Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-04406/USCOURTS-cand-3_03-cv-04406-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Breach of Contract

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

FIREMAN’S FUND INSURANCE

COMPANY,

Plaintiff,

v.

GENERAL REINSURANCE CORP.,

Defendant.

____________________________________/

No. C-03-4406 JCS

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

On May 31, 2005, the Court conducted a non-jury trial in the above matter. Pursuant to Federal

Rule of Civil Procedure 52(a), the Court hereby makes the following Findings of Fact and Conclusions of

Law.

I. FINDINGS OF FACT

A. Background

1. Basic Principles of Reinsurance

1. “Reinsurance . . . means . . . the ceding by one insurance company to another of all or a

portion of its risks for a stipulated portion of the premium, in which the liability of the reinsurer is solely to

the reinsured, which is the ceding company, and in which contract the ceding company retains all contact

with the original insured, and handles all matters prior to and subsequent to loss.” 13A Appleman,

Insurance Law & Practice § 7681 at 480 (1976).

2. Reinsurance contracts, referred to as a “certificates,” typically are “short and concise, using

terms of art rather than lengthy, legalistic explications to define the obligations of the parties.” B. Ostrager

and M.K. Vyskocil, Modern Reinsurance Law and Practice, Section 5.03, p. 5-9 (Glasser Legal Works

2000).

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3. A reinsurance certificate is facultative if it provides reinsurance on part or all of a single

insurance policy issued by the cedent, rather than reinsuring multiple policies issued by the cedent in a

particular line of business. The latter is referred to as treaty reinsurance.

2. The Parties

4. Plaintiff, Fireman’s Fund, is a California corporation with its principal place of business in

Novato, California. Joint Statement of Stipulated or Undisputed Facts (“Joint Statement”), ¶ 1. 

5. Defendant, General Reinsurance Corp. (“Gen Re”) is a Delaware corporation with its

principal place of business in Stamford, Connecticut. Joint Statement, ¶ 2.

6. Both parties are present and doing business in the Northern District of California. Joint

Statement, ¶ 4.

B. The Facultative Reinsurance Certificates (“the Certificates”) 

1. Texaco Certificate and Declaratory Judgment (“DJ”) Expenses

7. Fireman’s Fund issued a policy of excess liability insurance to Texaco, Inc., policy number

XLX 102-76-30, effective January 1969 (“the Texaco Policy”), which provided liability coverage to

Texaco for bodily injury and property damage. Joint Statement, ¶ 5; see Ex. 200.

8. Gen Re issued facultative reinsurance certificate number F90121 (“the Texaco

Certificate”), effective January 1, 1969, reinsuring a portion of the risk assumed by Fireman’s Fund with

respect to the Texaco Policy. Joint Statement, ¶ 6; see Ex. 2. 

9. The Texaco Certificate includes the following provision:

C. All claims involving this reinsurance, when settled by the Company

[Fireman’s Fund] shall be binding on the Reinsurer [Gen Re], which shall

be bound to pay its proportion of such settlements, and in addition thereto,

in the ratio that the Reinsurer’s [Gen Re’s] loss payment bears to the

Company’s [Fireman’s Fund’s] gross loss payment, with respect to

business accepted on an excess of loss basis and in the ratio that the

Reinsurer’s [Gen Re’s] limit of liability bears to the Company’s [Fireman’s

Fund’s] gross limit of liability with respect to business accepted on a pro

rata basis, its proportion of expenses, other than Company [Fireman’s

Fund] salaries and office expenses incurred by the Company [Fireman’s

Fund] in the investigation and settlement of claims or suits and, with the

prior consent of the Reinsurer [Gen Re] to trial court proceedings, its

proportion of court costs and interest on any judgment or award.

Ex. 2.

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10. Texaco filed declaratory relief actions against Fireman’s Fund seeking coverage under the

Texaco Policy for claims made against it by third parties alleging environmental contamination and asbestos

injuries. Joint Statement, ¶ 7.

11. Fireman’s Fund notified Gen Re of the declaratory relief actions filed by Texaco. Joint

Statement, ¶ 8.

