Fireman’s Fund Insurance Co. v. General Reinsurance Corp.

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

Submitted by Amy Piccola*

Date Promulgated: August 5, 2005

Fireman’s Fund Insurance Co. v. General Reinsurance Corp., No. C-03-4406 JCS, 2005 WL 1865424 (N.D. Cal. Aug. 5, 2005)

Court: U.S. District Court for the Northern District of California

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 insureds.

Key Holding

Cedent and reinsurer contested applicability of clause in facultative certificate requiring reinsurer to pay its proportion of expenses incurred by cedent in investigating and settling claims to those legal expenses incurred by cedent in defending declaratory judgments brought by five of its insureds.

The District Court for the Northern District of California found that the term “expenses”, as used in the certificates at issue, was ambiguous and further found that neither party presented persuasive evidence of the parties’ intentions at the time of contracting. The Court therefore looked to the custom and practice in the industry at the time the certificate was issued and concluded that the certificates covered the declaratory judgment expenses sought by the cedent.

The Court also noted that its interpretation was consistent with “common sense and principles of reinsurance,” explaining that because of the common interest of the cedent and reinsurer in the outcome of declaratory judgment actions, “it made little sense to draw a distinction between [declaratory judgment] expenses and other types of expenses.”

Key Takeaways

The District Court for the Northern District of California accepted testimony—both fact and expert—on the issue of reinsurance custom and practice. The Court found the testimony of cedent’s expert to be “highly credible,” basing its conclusion that there was a “nearly universal custom and practice” of paying declaratory judgment expenses under facultative certificates during the relevant time period, on his testimony. That expert: (1) worked in the insurance industry for nearly forty years; (2) founded his employer’s reinsurance division and was thereafter responsible for reinsurance assumed and reinsurance ceded; (3) purchased facultative reinsurance from the defendant as well as other reinsurers; and (4) remained active in the industry after retirement.

While it found it instructive, the Court did not find the testimony of cedent’s employee as credible, noting that the employee “had a vested interest in the outcome of [the] litigation.”

The Court also found that the testimony of reinsurer’s senior vice president was not credible. Not only did the vice president have “a strong vested interest” in the litigation, he failed to establish a factual foundation for his testimony regarding the intentions of the involved underwriters.

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