Affiliated FM Insurance v. Constitution Reinsurance Corp.

Abrams, J.

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 *841in a 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. 403 (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 *842Discussion. 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 action 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 (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 (1987),5 quoting Robert Indus., Inc. v. Spence, 362 Mass. 751, 753-754 (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 *843the 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.

*844In 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 846.

“ ‘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. 391, 397 (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 Con*845stitution, 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 [1977], citing Wright v. Commonwealth, 351 Mass. 666, 673 [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 (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 (1974), quoting Baccari v. B. Perini & Sons, 293 Mass. 297, 303 (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 words *846themselves remain the most important evidence of intention.” Robert Indus., Inc. v. Spence, supra at 755, quoting National City Bank v. Goess, 130 F.2d 376, 380 (2d Cir. 1942). “In interpreting contracts, ‘[t]here is in fact no “one correct” meaning of an expression .... If there is a plain, ordinary, and proper meaning of a term, that is evidence of how the parties intended to use that term. Similarly, trade or business usage is also relevant.’ ” Jamesbury Corp. v. Worcester Valve Co., 443 F.2d 205, 210 (1st Cir. 1971), quoting 3 Corbin, Contracts § 535, at 16 (1970).

The existence and scope of a usage of trade are questions of fact. See Restatement (Second) of Contracts § 222 (2) (1981); DiMarzo v. American Mut. Ins. Co., 389 Mass. 85, 103 (1983). At the hearing, although the parties submitted extrinsic evidence of Constitution’s practice, neither party offered evidence of the pertinent custom and usage.11 Where, as here, the contract language is ambiguous, evidence of custom and trade practice may be admitted to arrive at an interpretation “which appears to be in accord with justice and common sense and the probable intention of the parties.” Keating v. Stadium Management Corp., 24 Mass. App. Ct. 246, 252 (1987), quoting Clark v. State St. Trust Co., 270 Mass. 140, 153 (1930). The case is remanded to the Superior Court for further proceedings.

So ordered.

In July, 1987, when Affiliated advised Constitution of the EEOC action against Campbell, Constitution posted a liability reserve under the facultative certificate to cover its potential liability exposure.

Shortly thereafter, EEOC terminated its investigation without assessing any fines or penalties against Campbell.

Affiliated reinsured portions of the Campbell Soup policy with other reinsurers pursuant to separate facultative certificates. The plaintiffs brief reports that only Constitution has refused to pay its portion of Affiliated’s legal expenses in the Campbell Soup litigation.

The material language of the facultative certificate is found in clauses A and D. Clause A provides in pertinent part: “The liability of the Rein-surer [Constitution] . . . shall follow that of the Company [Affiliated] subject in all respects to all of the terms, conditions, and limits of the Company’s policy [issued to Campbell] except when otherwise specifically provided herein . . . .” Clause D provides: “Upon receipt of a definitive statement of loss, the Reinsurer shall promptly pay its proportion of such loss as set forth in the Declarations. In addition thereto, the Reinsurer shall pay its proportion of expenses [other than office expenses and payments to any salaried employee] incurred by the Company in the investigation and settlement of claims or suits and its proportion of court costs and interest on any judgment or award, in the ratio that the Reinsurer’s loss payment bears to the Company’s gross loss payment.”

The parties submitted to the judge conflicting affidavits and depositions of Constitution’s practice. Because the judge determined that the contract was unambiguous, he refused to consider extrinsic evidence offered by each party of Constitution’s practice. We have only Affiliated’s documents in the record before us. Therefore, we do not reach or decide the issue whether the evidence was admissible as evidence of the parties’ intentions.

See, e.g., 19 G. Couch, Insurance § 80:68, at 675 (2d ed. 1983) (“If the original insured sues the original insurer and the reinsurer is notified and refuses or neglects to defend, it [the reinsurer] is bound by the judgment against the insurer, and is liable for the reasonable and necessary expenses and costs incurred bona fide in such defense . . .”); 13A Appleman & Appleman, Insurance Law and Practice § 7700, at 566-567 (1976) (“The reinsurer is liable to the reinsured for all costs incurred in good faith in defending the suit brought by the original insured, *843or brought against the original insured . . .”); K. R. Thompson, Reinsurance 328-329 (4th ed. 1966) (“If a reassured is sued by the original insurer, it would be under a duty to defend the case . . . and the costs which necessarily arise in such a suit might be considered as incurred upon reasonable grounds, and are allowed as composing part of a claim of indemnity against the reinsurer”).

See G. Staring, Law of Reinsurance § 15:2[5], at 12 n.58 (1993), citing Schmidlin, The Scope of Reinsurance Coverage: The Costs of Declaratory Judgments and the Problem of Punitive Damages, in International Reinsurance: Asbestos Claims 87, 89-91 (1988) (“[T]here is ... a large class of affirmative defenses through declaratory actions about which there may be differences of opinion, even though the defense may ultimately benefit the reinsurer. . . . Declaratory judgment actions brought by insurers against their insureds . . . have become very numerous and expensive and the view has been expressed by a prominent reinsurance executive that the costs of some of them are not properly for reinsurers’ accounts ...” [emphasis added]). In the present case, Affiliated did not initiate the declaratory judgment action, but was instead defending an action brought by Campbell, its insured.

Affiliated relies on several Nineteenth Century cases to support its argument. See New York State Marine Ins. Co. v. Protection Ins. Co., 18 Fed. Cas. 160 (D. Mass. 1841); Faneuil Hall Ins. Co. v. Liverpool & London Globe Ins. Co., 153 Mass. 63 (1891); Hastie v. DePeyster, 3 Cai. R. 190 (N.Y. Sup. Ct. 1805). As the Superior Court judge pointed out in his order allowing summary judgment: “In the above cases, however, the specific contract language relied on by the courts, if any, is not recited or discussed in any meaningful way. Thus, at best, the cases may establish Affiliated’s entitlement to reimbursement in the absence of policy language to the contrary.”

Comment b states in part: “There is no requirement that an agreement be ambiguous before evidence of a usage of trade can be shown, nor is it required that the usage of trade be consistent with the meaning the agreement would have apart from the usage.”

See Restatement (Second) of Contracts § 203 (b) (1981) (“[E]xpress terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade”).

The amicus brief submitted by the American Insurance Association, a national trade organization representing 252 insurance companies, specifically requests that the case be remanded in order to develop a more complete record concerning industry practice.