ARGUMENT ANALYSIS

Justices favor reliable enforcement of choice-of-law clauses in maritime insurance contracts

As the hour of this morning’s argument in Great Lakes Insurance v Raiders Retreat Realty progressed, it seemed to become more and more clear how the justices will resolve this case. The question – whether state or federal law should govern the enforceability of maritime choice-of-law clauses – at first seems technical. Here, for example, a foreign insurance company insured a yacht owned by a Pennsylvania company. Although neither party to the contract is from New York, the insurance contract selected New York law, as these contracts typically do. The question in the case is whether a coverage dispute should be resolved under New York law (which would accept the insurer’s denial of coverage) or Pennsylvania law (which probably would not). The contract calls for New York law, so the justices have to decide whether federal courts should respect that contract.

Congress has not passed any legislation that is particularly relevant, and the baseline traditionally has been that maritime law is entirely federal, largely because of the Constitution’s delegation to federal courts of authority to adjudicate disputes under the law of admiralty. The argument suggests that the decision here will reconcile three of the court’s earlier cases. The first is the 1955 decision in Wilburn Boat Co. v. Fireman’s Insurance Co., a maritime insurance case in which the Supreme Court held that in the absence of any controlling precedent or statute courts should look to the relevant state law. Wilburn Boat emphasized the long tradition of state regulation of the insurance industry and the absence of federal insurance regulation. The second and third important precedents are The Bremen v. Zapata Off-Shore Co. and Carnival Cruise Lines v. Shute. Both of those cases involved maritime law, but not insurance, and both of them enforced choice-of-forum clauses without mentioning Wilburn Boat.

Jeffrey Wall presented argument for the insurance company. Justice Elena Kagan was the leading critic of his presentation, which apparently touched a nerve when he suggested that the owner’s argument rested on “more idiosyncratic … claims” available under Pennsylvania law. Kagan immediately pointed out that “you can call it idiosyncratic, but what they really are is consumer-protective as against insurance companies in situations of this kind.” For her, “the question is, as between two state laws, why we should necessarily allow the New York law to apply when everything about this case screams Pennsylvania.” In her mind, the answer to that question, for a maritime insurance contract, comes straight out of Wilburn Boat: “I would have thought that what Wilburn Boats stands for … in its essence, is [that] it should be the state regulating insurance that gets to have its way.”

As she explained at length, “Wilburn seemed to say, … even when you’re trying to figure out what the federal law should be in this area, … the states have an extremely important role to play, and so it should be a state rule of decision.” Kagan characterized “[m]ost of [Wall’s] brief” as “an effort to run away from that aspect of Wilburn repeated over and over and over again.” To underscore how incongruous it would be to let a maritime insurer avoid Pennsylvania insurance law, she noted what would happen “if the plaintiff here were an airline company or a railroad or a trucking concern”: The traditional approach for resolving choice-of-law disputes (under the Restatement) would apply Pennsylvania law.

But other than Kagan’s comments, most of the argument was smooth sailing for the insurer. For one thing, several justices regard later cases including The Bremen and Carnival Cruise Lines as retreating from Wilburn Boat. In particular, the justices seemed to think that decisions that freely allow people to choose where cases should be litigated (“choice-of-forum” clauses, the subject of Bremen and Carnival Cruise Lines) shed a lot of light on whether federal courts should let people freely choose the law that will decide their cases (the issue here).

The position of the owner (presented by Howard Bashman) is that those cases are irrelevant because they don’t involve insurance contracts, but Justices Brett Kavanaugh and Neil Gorsuch were openly skeptical about that distinction. Kavanaugh’s approach seemed to rest on the idea that Wilburn Boat was dubious even when it was decided (“something of a dislocating decision in the industry”), which had been made palatable only by the “commonplace” use of choice-of-law provisions to avoid “all this uncertainty created by Wilburn Boat.” With The Bremen providing a conspicuous validation of that approach, he suggested it “would be kind of Wilburn Boats redux if we go back now and say, oh, no, that whole experiment for the last couple generations of choice-of-law provisions is no good.” To be clear “Wilburn Boats redux” was not a compliment.

It seemed the death knell for the owner when Justice Sonia Sotomayor weighed in with a long narrative making her opposition quite unambiguous. Sotomayor takes the presumption that choice-of-law clauses should be enforced as a given: “Every lower court [that has] faced the question has presumed there’s that presumption. You haven’t given me a reason why in admiralty law there wouldn’t be that presumption.” Moreover, to make matters even worse for the owner, Sotomayor volunteered her sense of the federal policy that should inform the question:

We want uniformity in maritime interpretation. We want people to be secure in knowing which laws we are going to apply, not what the substance of those laws are, but which law is going to apply. Everything that moved us to find that presumption in the forum-selection world seems to apply here. So now tell me why it shouldn’t.

If Sotomayor’s general agreement with Kavanaugh and Gorsuch didn’t make the outcome clear enough, it got even worse for the owner when Justice Ketanji Brown Jackson weighed in moments later echoing Sotomayor: “if you have state interests operating in the exception, you’re going to have all of these different exceptions popping up at different times and people aren’t going to know what they’re doing.”

It remains to be seen exactly how they will explain this result, but I don’t think there is a lot of doubt that the route the court is going to leave for invalidating maritime choice-of-law clauses is going to be narrow.