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Maritime Law

Choice-of-Law Clauses in Marine Cargo Insurance Policy

Michael Orlando | January 10, 2009

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A aerial view of a cargo ship filled with shipping containers at sea

It is a common practice for London-based insurers to issue high value marine cargo insurance policies that include choice-of-law clauses specifying that the laws of England and Wales are to apply to the policy. 1

So long as the policy is for marine insurance, any dispute over the policy filed in a U.S. court should generally fall within federal admiralty jurisdiction. 2 For a marine cargo insurance policy, being a marine contract, federal admiralty law determines the enforceability of the choice-of-law clauses that are contained in the policy. 3

Generally, when a marine insurance policy is issued by British insurers, it will be difficult to dispute that England does not have a substantial relationship to the parties and the transaction. Typically, for a slip policy that is underwritten by Certain Underwriters at Lloyd's of London, the managing agents are located in London, England, and, again, usually there is no question that this insurance was negotiated and placed in the London insurance market through a British insurance broker. Few parties would dispute that Lloyd's connection to marine cargo insurance dates back to the 17th Century in London, and that the connection is substantial.

For the second part of the test, generally, English law does not conflict with the fundamental purposes of federal maritime law. In fact, the prima facie validity of choice-of-law clauses contained in maritime contracts arises from federal admiralty law cases. As noted by the Fifth Circuit in Mitsui & Co. (USA) v. Mira M/V, 111 F.3d 33, 35 (5th Cir. 1997):

The Supreme Court has consistently held forum-selection-clauses and choice-of-law clauses presumptively valid. Vimar Seguros y Reaseguros, S.A. v. M/V SKY REEFER, 515 U.S. 528, [538-540](1995) (foreign arbitration clause); Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595 (1991); M/S BREMEN v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972); see also Kevlin Serv., Inc. v. Lexington State Bank, 46 F.3d 13, 15 (5th Cir. 1995). The Court in BREMEN articulated the policy underlying the presumptive validity of these clauses:

  • The expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts.... We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws....

The Supreme Court has therefore instructed American courts to enforce such clauses in the interests of international comity and out of deference to the integrity and proficiency of foreign courts. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629 (1985).

The presumption of validity may be overcome, however, by a showing that the clause is "unreasonable under the circumstances." BREMEN, 407 U.S. at 10. The burden of proving unreasonableness is a heavy one, carried only by a showing that the clause results from fraud or overreaching, that it violates a strong public policy, or that enforcement of the clause deprives the plaintiff of his day in court. Id. at 12-13, 15, 18.

Source: 111 F.3d 33, 35-36 (Supreme Court Reporter and Lawyer's Edition citations omitted)

Noted admiralty scholar Professor Schoenbaum, aptly summarizes the issue when he states in his seminal treatise, Admiralty and Maritime Law:

A choice of law provision in a marine insurance contract will be upheld in the absence of evidence that its enforcement would be unreasonable or unjust. See 2 T. Schoenbaum, Admiralty and Maritime Law § 19-7, p. 276 (4th ed., 2004) (citation omitted).

In BREMEN, and a year later in Carnival Cruise Lines, the Supreme Court required the enforcement of forum selection clauses in admiralty contracts. The Court held in BREMEN that, "absent some compelling and countervailing reason," a negotiated forum-selection clause "should be honored by the parties and enforced by the courts." 407 U.S. at 12, 92 S.Ct. at 1914. In Carnival Cruise Lines, the Court extended its decision in BREMEN to hold enforceable a forum selection clause contained in a standard form contract of passage.

It is clear from these Supreme Court decisions, that the agreements of private parties, whether freely negotiated or not, are ordinarily to be given full effect by federal courts. Accordingly, choice-of-law clauses in admiralty contracts, which are analyzed and interpreted the same way as forum selection clauses, have generally been held presumptively valid and enforceable. 4

Conclusion

Parties should pay particular attention to choice-of-law clauses when requesting insurance on high value marine policies. As we now have more of a global economy, U.S. courts are generally enforcing choice-of-law clauses. To the extent U.S. companies desire to have U.S. or a particular state's laws apply in a maritime context, then such needs to be spelled out in clear terms in the contract.

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Footnotes

1 The author gratefully acknowledges the assistance of his former associate Richard Preston.
2 Insurance Co. v. Dunham, 78 U.S. (11 Wall.) 1, 20 L. Ed. 90 (1871) (invocation of admiralty jurisdiction proper in lawsuit involving marine insurance); Offshore Logistics Services, Inc. v. Mutual Marine Office, Inc., 639 F.2d 1168, 1170 (5th Cir. 1981) (same); International Sea Food Ltd. v. M/V Compeche, 566 F.2d 482, 485 (5th Cir. 1978) (long settled marine insurance is marine contract within the jurisdiction of an admiralty court).
3 See, e.g., Haynsworth v. The Corp., 121 F.3d 956, 962 (5th Cir. 1997), cert. denied, 523 U.S. 1072, 118 S. Ct. 1513 (1998) (noting federal law applies to choice of law clause enforceability determination); see also Sembawang Shipyard, Ltd. v. Charger, Inc., 955 F.2d 983, 986 (5th Cir. 1992) (noting choice of law clause is presumptively valid and no difference between forum selection clauses and choice of law clauses for purposes of court's analysis of enforceability). "[W]here the parties specify in their contractual agreement which law will apply, admiralty courts will generally give effect to that choice." Hawkspere Shipping Co. v. Intamex, S.A., 330 F.3d 225, 233 (4th Cir. 2003) (citing Chan v. Soc'y Expeditions, Inc., 123 F.3d 1287, 1297 (9th Cir. 1997), cert. dismissed by, Society Expeditions, Inc. v. Chan, 522 U.S. 1100, 118 S. Ct. 906, 139 L. Ed. 2d 921 (1998)); Richards v. Lloyd's of London, 135 F.3d 1289, 1293 (9th Cir. 1998) (en banc) (applying U.S. Supreme Court law to find English choice-of-law clause enforceable); Milanovice v. Costa Crociere, S.P.A., 954 F.2d 763, 767 (D.C. Cir. 1992) (finding if "choice-of-law provision is enforceable, we will use the law that it selects to evaluate the enforceability of the remainder of the contract terms"); Siegleman v. Cunard White Star, 221 F.2d 189, 193 (2d Cir. 1955) (finding choice of law provision selecting English law enforceable, and then using English law to interpret the contract); Jansson v. Swedish American Line, 185 F.2d 212, 218 (1st Cir. 1950) (noting "when the parties contract with the law of some particular jurisdiction in view, the law of that jurisdiction will be applicable in determining the interpretation and validity of the contract"); In Re Horizon Vessels, Inc., 2007 WL 655927 at *11 (S.D. Tex. Feb. 28, 2007) (slip copy) (citing Dupre v. Penrod Drilling Corp., 993 F.2d 474, 476 n. 4 (5th Cir. 1993) quoting Stoot v. Fluor Drilling Servs., Inc., 851 F.2d 1514, 1517 (5th Cir. 1988)) (in admiralty law, contractual choice of law clauses govern unless there is no substantial relationship to the parties or the transaction or the chosen law conflicts with the fundamental purposes of maritime law).
4 See, e.g., Sembawang Shipyard, 955 F.2d 983 (5th Cir. 1992); Cantieri Navali Riuniti v. M/V Skyptron, 802 F.2d 160, 163 n. 4 (5th Cir. 1986).
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