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

• Decision Date: 28 January 1994
• Citation: 626 N.E.2d 878,416 Mass. 839
• Parties: AFFILIATED FM INSURANCE COMPANY v. CONSTITUTION REINSURANCE CORPORATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 878

626 N.E.2d 878

416 Mass. 839

AFFILIATED FM INSURANCE COMPANY v. CONSTITUTION REINSURANCE CORPORATION.

Supreme Judicial Court of Massachusetts Norfolk.

Argued Oct. 7, 1993.

Decided Jan. 28, 1994.

Alan R. Miller, Rosemary Connolly, Boston, with him, for plaintiff.

Mitchell S. King, Alice Olsen Mann, Boston, with him, for defendant.

Thomas W. Brunner, Christopher D. Cerf & John C. Yang, Washington, DC, and Rosanna Sattler and Jeffrey W. Armstrong, for American Ins. Ass'n, amicus curiae, submitted a brief.

Debra J. Anderson & George M. Brady, III, Washington, DC, for The Reinsurance Ass'n of America, amicus curiae, submitted a brief.

Before LIACOS, C.J., and WILKINS, ABRAMS, LYNCH, O'CONNOR and GREANEY, JJ.

ABRAMS, Justice.

The plaintiff, Affiliated FM Insurance Company, appeals from the allowance of the defendant's motion for summary judgment. Affiliated brought this action seeking a declaration that the defendant, Constitution Reinsurance Corporation, was required, under its facultative reinsurance certificate (FRC), to reimburse Affiliated for its legal expenses in defending itself against a declaratory judgment action brought by its insured, Campbell Soup Company. A Superior Court judge ruled that the terms of the facultative certificate were unambiguous, and that Affiliated's legal expenses were not covered under the certificate. We allowed Affiliated's application for direct appellate review. We reverse and remand for further proceedings.

Facts. The material facts are not in dispute. Affiliated insured Campbell under three consecutive one-year excess liability umbrella insurance policies from August 1, 1976, through August 1, 1979. For each of the policy years, Constitution, pursuant to three facultative certificates, reinsured a portion of Affiliated's risks.

Constitution drafted each of the three certificates. Under the FRC in question, Constitution agreed to indemnify Affiliated for fifteen percent of the risk insured under Campbell's policy with Affiliated. In exchange, Affiliated paid Constitution fifteen percent of the $40,000 premium it received from Campbell ($6,000), less a twenty-two and one-half percent commission ($1,350). The FRC did not alter or affect Affiliated's obligations to Campbell in any way, nor did it confer any contractual rights on Campbell. Constitution never has had any direct relationship with or obligation to Campbell.

In 1987, the Equal Employment Opportunity Commission (EEOC) charged Campbell with discriminating, on the basis of race and gender, in the hiring and promotion of employees at its Texas facility. Campbell brought suit against Affiliated in New Jersey Superior Court seeking a declaration that Affiliated had a duty to pay for Campbell's defense in the EEOC action and a duty to pay any damages that might be assessed against Campbell by EEOC. Affiliated denied any obligation to defend or indemnify Campbell in the EEOC action, and retained counsel to defend it in the declaratory judgment action. ¹ In 1991, the Supreme Court of New Jersey affirmed a lower court's entry of summary judgment in favor of Affiliated. Campbell Soup Co. v. Liberty Mut. Ins. Co., 239 N.J.Super.Ct. 403, 571 A.2d 969 (1990). Affiliated thereby was relieved of any duty to defend or to indemnify Campbell in the EEOC action. ²

Affiliated thus billed Constitution for $17,879.58, fifteen percent of the legal expenses it incurred in defending the declaratory judgment action filed by Campbell. ³ Constitution refused to make payment on the basis that it had no obligation to contribute to the cost of defense of Campbell's action. Constitution asserted that the expenses were not risks covered under the FRC. ⁴

Discussion. The central issue is whether "expenses [other than office expenses and payments to any salaried employee] incurred by the Company in the investigation and settlement of claims or suits" includes legal expenses incurred in defending a declaratory judgment brought by the insured. We must look to the language of the FRC to resolve this issue. Construing the language of an insurance contract is a question of law for the reviewing court. See Cody v. Connecticut Gen. Life Ins. Co., 387 Mass. 142, 146, 439 N.E.2d 234 (1982).

It is unclear whether the parties intended the contract to include litigation expenses for declaratory relief brought by an insured against its insurer to determine coverage. "When the written agreement, as applied to the subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of elucidating, but not of contradicting or changing its terms." Keating v. Stadium Management Corp., 24 Mass.App.Ct. 246, 249, 508 N.E.2d 121 (1987), ⁵ quoting Robert Indus., Inc. v. Spence, 362 Mass. 751, 753-754, 291 N.E.2d 407 (1973).

