Aetna Cas. and Sur. Co. v. Home Ins. Co.

• Decision Date: 27 March 1995
• Docket Number: No. 89 Civ. 7043 (BN).,89 Civ. 7043 (BN).
• Citation: 882 F. Supp. 1328
• Parties: The AETNA CASUALTY AND SURETY COMPANY, Plaintiff, v. The HOME INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

882 F. Supp. 1328

The AETNA CASUALTY AND SURETY COMPANY, Plaintiff, v. The HOME INSURANCE COMPANY, Defendant.

No. 89 Civ. 7043 (BN).

United States District Court, S.D. New York.

March 27, 1995.

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Frank M. Nicoletti, Lowenhal, Landau, Fischer & Bring, P.C., NY City, for Home Ins. Co.

OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW

NEWMAN, Senior Judge:¹

This case is a postscript to the Dalkon Shield mass tort litigation, which involved approximately 400,000 claims and complex litigation in several courts.

Aetna Casualty and Surety Company ("Aetna") was the products liability insurance carrier for A.H. Robins Company, Inc. ("Robins"), manufacturer of the Dalkon Shield intrauterine birth control device ("Dalkon Shield" or "IUD"). Aetna issued primary and excess layer policies, which it then reinsured through the placement of facultative reinsurance with numerous other insurance companies. In the instant case, Aetna maintains that one of its reinsurers, the Home Insurance Company ("Home"), is obligated to indemnify Aetna for Home's pro rata share of claims expenses incurred by Aetna in the defense of Robins.

This matter arises under the court's diversity jurisdiction, pursuant to 28 U.S.C. § 1332(a). The case was tried to the court in a twelve day bench trial. The following constitute the court's findings of fact and conclusions of law pursuant to F.R.C.P. Rule 52(a).

THE RECORD

Aetna offered the following witnesses: William J. Gilmartin, as an expert on reinsurance contract interpretation; Lee L. Bennett, formerly of Aetna's law department and the individual having direct oversight responsibility for the Dalkon Shield litigation; John F. Shea, Jr., formerly a Judge of the Superior Court of the State of Connecticut and subsequently Vice President and Claims Counsel at Aetna; and Michael C. Rees, an expert on reinsurance accounting currently employed by Aetna.

Home called: James A. Robertson, as an expert on insurance policy wording; John W. Hilton, formerly Senior Vice President and Senior Claim Counsel for Home; William D. McGehee, a director in the Aetna claims department who had worked with Judge Shea to resolve coverage disputes with Robins; Denis Bentley, an expert on reinsurance policy wording; and James F. Duhig, Assistant Vice President in the Home excess lines department.

The following individuals testified by deposition: Edmund Choinski, one of the underwriters of the reinsurance contracts at issue; Anthony N. Christian, the head of reinsurance at Home during the period when the instant reinsurance contracts were issued; Robert J. Hagar, director of Underwriting at Aetna; John L. Hess, underwriter at Aetna in connection with the Robins insurance; and Walter E. Farnam, formerly Assistant Vice President of Underwriting at Aetna.

The parties additionally offered in excess of 150 documentary exhibits, including the policies themselves, billing records, correspondence between the parties, and other relevant items.

CONTENTIONS OF THE PARTIES

The foundation of Aetna's claim is the contention, that following a dispute with Robins concerning the scope of coverage afforded by the Aetna excess policies, Aetna entered into a settlement with its insured wherein it made a reasonable judgment that Robins' interpretation of the policies would be likely to prevail at trial. Specifically, Robins had argued that Aetna was required under its policies to bear the costs of defending against claims in addition to the policies' liability limits, which Robins argued merely capped Aetna's liability for damages, i.e., compensation for third-party claimants alleging physical injury from the Dalkon Shield. Aetna urges that its settlement of this dispute on terms favorable to Robins proceeded from its own reasonable, good faith interpretation of the Aetna policies, and particularly its decision that the costs of defending Robins against such claims were payable as a supplemental benefit, beyond the monetary loss limitations.

Aetna takes the position, that because the scope of coverage afforded by the Home reinsurance policies is identical to that of the reinsured excess policies, Home was obligated under its contract of reinsurance to indemnify Aetna for allocated claims expenses incurred in defending Robins on a cost-supplemental basis as well.² Aetna insists Home must "follow the settlement" with Robins because the Home reinsurance policies, both by their language and by operation of rules of construction peculiar to the reinsurance industry, obligated Home to indemnify Aetna for risks that Aetna reasonably decided were at least arguably covered under the excess policies. Thus, in the absence of clauses in the Home policies stipulating terms different from those of the Aetna policies, and regarding Home's liability for expenses outside its own cap on liability in particular, Aetna concludes Home was required to reimburse Aetna on a pro rata basis for expenses in addition to damages, the latter of which only was capped by the loss limitations of both the Aetna and Home policies.

