustrate Pennsylvania’s strong public policy of punishing insurers that deny coverage in bad faith.

The district court disagreed, holding 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.” The key to this result was the court’s interpretation of the Supreme Court’s decision in The Bremen v. Zapata Off-Shore Co. as relevant to choice-of-forum clauses, not choice-of-law clauses.

In The Bremen, the Supreme Court noted that “[a] contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.” Distinguishing The Bremen, the district court determined that in the context of choice-of-law provisions, presumptive enforceability was the rule. Therefore, New York law should apply as the parties contracted, the court held, rendering Raiders’ Pennsylvania-based counterclaims inappropriate.

Raiders appealed the dismissal of its three counterclaims, and the Third Circuit reversed the lower court’s ruling. The appellate court reasoned that the district court had construed The Bremen too narrowly, as only applying to forum clauses. Importantly, the court noted that other circuits, including the Fifth Circuit, have extended The Bremen to choice-of-law contexts.

The Third Circuit did not do away with the principle of the presumptive enforceability of choice-of-law provisions, but it determined that one exception to that rule is where a strong public policy of the forum state would be thwarted by enforcing the choice-of-law clause.

The Supreme Court’s agreement to hear Great Lakes signals one of two things: either the Court is ready to put the presumption back in presumptive enforceability, or instead place its seal of approval on a fairly significant exception to the enforcement of choice-of-law clauses in marine insurance policies.

Stay tuned for more coverage as this case further unfolds before the Supreme Court.