Yacht Owner’s Fight With Insurer Tees Up Rare High Court Review

A Munich Re unit is set to challenge a Pennsylvania yacht owner at the US Supreme Court, bringing into focus a longstanding clash between federal maritime law and state insurance rules.

Great Lakes Insurance SE and the yacht owner, Raiders Retreat Realty Co., will argue on Oct. 10 over a provision in Raiders’ marine insurance policy that says federal maritime law must be used to resolve any disputes, with New York state’s insurer-friendly law serving as a backup.

The case—a rare insurance dispute that made it all the way to the highest court—delves into a legal gray area and presents potential downsides for both maritime businesses and carriers, with far-reaching implications for contracts that contain similar language, attorneys said.

“This decision could impact federal choice-of-law jurisprudence beyond maritime insurance,” said Scott Seaman, a Hinshaw & Culbertson LLP partner who represents carriers.

Great Lakes is challenging the Third Circuit’s ruling that a separate Pennsylvania insurance law favoring policyholders could take priority over the federal maritime choice-of-law provision. Only federal law matters when it comes to maritime contracts—and the Third Circuit broke with two centuries of precedent in its decision, the insurer says.

Maritime contracts—used by cruise lines, cargo carriers, and shipbuilding facilities—are governed by federal law, while insurance policies are strictly matters of state law. The provision at the center of the high court dispute is prevalent in both maritime contracts and marine insurance policies that cover the transportation of goods over land and sea.

If the high court upholds the Third Circuit’s decision, any state’s insurance or policyholder law could be found to override the widely used federal choice-of-law provision, insurers say. That would lead to an unpredictable legal landscape, according to maritime law and insurer attorneys.

“This creates uncertainty, which is something most sophisticated parties in the maritime industry seek to avoid,” said Oliver Beiersdorf, a Reed Smith LLP partner who has represented shipowners.

Key maritime players, from ferry operators to offshore energy and construction companies, are closely watching the case, according to briefs filed by industry groups.

As for marine insurance policies, Great Lakes has warned that a loss at the high court could force carriers to hike prices in some states.

“If insurers believe that they cannot have certainty in enforcing their contract provisions, they may cut coverage and increase premiums,” Seaman said.

Choice of Law

It’s rare for the Supreme Court to take up insurance cases, which are typically governed by state law. Great Lakes got the justices’ attention, however, raising questions about maritime contracts and federal admiralty laws.

Marine insurers usually include a choice-of-law provision specifying that federal maritime law governs the insurance contract, and that New York law applies in the absence of a federal precedent.

“Insurance companies generally want New York state law to apply to coverage disputes, because New York law historically has been more favorable to insurers,” said Anthony Bartell, a McCarter & English LLP partner who represents policyholders. “Policyholders don’t really have the power to negotiate over these provisions” in most instances, he said.

“In a lot of cases, the application of a particular state’s law means the difference between whether or not the policyholder gets the coverage,” Bartell added.

Raiders held a $550,000 marine insurance policy with Great Lakes. Its yacht ran aground in June 2019, incurring over $300,000 in damages. After Great Lakes denied coverage and sued Raiders in Pennsylvania federal court, the yacht owner brought counterclaims under Pennsylvania insurance law alleging breach of fiduciary duty, bad faith, and unfair trade practice.

The district court sided with the insurer, finding New York law applies, and dismissed Raiders’ Pennsylvania law-related claims. The Third Circuit last year overturned that decision, agreeing with Raiders that Pennsylvania law could preclude the application of New York’s. Great Lakes subsequently appealed to the high court, which agreed to the hear the case in March.

Federal vs. State

Great Lakes argues the Third Circuit erred in holding that state laws can interfere with the interpretation of a marine insurance policy.

The Third Circuit was the first federal appeals court in 200 years to hold that state laws can make the clause unenforceable, and the ruling will create chaos for the maritime industry, Great Lakes said.

Allowing state law to trump the federal choice-of-law provision “opens up a lot of uncertainty and a can of worms,” Seaman said. “When you’re talking about federal public policy, there isn’t a lot compared to public policies of all the 50 states.”

But Raiders asked the high court to respect that insurance matters are governed by state law. It pointed to the Supreme Court’s 1955 decision in Wilburn Boat Co. v. Fireman’s Fund, which held that state law governs marine insurance contracts when there is no federal law.

The First Circuit found in April that “there is no federal maritime rule governing construction of marine insurance contracts” in a similar case involving Great Lakes. The court in that case refused to dismiss the policyholder’s claims under Massachusetts law, holding the claims weren’t bound by the choice-of-law provision because they weren’t related to an insurance contract.

‘No Free Lunch’

Great Lakes is essentially asking the Supreme Court to nullify Wilburn Boat and create a federal standard to benefit insurers, said Scott D. Greenspan, a senior counsel who represents policyholders at Pillsbury Winthrop Shaw Pittman LLP.

Marine insurers started to add more choice-of-law provisions after the Wilburn Boat ruling to make sure New York law applies when there is no federal maritime law, Seaman said. New York’s maritime jurisprudence is more developed than that of other states, he noted.

A loss for the insurer could have ripple effects for maritime businesses throughout the industry, Seaman said.

“A policyholder might win a case and walk away with coverage, but if they’re getting coverage that they’re not entitled to, it may mean that all policyholders are paying for it down the line with higher premiums,” he said. “There really is no free lunch.”

The case is Great Lakes v. Raiders, U.S., No. 22-500.