Hold onto your hats, folks – the U.S. Supreme Court has agreed to hear an insurance coverage dispute in a rare case that could have major implications for policyholders and insurers alike. Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, 47 F.4th 225 (3d. Cir. 2022), involves a maritime coverage dispute in which interested parties are watching closely to see how the Supreme Court chooses to handle the choice-of-law issue at its heart, in a decision which could potentially have far-reaching consequences. Basically, the case revolves around whether the “strong public policy” of a state can override the validity of a choice-of-law provision in a maritime insurance contract. While this may sound dull, it is actually a pretty big deal – different states have vastly different legal standards when it comes to determining whether an insurer has denied coverage in bad faith, and deciding which state’s law applies can be game-changing. So, buckle up – this one is going to be a wild ride.
At the crux of this case is a disagreement over whether the case will be governed by New York or Pennsylvania law. The owner of a maritime vessel originally purchased an "all risks" policy from Great Lakes Insurance. In 2019, the vessel was involved in an accident and Great Lakes refused to provide coverage because it found that the fire extinguishers on the vessel were not properly tagged and certified. Great Lakes claimed that circumstance voided coverage under the contract. Raiders Retreat filed a counterclaim for breach of contract and breach of fiduciary duty according to Pennsylvania law. Great Lakes asserted that according to the contract, any disputes must be brought under federal law and, if no such relevant law was available, then New York law should be applied.
The United States District Court for the Eastern District of Pennsylvania reasoned that the normal resolution to a choice of law dispute is found in a reading of the contract. The District Court held that the law of the state that the parties agreed to in the contract should be applied. The choice-of-law provision in the policy – which favors applying New York law to the subject dispute–would then govern shipowner’s extra-contractual “bad faith” claims against its insurer. The Third Circuit Court of Appeals bucked tradition and found that, "a choice of law contract might not be enforceable if its election for New York law were contrary to the strong public policy of the displaced state, Pennsylvania."
On appeal, Great Lakes contends that the Third Circuit prioritized state law choice of law rules over the federal rules, which is a violation of the Supremacy Clause as well as settled judicial precedent in this arena. Different states have different legal standards when it comes to determining whether an insurer has denied coverage in bad faith, and deciding which state’s law applies can have a significant impact on the outcome of the case.
The Supreme Court will be asked to settle the dispute – whether the maritime choice-of-law provision is inviolable under Federal maritime law and thus, voids the bad faith claims the policyholder advanced under Pennsylvania law. Alternatively, the Supreme Court could decide that a choice-of-law provision cannot be used to thwart the public policy of the forum state, particularly in the context of state-law-dependent insurance claims. This could open the door for parties to challenge the application of choice-of-law provisions in a wide variety of insurance disputes. As a result, policyholders and insurance groups are expected to submit amicus briefs to the Supreme Court in support of their respective positions. While insurance coverage cases are few and far between before the Supreme Court, Great Lakes is one that both policyholders and insurers will be closely monitoring.