Employers Insurance Co. of Wausau v. American Re-Insurance Co.

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

Submitted by Amy Piccola*

Date Promulgated: March 10, 2003

Employers Insurance Co. of Wausau v. American Re-Insurance Co., 256 F. Supp. 2d 923 (W.D. Wisc. 2003)

Court:  U.S. District Court for the Western District of Wisconsin

Issue Decided: Whether reinsurer’s obligation to pay its proportion of “allocated loss 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 U.S. District Court for the Western District of Wisconsin held that “there can be no question” that the cedent’s declaratory judgment expenses qualified as “allocated loss expenses” under the reinsurance certificate. “Allocated loss expenses” encompassed “all expenses incurred in the investigation and settlement of claims or suits” and, according to the Court, expenses incurred in declaratory judgment actions attempting to avoid coverage for claims were necessarily incurred in investigating and settling claims or suits.

The Court rejected the reinsurer’s argument that the sentence in the Certificate excluding from coverage those “expenses incurred . . . in regard to any actual or alleged liability that is not within the circumscribed provisions of the policy reinsured” applied to declaratory judgment expenses. Rather, the Court determined that “the most natural reading” of that sentence was that it was “intended to exclude from ‘allocated loss expenses’ those costs incurred in the investigation and settlement of claims other than claims for coverage under the terms of the policy.”

Key Takeaways

The U.S. District Court for the Western District of Wisconsin’s determination that the term “allocated loss expenses” unambiguously included legal expenses incurred by cedent in defending itself against declaratory judgment action brought by its insured was based on “common sense and proper grammar.”

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