Affiliated contends that the commentators have spoken with one voice on this question and uniformly have concluded that the reinsurer is contractually obliged to bear its proportionate share of the legal costs associated with investigating, and, where appropriate, resisting demands for coverage. There is support for Affiliated's position among the insurance treatises. ⁶ The treatises are not dispositive of the issue before the court. They do, however, state general principles drawn from the older cases. Constitution has not cited any commentators which support its position on the precise issue before us. ⁷

Nor have we found any case law addressing this issue directly. ⁸ Bellefonte Reinsurance Co. v. Aetna Casualty & Sur. Co., 903 F.2d 910 (2d Cir.1990), relied on by the Superior Court judge, addressed a different question: whether a reinsured was entitled to payment for defense costs in excess of the stated liability limit of the policy. The amount sought by Affiliated in this case is well within the policy limit. Bellefonte did not deal with the issue of litigation expenses incurred during the process of coverage determination.

In Bellefonte, the court concluded that in spite of language which provided for expenses "in addition thereto," all defense costs were "subject to" the express cap on liability set forth in the certificate. Bellefonte, supra at 914. Relying on this reasoning, Constitution argues that clause D which obligates Constitution to pay its proportion of expenses is limited by the "subject to" language in clause A. Clause A states that the liability of Constitution "shall be subject in all respects to all the terms, conditions, and limits of the Company's policy except when otherwise specifically provided herein...." Constitution asserts that Affiliated's legal expenses are not within the terms and conditions of the Campbell policy, nor are they expenses specified in clause D. Clause D provides that "in addition" to loss payments, Constitution shall pay "expenses ... incurred ... in the investigation and settlement of claims or suits." Constitution's reading of the interaction of clauses A and D leaves unresolved the question of what is included by the term "expenses."

The Superior Court judge interpreted the language of the certificate to limit "expenses" to those expenses that would be covered under the terms and conditions of the Affiliated-Campbell policy; for example, expenses incurred in defending Campbell from liability. The dissent agrees with the Superior Court that the meaning of the word "expenses" is clear, and cannot reasonably be interpreted to include expenses incurred in coverage litigation, post at 882.

" 'Expenses' is a word of broad import. It has no fixed definition. It is of varying signification and is dependent for its precise meaning upon its connection and the purpose to be accomplished by its use. It is comprehensive enough to include a wide range of disbursements. Standing alone, it is ambiguous." Pittsfield & N. Adams R.R. v. Boston & Albany R.R., 260 Mass. 390, 397, 157 N.E. 611 (1927). Read in the context of the entire certificate, the two clauses, taken together, do not clarify the meaning of "expenses."

Affiliated contends that, if there is doubt concerning the scope of expenses, the doubt should be resolved against Constitution, the drafter of the certificate. Although there is a rule of construction that certain writings are to be construed against the author of the doubtful language, (Merrimack Valley Nat'l Bank v. Baird, 372 Mass. 721, 724, 363 N.E.2d 688 [1977], citing Wright v. Commonwealth, 351 Mass. 666, 673, 223 N.E.2d 666 [1967] ), that rule must give way to the primary objective that a contract is to be construed to reflect the intention of the parties. Shea v. Bay State Gas Co., 383 Mass. 218, 225, 418 N.E.2d 597 (1981).

Where, as here, the contract language is ambiguous, evidence of trade usage is admissible to determine the meaning of the agreement. See Restatement (Second) of Contracts § 222 comment (b) (1981). ⁹ "The argument that a contract may not be 'varied' by evidence of pertinent custom and usage misconceives the role played by such evidence. 'Valid usages known to contracting parties, respecting the subject matter of an agreement, are by implication incorporated therein, unless expressly or impliedly excluded by its terms, and are admissible to aid in its interpretation, not as tending in any respect to contradict or vary a contract, but upon the theory that the usage forms a part of the contract.' " Hardware Specialties, Inc. v. Mishara Constr. Co., 2 Mass.App.Ct. 277, 280, 311 N.E.2d 564 (1974), quoting Baccari v. B. Perini & Sons, Inc., 293 Mass. 297, 303, 199 N.E. 912 (1936). See A.J. Cunningham Packing Corp. v. Florence Beef Co., 785 F.2d 348, 351 (1st Cir.1986). See also 3 A. Corbin, Contracts § 555, at 232-233 (1960).

Express terms are to be given preference in interpretation over course of performance and usage of trade. ¹⁰ "After interpretation has called to its help all those facts which make up the setting in which the words are used ... the...