Home concedes that it undertook to reimburse Aetna for claims expenses but did so subject to the limit of liability expressed in the Home reinsurance policies. Home maintains that the reinsurance contracts should be interpreted in light of the course of performance, and highlights the fact that Aetna billed reinsurers for expenses subject to limits prior to the Robins settlement. Home argues that any ambiguity concerning coverage for defense costs resulted from a mutual drafting mistake, and accordingly seeks reformation of the contracts.

Home also contends, that although the Aetna policies might reasonably be interpreted to provide for the payment of expenses in addition to Aetna's limit of liability, the Home policies by their express terms limited Home's liability for any payments, whether for damages to claimants or for expenses incurred in defending against such claims, to the dollar limits typed on the declarations pages of its policies. In this respect, Home repeats arguments that it offered, unsuccessfully, during the summary judgment phase of this litigation, summarized infra.

Home further insists that the "follow the fortunes" (or "follow the settlements") doctrine invoked by Aetna has no application in facultative reinsurance as opposed to treaty reinsurance.³ In the alternative, Home argues that even if a duty to follow loss settlements exists in facultative reinsurance, it does so only where explicit clauses exist obligating the reinsurer to follow loss settlements, and not as a matter of industry practice. Home additionally contends that it is relieved of the obligation to follow the Robins settlement because it was neither reasonable nor made in good faith. Finally, Home argues that Aetna failed to prove its damages or its entitlement to prejudgment interest.

FINDINGS OF FACT

Background

From March 1968 through March 1978, Aetna was the products liability insurance carrier for Robins. As noted, Aetna spread much of the risk among numerous reinsurers, while keeping a retention of its own approximating $15 million. Home participated as one of Aetna's reinsurers with respect to excess policies in the policy years 1970, 1972, 1973, 1974 and 1976.⁴

In each of the years when Home participated as a reinsurer of Aetna, a reinsurance intermediary acting on Aetna's behalf issued to Home and all other reinsurers a Certificate of Reinsurance.⁵ Although some participating reinsurers used the certificates as their contract of reinsurance with Aetna, Home chose to use its own form excess insurance contract as the governing expression of its contract of reinsurance with Aetna, and accordingly manuscripted "R/I", meaning reinsurance, along with certain other information on the declarations page of the form excess policy. The parties have stipulated that the Home form excess insurance policies superseded the certificates that had been issued by insurance intermediaries; thus, the certificates may not be relied upon to determine the intent of the parties as to any material fact in dispute. Rather, the court must refer to the language of the Aetna excess policies and the Home reinsurance contracts to determine the degree to which those policies offer coextensive coverage: for if the Home policies indemnify anything Aetna insures, the terms of the Aetna excess policies will be dispositive of Home's liability to Aetna, i.e., unless the Home policies specify an exclusion.

The Dalkon Shield

In 1970, Robins acquired the exclusive right to manufacture and sell the Dalkon Shield. Robins introduced the Dalkon Shield into the market in early 1971, and ultimately sold some 2,200,000 IUD's before withdrawing the product in 1974. Soon after the initial sales of the Dalkon Shield, numerous complaints of physical injuries related to the use of the product were reported, including uterine perforations and infections, unwanted pregnancies, spontaneous abortion, fetal injuries and the need for emergency hysterectomies. From 1973 to 1985, some 9,238 claims were asserted against Robins, resulting in payments of approximately $530,000,000. With several thousand cases still pending in various courts, and in the face of a rapidly deteriorating financial situation, Robins was ultimately forced in August 1985 to file for protection under Chapter 11 of the Bankruptcy Code in the United States District Court for the Eastern District of Virginia. By the time the reorganization proceedings were concluded, approximately 400,000 claims were asserted against Robins.

The Coverage Litigation

Even before the bankruptcy, however, the sheer number of claims had mounted for a long time, implicating the Aetna excess policies and the reinsurers, including Home. Disputes developed between Aetna and Robins concerning the scope of coverage under the Aetna policies including, inter alia, the question of whether a claim...