12. Fireman’s Fund incurred DJ expenses defending against Texaco’s claims for coverage

under the Fireman’s Fund Texaco Policy. Fireman’s Fund also paid money to Texaco to settle the

coverage issues raised by the declaratory relief actions (“the loss payment”). Gen Re reimbursed Fireman’s

Fund for Gen Re’s proportionate amount of the loss payment. Joint Statement, ¶ 9.

13. On December 6, 1996, Fireman’s Fund sent Gen Re two invoices, each in the amount of

$15,426.35, seeking reimbursement under the Texaco Certificate of Gen Re’s proportionate share of the

DJ expenses Fireman’s Fund incurred defending against the Texaco declaratory relief actions. These

invoices were received by Gen Re on or before December 17, 1996. Joint Statement, ¶ 11; see Exs. 201-

202. 

14. One of the invoices sent on December 6, 1996, is addressed to Gen Re’s San Francisco

office and states “TOTAL DUE FFIC THIS NOTICE.” See Ex. 201. The other invoice does not indicate

which office it was sent to and does not specify when payment is due. See Ex. 202.

15. Fireman’s Fund sent Gen Re a third invoice in the amount of $4,282.04 on September 16,

1998, which was received by Gen Re on or before December 17, 1998. Joint Statement, ¶ 12; see Ex.

203.

16. The third invoice is addressed to Gen Re’s San Francisco offices and states “BALANCE

DUE FFIC.” See Ex. 203.

17. Fireman’s Fund sent Gen Re a fourth invoice in the amount of $15,087.00 on February 9,

2000. Joint Statement, ¶ 13; see Ex. 204.

18. The fourth invoice is addressed to Gen Re’s San Francisco office and states “Net Due on

Receipt.” See Ex. 204.

19. The amount in controversy as to the Texaco DJ expenses is $50,221.74. Joint Statement,

¶ 14.

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20. Gen Re contends that it is not obligated to pay the Texaco DJ expenses and has not paid

any portion of them. Joint Statement, ¶ 15.

2. SoCal Edison Certificate and DJ Expenses

21. Fireman’s Fund issued a policy of excess liability insurance to Southern California Edison

Company (“SoCal Edison”), policy number XLX 104-53-67, effective April 1970 (“the SoCal Edison

Policy”), which provided liability coverage to SoCal Edison for bodily injury and property damage. Joint

Statement, ¶ 16; see Ex. 205.

22. Gen Re issued facultative reinsurance certificate number F99815 (“the SoCal Edison

Certificate”), effective April 16,1970, reinsuring a portion of the risk assumed by Fireman’s Fund with

respect to the SoCal Edison Policy. Joint Statement, ¶ 17; see Ex. 3. 

23. The SoCal Edison Certificate includes the following provision:

C. All claims involving this reinsurance, when settled by the Company

[Fireman’s Fund] shall be binding on the Reinsurer [Gen Re], which shall

be bound to pay its proportion of such settlements, and in addition thereto,

in the ratio that the Reinsurer’s [Gen Re’s] loss payment bears to the

Company’s [Fireman’s Fund’s] gross loss payment, with respect to

business accepted on an excess of loss basis and in the ratio that the

Reinsurer’s [Gen Re’s] limit of liability bears to the Company’s [Fireman’s

Fund’s] gross limit of liability with respect to business accepted on a pro

rata basis, its proportion of expenses, other than Company [Fireman’s

Fund] salaries and office expenses incurred by the Company [Fireman’s

Fund] in the investigation and settlement of claims or suits and, with the

prior consent of the Reinsurer [Gen Re] to trial court proceedings, its

proportion of court costs and interest on any judgment or award.

Ex. 3.

24. SoCal Edison filed declaratory relief actions against Fireman’s Fund seeking coverage

under the SoCal Edison Policy for claims made against it by third parties alleging environmental

contamination. Joint Statement, ¶ 18.

25. Fireman’s Fund notified Gen Re of the declaratory relief actions filed by SoCal Edison. 

Joint Statement, ¶ 19.

