The murky waters where state law and federal maritime law converge

The U.S. Supreme Court in Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC (Sup. Ct. Dkt. No. 22-500), considers when state law can supplement federal maritime law. Specifically, the Court is presented with the following question:

Under 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?

The specific choice-of-law clause at issue provides as follows:

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.

The underlying coverage denial by Great Lakes Insurance SE (“Great Lakes Insurance”) to Raiders Retreat Realty Co. LLC (“Raiders”) giving rise to the case was aptly summarized by Justice Alito at oral argument on Oct. 10, 2023:

“Now this is a case about a yacht [owned by Raiders] that ran aground, and when the claim is filed, your client [Great Lakes Insurance] denies the claim because you say they [Raiders] didn’t do what they [Raiders] were supposed to do regarding fire extinguishers. But there was no fire. The absence of fire extinguishers up to your [Great Lakes Insurance’s] standards had nothing whatsoever to do with this.”

Great Lakes Insurance filed an action for declaratory judgment in the U.S. District Court for the Eastern District of Pennsylvania to determine whether the policy it issued was void. Commenting on Great Lakes Insurance’s assertion that such a denial may seem harsh to the “land-bound” but [somehow] not the seabound, Justice Alito prodded:

“Now, if I were not land-bound, suppose I – you know, I – I spent a lot of time sailing around the world on ships, it wouldn’t seem harsh to me anymore?”

Raiders aptly summarized in its brief the underlying facts as follows:

[W]hen a claim for coverage is received, it is Great Lakes’ practice to scour the policyholder’s behavior in the hope of uncovering entirely unrelated, technical violations by the policyholder, so that Great Lakes can deny coverage and avoid paying for claims that it had seemingly agreed to insure.

Restating the question presented to the Court, Raiders persuasively argues that the “question here boils down to whether Pennsylvania’s interest in applying its own law to a conflict having numerous, significant connections to Pennsylvania outweighs the insurer’s decision to include a choice-of-law provision in this adhesion contract.”

The question presented to the Court dives into the often murky yet necessary intersection of state law with federal maritime law. “‘With admiralty jurisdiction,’ as often said, ‘comes the application of substantive admiralty law.’” Yamaha Motor Corp. v. Calhoun, 516 U.S. 199, 206 (1996) (holding state law remedies may increase but not diminish recovery permitted under federal admiralty law, in claims arising from the death of a non-seafarer within state territorial waters) (hereinafter “Calhoun”), quoting East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 864 (1986). “Federal maritime law has long accommodated the States’ interest in regulating maritime affairs within their territorial waters … consistent with federal maritime principles and policies.” Calhoun, 516 U.S. 199, 215 n. 13.

“The exercise of admiralty jurisdiction … ‘does not result in automatic displacement of state law.’” Calhoun at 206; Askew v. American Waterways Operators, Inc., 411 U.S. 325, 341 (1973) (courts in admiralty cases may reach beyond maritime precedents and apply state law “absent a clear conflict with federal law”).

Wheeler v. Bonnin, 47 Or.App. 645 (1980) is illustrative regarding the general application of state law under admiralty jurisdiction. In considering the application of Oregon state law in admiralty jurisdiction, the court explained in pertinent part as follows:

“It is true that state law must yield to the needs of a uniform federal maritime law when this Court finds inroads on a harmonious system. But this limitation still leaves the States a wide scope. State-created liens are enforced in admiralty….State rules for the partition and sale of ships, state laws governing the specific performance of arbitration agreements, state laws regulating the effect of a breach of warranty under contracts of maritime insurance – all these laws and others have been accepted as rules of decision in admiralty cases….”

Id. at 649. The Wheeler court further summarized:

“In the [field] of maritime contracts, this Court has said, as in that of maritime torts, the National Government has left much regulatory power in the States.”

Id. at 649-50 (citing Romero v. International Term. Operat. Co., 358 U.S. 354, 373 (1959)).

Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955), discussed extensively in briefing (and oral argument) here, arose when a fire consumed a small houseboat used for commercial carriage of passengers on Lake Texoma, an artificial inland lake between Texas and Oklahoma. Id. at 311. The insurer of the boat refused to pay for the damage, because title to the boat had been transferred without the insurer’s permission, contrary to a provision of the policy. The insured argued that Texas state law should apply, which would void the policy only if the breach contributed to the loss. Id. at 311-12. The Supreme Court agreed with the insured, reasoning that, while state law cannot override federal statutory or common law admiralty rules, in the absence of an established federal maritime rule, state law controls. Id. at 314-21.

Wilburn Boat, however, provides “limited direction” on how we are to determine whether a rule is “judicially established.” See Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., 518 F.3d 645, 650 (9th Cir. 2008). “In the Ninth Circuit, we require that the rule be sufficiently longstanding and accepted within admiralty law that it can be said to be ‘established.’ Putting a slightly different spin on Wilburn Boat, the Fifth Circuit requires an admiralty rule be ‘entrenched federal precedent.’” 518 F.3d at 650 (citing Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 886 (5th Cir. 1991)).

Here, Great Lakes Insurance ultimately asks the Court to apply an imaginary, as opposed to well established, federal rule that a contractual choice-of-law provision must be enforced unless it conflicts with “federal maritime policy” (which does not exist on point). In determining the enforceability of choice-of-law provisions, Pennsylvania (similar to nearly every other state) follows the Restatement, which requires a court in some circumstances to consider the public policy of the state whose law would apply in the absence of the choice-of-law provision (which in this case is Pennsylvania, the forum state).

With respect to maritime contracts, the Court should adopt and follow the Restatement’s rule, which allows for consideration of the public policy of the state whose law would apply in the absence of the provision. Such a rule would still presume the enforcement of the choice-of-law provision unless “(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which….would be the state of the applicable law in the absence of an effective choice of law by the parties.” The Restatement’s rule is accepted by nearly every state for good reason as it presumes enforcement of the contractual provision, yet still allows, under the appropriate circumstances, consideration of the policy of the state with the greatest interest in the issue.

Maritime law has looked to the Restatement in other contexts. For example, in assessing whether to apply state law, the Restatement, or some combination of both to maritime product liability actions, numerous courts have embraced the Restatement as the “best expression” of the law of products liability under the general maritime law. Ocean Barge Transp. Co. v. Hess Oil Virgin Islands Corp., 726 F.2d 121, 123 (3d Cir. 1984); Herbert v. Outboard Marine Corp., 638 F.Supp. 1166, 1170 (E.D. La. 1986); 1 Thomas J. Schoenbaum, Admiralty and Maritime Law § 5-7 (5th ed. 2012) (“The applicable substantive law of products liability in admiralty is Section 402 of the Restatement (Second) of Torts.”). Notably, the Supreme Court has applied the Restatement (Second) of Torts in a maritime product liability case. See Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875 (1997).

Here, the Restatement’s rule with respect to contractual choice of law provisions strikes the appropriate balance between the need for uniformity in maritime law while still considering states’ interests. If the Court does not answer “yes” to the question it is presented with above, states’ interests in maritime contracts will be cast aside entirely. Such a result is contrary to Wilburn, its progeny, and public policy.