Supreme Court Takes Up Boat Insurance Case

Claim With No Fire Damage (No Fire at All) Denied Because of Out-of-Date Extinguishers

This 70-foot Viking Cockpit Motoryacht is at the center of a case before the U.S. Supreme Court involving marine insurance precedents. Raiders is owned by Pennsylvania businessman and hockey enthusiast Phil Pulley. She’s also listed for sale at $529,000 at Nautical Ventures of Fort Lauderdale

Phil Pulley’s 70-foot motoryacht was underway on the Intracoastal Waterway in Fort Lauderdale when it “hit something” and began taking on water fast. Not wanting to sink, Pulley said he ran Raiders aground onto a sandbar known as the Triangle at the intersection of the New River and ICW.

By then the water was up to the engine oil pans, Pulley said. There was no fire.

The collision and grounding, which happened in June 2019, caused $300,000 in damage to the 1988 vessel. Subsequent litigation over Raider’s insurance policy has brought the case before the U.S. Supreme Court, whose decision will have implications for boaters everywhere.

The boat was insured by a German company with a branch in London, Great Lakes Insurance. While investigating the claim, Great Lakes learned that the boat’s fire suppression system did not comply with the requirements in Pulley’s policy. (Think fire extinguishers past their replacement date.)

Great Lakes did not deny the claim—not exactly. Instead it declared the policy “void from it’s inception” for non-compliance with the contract. (You could accurately say that the claim was “effectively denied.”) The premiums that Pulley had paid were refunded, obviously a small fraction of the claim, and Pulley was left to repair the damage out of his own pocket.

Pulley told Loose Cannon that he later learned that a billion dollars in maritime insurance claims had been denied over the past decade in this fashion.

Pulley lives in Pennsylvania, where Raiders has her home port. When the case went to court, Pulley’s lawyers argued that what happened to their client amounted to a “bad faith insurance claim.” That’s when an insurance company reneges on its contract to avoid paying a claim.

Pennsylvania is a state whose laws don’t support the notion of effectively denying damage claims because of unrelated contract violations. (A similar contract-based denial was the subject of this story published in January about a Florida case.)

Courts Turn Boat Insurance in Florida Upside Down

But insurance companies have been getting around pro-policyholder state laws by including a “choice of law” clause in their contracts. In Pulley’s case, the contract specified that the laws of New York would apply in deciding the outcome of claims disputes. New York precludes bad-faith claims against insurers. This is the clause:

It is hereby agreed that any dispute arising hereunder shall be adjudicated according to the well-established, entrenched principles and precedents of substantive U.S. 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 first federal judge sided with Great Lakes. A federal appeals court sent the case back, saying that the first judge needed to consider whether Pennsylvania had a “strong public policy” to protect it’s citizens in cases such as Pulley’s. The existence of such a policy trumps “choice of law” insurance clauses. This is the point where the Supreme Court stepped to avert the legal chaos that might ensue whichever way the lower court decided.

“This very analysis would butt up against the overwhelming precedent that choice or law clauses are enforceable under maritime law and subject to a federal choice of law rules,” wrote maritime lawyer James Mercante for the New York Law Journal. Mercante went on to say:

The central issue for the Supreme Court to decide is whether the law of the forum state should be considered at all in the analysis. The writ speaks to this and suggests that the Third Circuit must be reversed because ‘no state government can ever express a strong public policy which tells the federal government which clauses are, or are not, enforceable in a maritime contract…

Without a choice of law clause in a maritime contract, chaos prevails because neither the courts nor the litigants have any idea what law will eventually be applied. The marine insurance industry has employed the choice of law clause to affect some modicum of predictability.

So, on one hand, we have a boater whose lawyers are arguing that choice-of-law clauses are unreasonable and unjust when applied against a claim. What does an out-of-date fire extinguisher have to do with a bent shaft?

On the other, we have an insurance industry that relies on strict adherence to contract provisions to shape the behavior of its policyholders and which allows insurers to set rates that are competitive, yet sufficient to cover risk and stay in business.