B. Supreme Court Case Law
1. Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, 601 U.S. 65 (Feb. 21, 2024).
In Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, in a decision by Justice Kavanaugh, the Supreme Court unanimously reversed the Third Circuit and upheld application of a choice of law clause in a maritime insurance contract. The Court emphasized the federal interest in the uniform application of maritime law, given the exclusive grant of federal jurisdiction over all cases involving maritime and admiralty law.
The case arose from damage to a vessel owned by Raiders Realty caused when it ran aground near Fort Lauderdale, Florida. Raiders is a Pennsylvania corporation, though it regularly docked the vessel in Florida. It had insured the vessel under a maritime hull insurance policy issued by Great Lakes Insurance, a German company headquartered in London. The issue was joined on whether the policy had been voided by Raider’s breach of one provision of the insurance contract. The policy included a variety of requirements that particular equipment on the vessel be maintained. Raiders had failed to maintain the fire suppression system, and Great Lakes asserted that, as a result, the policy was void in its entirety. Raiders responded that the damage was caused by the vessel running aground and that the fire suppression system was entirely unrelated to the events or the damage. Pennsylvania law (Raiders’ home jurisdiction) required that a policy could be voided only by a breach that was related to the insured event. But the contract contained an express choice of law clause making New York law applicable. New York law did not require that the breach be related to the insurable event but would void the whole policy as a result of Raiders’ breach of the requirement related to the fire suppression system.
In response to motions, the district court applied the choice of law clause, and rejected Raiders’ claim. The Third Circuit reversed, holding that, while choice of law provisions in maritime contracts are presumptively valid, here the clause must yield to the strong public policy in Pennsylvania law, seeking to protect insureds from losing protection as a result of actions that were unrelated to the insured’s underlying claim. There was a circuit split on the issue of whether state public policies could overcome choice of law contractual terms, and the Court granted certiorari to resolve the issue.
Justice Kavanaugh’s opinion emphasized the constitutional imperative that admiralty law operate uniformly throughout the country, where the federal courts apply federal decisional law. Federal courts create uniform federal law, although in some cases a federal court may decide to apply state law rather than to create a new federal rule.
The Court concluded that a long-standing established federal rule meant that choice of law clauses are presumptively valid. That rule has a “salutary effect” of assuring the parties’ freedom of contract and dispelling confusion as to applicable law. The presumptive validity facilitates maritime commerce and allows parties to focus their attention on relevant precautions under applicable law, thus lowering the cost of maritime insurance. The Court then held that, while Wilburn had declined to impose a uniform rule on warranty provisions in maritime contracts, choice of law provisions were different, and a uniform rule was already in place. Indeed the Court noted that Wilburn’s holding had led to the inclusion of choice of law provisions in maritime contracts, precisely to assure that the parties would avoid the risk of which state law would apply.
The Court then held that any exceptions to the validity of choice of law provisions were narrow—only a contrary federal law or contrary federal maritime policy, or where there was no “reasonable basis” for the selected law, would void a choice of law clause. A contrary state law was not a basis on which to void the choice of law, especially because that would create confusion as to the uniformity of maritime law.
Justice Thomas issued a concurrence, noting that he joined the Court’s decision in full, while expressing doubt that Wilburn had been properly decided.
C. The Dali’s Allision
1. The Events
On March 26, 2024, shortly before 1:30 AM local time, a large container ship, the MV Dali, lost propulsion and electric power and struck the Francis Scott Bridge, which crosses the Patapsco River at the entry to the Baltimore Harbor. The force of the collision with a pier supporting the major truss caused the bridge to fail catastrophically. Because the on-board pilot was able to issue a distress call prior to the allision, bridge traffic was stopped. Six construction workers doing pothole repairs on the bridge were not able to be notified and died, although two others survived.
Videos of the event and early reporting show that the vessel lost all power, including propulsion and electricity before the event, when she was under her own power, the tugs that assisted departure from the quay having been dismissed. Apparently the emergency generators were started, which resulted in a short-term restoration of electric power (as the ship’s lights came back on for a very brief time, but then went dark again), but the main engine could not be restarted. The pilot took reasonable response measures—including ordering dropping the anchor and ordering the rudder to moved hard left—but, without propulsion, the vessel was carried by current and momentum into the bridge pier.
The root cause for the loss of power has not been finally determined at this time. The event is being investigated by the National Transportation Safety Board under a Memorandum of Understanding with the Coast Guard, and (as noted below) reports indicate counsel for the owner/operator are also investigating, as are counsel (and likely experts) retained by claimants.
