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Galilea, LLC v. AGCS Marine Insurance Co.

Court of Appeals for the Ninth Circuit
879 F.3d 1052 (2018)
ELI5:

Sections

Rule of Law:

The Federal Arbitration Act constitutes an established rule of federal maritime law that supersedes conflicting state laws prohibiting arbitration in insurance contracts; furthermore, the incorporation of American Arbitration Association (AAA) rules in a contract between sophisticated parties constitutes clear and unmistakable evidence of the parties' intent to delegate questions of arbitrability to the arbitrator.


Facts:

  • Taunia and Chris Kittler formed Galilea, LLC, a Nevada company, to purchase a sixty-foot sailing yacht.
  • While sailing in the Caribbean, the Kittlers applied for insurance coverage through Pantaenius, an agent for the defendant Underwriters.
  • The Kittlers signed an insurance application containing specific arbitration and choice-of-law provisions.
  • Subsequently, the Underwriters issued a formal insurance policy which contained different arbitration terms and designated a 'Cruising Area' limit.
  • The policy stated it would be governed by federal maritime law, or New York law where federal law was silent, and incorporated the Rules of the American Arbitration Association (AAA).
  • One month after the policy issued, the yacht ran ashore near Colón, Panama.
  • The Underwriters denied coverage for the loss, asserting that the yacht was located south of the authorized 'Cruising Area' defined in the policy.
  • A dispute arose regarding the validity of the policy terms and the denial of the claim.

Procedural Posture:

  • The Underwriters initiated arbitration proceedings in New York.
  • Galilea filed a complaint asserting twelve causes of action in the U.S. District Court for the District of Montana.
  • Galilea moved to stay the arbitration proceedings.
  • The Underwriters moved to dismiss the complaint and compel arbitration.
  • The District Court held that the policy's arbitration clause was enforceable under the FAA.
  • The District Court granted the motion to compel arbitration for two claims but denied it for the remaining ten claims, ruling that the court had the authority to determine the scope of the arbitration clause.
  • Both parties filed certified interlocutory cross-appeals to the Ninth Circuit.

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Issue:

Does the Federal Arbitration Act require the enforcement of an arbitration clause in a maritime insurance policy despite state law prohibiting such clauses, and does the incorporation of AAA rules delegate the authority to determine the scope of that arbitration to the arbitrator?


Opinions:

Majority - Judge Berzon

Yes, the Federal Arbitration Act (FAA) governs maritime insurance policies, preempting state anti-arbitration laws, and the incorporation of AAA rules delegates threshold questions to the arbitrator. The court first determined that the formal policy, not the initial application, was the binding contract because the application was not attached to the policy as required by New York law. The court held that maritime insurance policies fall under federal admiralty jurisdiction. Under the Wilburn Boat doctrine, state law only applies to maritime contracts in the absence of a federal maritime rule. The court found that the FAA constitutes an established federal maritime rule requiring the enforcement of arbitration agreements in maritime transactions. Therefore, Montana's state law prohibiting arbitration in insurance contracts does not apply, nor does the McCarran-Ferguson Act save the state law from preemption, because the federal rule is specific to maritime commerce. Regarding the scope of the arbitration, the court applied the presumption that parties legally delegated 'gateway' questions of arbitrability to the arbitrator if there is 'clear and unmistakable' evidence. Citing precedent involving sophisticated parties, the court ruled that incorporating the AAA rules—which explicitly empower arbitrators to decide their own jurisdiction—constitutes such evidence. Because both Galilea (a limited liability company owning a multimillion-dollar asset) and the Underwriters are sophisticated parties, the arbitrator, not the court, must decide which specific claims fall within the scope of the arbitration clause.



Analysis:

This decision reinforces the supremacy of federal maritime law over state insurance regulations, particularly regarding the enforcement of arbitration clauses. It clarifies the application of the Wilburn Boat doctrine, establishing that the FAA is a controlling federal maritime rule that displaces conflicting state statutes like Montana's anti-arbitration insurance law. Practically, this prevents plaintiffs from using state insurance protections to avoid arbitration in maritime disputes. Furthermore, the case solidifies the Ninth Circuit's stance that incorporating AAA rules in contracts between sophisticated parties serves as a 'clear and unmistakable' delegation of arbitrability to the arbitrator. This means that in high-value commercial or maritime disputes, courts will likely decline to decide whether a specific claim is arbitrable, sending even that preliminary question to the arbitrator.

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