In a marine insurance coverage dispute involving the failure to recertify or inspect equipment on board the vessel, the U.S. Third Circuit Court of Appeals ruled that a federal district court in Pennsylvania should have considered whether applying New York law, as specified in the marine insurance policy, contravened Pennsylvania public policy. Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, No. 21-1562, 2022 WL 3724098, at *1 (3d Cir. Aug. 30, 2022).

The insurer of a grounded yacht denied coverage because the yacht’s fire-extinguishing equipment had not been timely recertified or inspected, notwithstanding the fact a fire did not cause damage to the yacht. The insurer filed suit in federal court in Pennsylvania seeking a declaration that the yacht owner’s alleged failure to recertify its fire-extinguishing equipment rendered the policy void from inception.

The yacht owner raised extra contractual counterclaims under Pennsylvania law, including breach of fiduciary duty, bad faith and breach of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. The marine insurance policy contained a choice of law provision mandating the application of New York law where no federal maritime law governed. The yacht owner argued that applying New York law, as specified in the marine insurance policy where no federal maritime law governed, would contravene Pennsylvania public policy (which the yacht owner believed afforded more protection to it), thereby making the New York choice of law provision in the marine insurance policy unenforceable under The Bremen v. Zapata Off-Shore Co. In The Bremen the U.S. Supreme Court held that a forum selection provision under federal admiralty law is unenforceable “if enforcement would contravene a strong public policy of the forum in which the suit is brought.” The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972). 

The District Court rejected the yacht owner’s argument, reasoning that The Bremen was a forum selection case in the context of international fora and U.S. law, and as such, was irrelevant to the subject choice of law dispute. Relying on Wilburn Boat Co. v. Fireman's Fund Insurance Co., 348 U.S. 310 (1955), which determined that “maritime contracts are governed by federal admiralty law when there is an established federal rule, but absent such a rule, state law applies,” the District Court held that the public policy of Pennsylvania could not overcome “the well-established principle that choice of law provisions in maritime contracts are presumptively valid.” The District Court, thus, declined to consider whether there is a strong Pennsylvania public policy that precludes applying New York law. The Third Circuit Court of Appeals vacated the decision.

The Third Circuit pointed out that although the contract in The Bremen did not specifically provide that the substantive law of one country should be applied, the Supreme Court nonetheless concluded the forum selection clause “was also an effort to obtain certainty as to the applicable substantive law.” Further, twenty years after The Bremen, in Carnival Cruise Lines v. Schute, the Supreme Court extended this reasoning to disputes over the proper forum which to bring suit under a forum-selection provision. Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 588 (1991). Following The Bremen and Carnival, the D.C. Circuit in Milanovich v. Costa Crociere, determined that “courts should honor a contractual choice-of-law provision in a passenger ticket unless the party challenging the enforcement of the provision can establish that “enforcement would be unreasonable and unjust,” “the clause was invalid for such reasons as fraud or overreaching,” or “enforcement would contravene a strong public policy of the forum in which suit is brought.” Milanovich v. Costa Crociere, S.p.A., 954 F.2d 763, 767 n.7 (D.C. Cir. 1992). Since then, other federal circuits have relied on Milanovich when considering choice of law provisions in maritime contracts.

The Third Circuit found that The Bremen’s framework is not “utterly irrelevant” in the context of choice of law provisions, but rather, “applies equally to them” as it does to provisions selecting a forum. The Third Circuit determined the District Court should have addressed “whether Pennsylvania has a strong public policy that would be thwarted by applying New York law.” The Third Circuit remanded the case to the District Court for further proceedings on this issue.