Affiliated FM Ins. Co. v. Constitution Reinsurance Corp.

Issue Discussed: DJ Expenses / Costs within or in Addition to Limits

Submitted by Amy Piccola*

Date Promulgated: January 28, 1994

Affiliated FM Insurance Co. v. Constitution Reinsurance Corp., 416 Mass. 839, 626 N.E.2d 878 (Mass. 1994)

Court: Supreme Judicial Court of Massachusetts, Norfolk

Issue Decided: Whether reinsurer’s obligation to pay its proportion of expenses incurred by cedent in investigating and settling claims extended to legal expenses incurred by cedent in defending itself against declaratory judgment action brought by its insured.

Key Holding

The Supreme Judicial Court of Massachusetts found that it was unclear whether the parties intended the certificate at issue to obligate the reinsurer to pay a proportion of litigation expenses incurred by the cedent in defending a declaratory judgment brought by its insured. In particular, the Court held that the term “expenses” is ambiguous, having no fixed definition and varying significantly depending on the context in which it is used. Here, the Court found that the certificate, when read in its entirety, did not clarify the meaning of “expenses”. The Court consequently remanded the case to the trial court for further proceedings on the meaning of the term.

Key Takeaways

In its order of remand, the Supreme Judicial Court of Massachusetts instructed the trial court to admit evidence of industry custom and practice to assist it in interpreting the parties’ agreement finding that the parties’ submission of evidence of the reinsurer’s historical practices alone was insufficient to give meaning to the agreement.

* Amy L. Piccola is an Associate in Saul Ewing LLP’s Insurance Practice Group.