Some initial reports asserted a potential cause of contaminated fuel. Contaminated fuel is a larger issue in marine transport. Most large vessels today operate on marine diesel engines designed to burn marine fuel oil or heavy fuel oil, also known as Bunker C or Bunker fuel oil. Bunker C is literally the bottom of the oil barrel; it is tarlike in consistency, and it must be heated and maintained at a warm temperature in order to flow. There have been reports of unscrupulous suppliers “extending” the amount of Bunker C by adding waste lubricating or other oils, water, and other materials. While marine engines are generally equipped with filters, and operators generally test fuel when it is being loaded, the presence of contaminants, waxes, and other materials can clog the engine or fuel lines and prevent operation. Reports indicate that the Dali was last bunkered in Shanghai and Korea before transiting the Panama Canal on the inbound voyage. She also called at New York and Norfolk prior to Baltimore. It is unclear whether additional bunkering occurred in New York or Norfolk. Reports say no fuel was lifted in Baltimore.
While there may have been some basis to investigate the quality of the bunker fuel, the NTSB in the ordinary course also reviews engine controls, power systems, and other equipment and crew actions, and there are reasons to doubt that it was the root cause. Generally, large vessels do not burn Bunker C in particular in U.S. ports because of environmental regulations. Bunker C tends to contain significant amounts of sulfur and other pollutants and to cause significant emissions. To avoid those environmental issues, vessels will typically burn ordinary diesel fuel (No. 2 oil) while in port. Reports do indicate that the NTSB investigation reviewed fuel records and concluded that contaminated fuel was not an issue.
2. Rather, the NTSB has noted in preliminary reports:
During the accident voyage, electrical breakers HR1 and LR1 unexpectedly opened when the vessel was three ship lengths from the Key Bridge, causing the first blackout (loss of electrical power) to all shipboard lighting and most equipment. While examining and testing the vessel’s electrical power distribution system and control circuitry, NTSB investigators (in coordination with vessel crew and parties to the investigation) noted an interruption in the control circuit for HR1’s undervoltage release.
The NTSB removed certain components of the electrical system, and portions of the related wiring, as well as interviewing crew members. The NTSB is continuing its review. The failure of the power system while in Baltimore would be consistent with reports that an inspection in Singapore identified issues with engine controls in 2023. They were not significant enough to cause the vessel to be held, and reports are that the issues were repaired and resolved. NTSB reports also indicate that the vessel had two separate power failures while docked in Baltimore. Those power failures were apparently caused by issues unrelated to the electrical system itself; in one instance, the generator’s exhaust stack was blocked, and, in the other, there was insufficient fuel pressure.
As of the time of this report, major portions of the bridge wreckage have been removed, the main channel has been reopened to vessel traffic, the Dali has been moved to Norfolk for repairs. Most of the original crew have been allowed to return home, and a replacement crew operated the vessel in its voyage to Norfolk.
3. Legal Status
As the Committee has noted in other reports, under U.S. law (consistent with international conventions), a vessel owner/operator is entitled to limit liability to the value of the ship post event and the revenue to be received from cargo. On April 1, 2024, Grace and Synergy have brought a limitation of liability action in federal court in Baltimore, alleging that the value of the vessel would not exceed $90MM, but that is reduced by expected salvage costs of $19.5MM and repair costs of $28MM. To that is added pending freight of $1.170MM. Thus, the owner and operator propose that the stipulated value under the Limitation of Liability Act would be $43.670MM.
The City of Baltimore has filed claims asserting that the vessel was unseaworthy and that the crew was not properly trained, and the State of Maryland has retained counsel to file its claims. A local business has filed a class action claim, asserting that the collapse of the bridge caused significant economic injury to local businesses in Baltimore. The families of those killed or injured in the allision are also likely to file suit. Separately, federal authorities also opened a criminal investigation into the events.
The United States also filed its own civil claim in the limitation action, seeking more than $103 million in damages related to response costs and other damages; and asserting that the loss of power was caused by poor maintenance and failures of the crew. On October 24, 2024, the Department of Justice announced that the vessel owner and the operator had agreed to settle the U.S. claim for an amount more than twice the limitation amount, and close to the original U.S. claim. The claims of the other claimants have not been resolved.
The cost to replace the bridge, liability for the lost workers and other damage is likely to total into the billions of dollars. The Dali has insurance, but its liability will be controlled under the Limitation of Liability Act. Reports indicate that the State of Maryland has insurance coverage on the bridge for some $300MM, and the President has indicated his intent to request federal funding to rebuild the bridge.
The effect of the Limitation of Liability Act filing is that any claimants must intervene in the Limitation action filed by the vessel owner and operator, in order to have a role in determining whether the vessel or its owner/operator were at fault (as limitation of liability is contingent on finding that the vessel and its owner/operator were not negligent or otherwise at fault). A vessel striking a fixed facility is presumed to be at fault, but that presumption is rebuttable. The petition filed by Grace and Synergy alleges that the allision was without fault or negligence by the vessel or the owner/operator, or, in the alternative, if there was fault or negligence, the owner/operator had no knowledge of the underlying fault.
The action is likely to take significant time to resolve: there will be interventions, motion practice, discovery related to any investigation and determination of cause, before any substantive decision. Technically, the court will determine only whether the owner/operator can limit liability. Any determination of damages would be tried separately.
4. Comments
In a prior report, addressing the partial closure of the port of Brunswick, Georgia, in 2019 caused by the capsizing of a car carrier, the MV Golden Ray, the Committee noted that the increasing size of commercial vessels raised significant issues about port navigation and the impact of accidents or events.
The collapse of the Key Bridge caused the closure of the Port of Baltimore until the debris and the vessel could be cleared and the navigation channel reopened. Full navigation has been restored in the main channel as debris was cleared. In the interim, ships that were in port could not depart, including several transport vessels that are part of the U.S. emergency maritime supply fleet for the U.S. armed forces if deployed abroad. Port operations were suspended, resulting in job losses or layoffs for longshoremen and related workers. Trade that would otherwise route through Baltimore was shifted to other ports, including cruise departures and some freight, but Baltimore is a major hub for car transport, and it is not clear that other East Coast ports have the underlying infrastructure to handle that traffic, and to handle coal traffic.
The collapse of the bridge has also focused attention on the susceptibility of other bridges to similar events. A trade group report in 2018 described the issues and the significant frequency of such events. Many of the major bridges in port areas are of earlier design and have the risk of single point failures. Since the Skyway Bridge collapsed in 1980 after being struck by a freighter, bridge designs have been updated to include greater protection, usually in the form of fenders, larger islands around piers, or other structural improvements. Such events are unusual but foreseeable. Even before the Key Bridge event in March, earlier in 2024 a freighter cut a major bridge in Guangzhao, China, and a bridge in Argentina was struck (though it did not collapse).
Press reports have identified U.S. bridges that predate updated standards and have limited protection against collision. Even in those instances where fenders or other protections have been installed, vessel size has been increasing, which results in increased force in the event of an allision. The Dali is a NeoPanamax and is not among the largest container ships. The increasing use of large vessels has (as we reported in 2019) increased the risk that channels can be blocked or other damage can occur, even if the frequency of the events has not increased. Even if an allision or collision does not occur, the grounding of a vessel can block a channel for an extended period. For example, in 2021, the Suez Canal was blocked for six days by the grounding of a container ship, MV Ever Given, which had successfully avoided a collision, but only by turning into the canal bank.
Maritime traffic is an essential part of the global supply chain, and the integrated consideration of port safety, traffic, cost, and risk to other infrastructure has now come under increased scrutiny. In this event, as required by local regulations, the Dali had a local pilot on board. Had the tugs remained with vessel until passage under the bridge, the event could have been prevented, but requiring tugs and pilots add to port costs.
D. Threats Posed by Maritime Drones
Over the last two years (since the Russian Invasion of Ukraine) and particularly since the Israeli invasion of Gaza, there has been increased attention to the risks to shipping arising from use of maritime drones or missile technology adapted from land warfare to maritime attacks.
In response to Russian efforts to block Ukrainian exports and to use its larger naval forces to support its ground forces, Ukraine has moved from using drones as surveillance tools to developing explosive drones or mines delivered by such vessels to attack the Russian Black Sea fleet. Ukraine has sunk or damaged approximately twenty-four Russian vessels using such devices and caused severe damage to the major bridge linking Russia and Crimea. As a result, Russia has dispersed its remaining Black Sea fleet vessels from its port in Sevastopol, and Ukraine has been able to resume its export operations.
Similarly, in announced efforts to support Hamas militants in Gaza, Houthi forces in Yemen have repeatedly use drone boats packed with explosives to attack commercial vessels transiting the Red Sea, and in efforts against American and British naval vessels seeking to provide protective services to commercial vessels. Reports indicate that the Houthis have targeted more than sixty vessels, and have been able to sink at least two since November 2023, despite U.S. and British attacks on supporting radar and launch sites. The Houthi attacks are in defiance of UN resolutions seeking to protect Red Sea shipping.
While the Houthi attacks have had limited effect in actually damaging ships, they have disrupted shipping through the Suez Canal and Red Sea, resulting in diversion or reorientation of trade, particularly between Asia and Europe, requiring transits to move via the Cape of Good Hope. The attacks also resulted in significant impacts on the Egyptian economy, which has lost fees that would otherwise have been paid for Suez Canal transits.
Longer term, the success of attacks using maritime drones raises significant economic and national security issues. The Ukrainian experience has demonstrated that easily available commercial drones can be converted and that drones for military use relatively easily created. The Houthi experience shows that non-state actors can acquire and use such devices to impose significant disruption on maritime trade, which some estimate carries eighty percent of global trade during some portion of the logistics cycle.
Given the significance of maritime trade, the ability of any state or group to create significant disruptions as part of a strategy of bringing attention to other issues raises significant concerns. While military planners and national security experts seek to review lessons learned from these events, and efforts will be made to address the potential asymmetric effects, from the commercial perspective the ship owners/operators, maritime insurers, and those involved in trade, need to be alert to the changing risks.