26. Fireman’s Fund incurred DJ expenses defending against SoCal Edison’s claims for

coverage under the SoCal Edison Policy. Fireman’s Fund also paid money to SoCal Edison to settle the

coverage issues raised by the declaratory relief actions. Gen Re reimbursed Fireman’s Fund for Gen Re’s

proportionate amount of the loss payment. Joint Statement, ¶ 20.

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27. On December 6, 1996, Fireman’s Fund sent to Gen Re three invoices dated November

26, 1996, for a total of $62,378.40, seeking reimbursement under the SoCal Edison Certificate of Gen

Re’s proportionate share of the DJ expenses Fireman’s Fund incurred defending against the SoCal Edison

declaratory relief actions. Gen Re received these invoices on or before December 17, 1996. Joint

Statement, ¶¶ 21-22; see Exs. 206-208.

28. All three invoices are addressed to Gen Re’s office in Stamford Connecticut and state

“TOTAL DUE FFIC THIS NOTICE.” See Exs. 206-208.

29. On February 2, 1998, Fireman’s Fund faxed to Gen Re revised billings dated February 2,

1998, for a total of $62,577.99. These invoices duplicate the November 26, 1996 invoices and include

additional DJ expenses in the amount of $199.59. Joint Statement, ¶ 23; see Exs. 209-211.

30. All three revised invoices are addressed to Gen Re’s San Francisco office and state “DUE

UPON RECEIPT.” Exs. 209-211.

31. The agreed upon amount in controversy as to the SoCal Edison DJ expenses is

$62,577.99. Joint Statement, ¶ 23.

32. Gen Re contends that is not obligated to pay the SoCal Edison DJ expenses and has not

paid any portion of them. Joint Statement, ¶ 25.

3. Penn Central Certificate and DJ Expenses

33. Fireman’s Fund issued a policy of excess liability insurance to Penn Central Company

(“Penn Central”), policy number XLX 105-07-66, effective April 1971 (“the Penn Central Policy”), which

provided liability coverage to Penn Central for bodily injury and property damage. Joint Statement, ¶ 26;

see Ex. 212.

34. Gen Re issued facultative reinsurance certificate number F46024 (“the Penn Central

Certificate”), effective April 16, 1971, reinsuring a portion of the risk assumed by Fireman’s Fund with

respect to the Penn Central Policy. Joint Statement, ¶ 27; see Ex. 4. 

35. The Penn Central Certificate includes the following provision:

C. All claims involving this reinsurance, when settled by the Company

[Fireman’s Fund] shall be binding on the Reinsurer [Gen Re], which shall

be bound to pay its proportion of such settlements, and in addition thereto,

in the ratio that the Reinsurer’s [Gen Re’s] loss payment bears to the

Company’s [Fireman’s Fund’s] gross loss payment, with respect to

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business accepted on an excess of loss basis and in the ratio that the

Reinsurer’s [Gen Re’s] limit of liability bears to the Company’s [Fireman’s

Fund’s] gross limit of liability with respect to business accepted on a pro

rata basis, its proportion of expenses, other than Company [Fireman’s

Fund] salaries and office expenses incurred by the Company [Fireman’s

Fund] in the investigation and settlement of claims or suits and, with the

prior consent of the Reinsurer [Gen Re] to trial court proceedings, its

proportion of court costs and interest on any judgment or award.

Ex. 4.

36. Penn Central filed declaratory relief actions against Fireman’s Fund seeking coverage

under the Penn Central Policy for claims made against it by third parties alleging environmental

contamination and other injuries. Joint Statement, ¶ 28.

37. Fireman’s Fund notified Gen Re of the declaratory relief actions filed by Penn Central. 

Joint Statement, ¶ 29.

38. Fireman’s Fund incurred DJ expenses defending against Penn Central’s claims for coverage

under the Fireman’s Fund Penn Central Policy. Fireman’s Fund also paid money to Penn Central to settle

the coverage issues raised by the declaratory relief actions. Gen Re reimbursed Fireman’s Fund for Gen

Re’s proportionate amount of the loss payment. Joint Statement, ¶ 30.

39. Fireman’s Fund sent Gen Re an invoice dated May 9, 2000, in the amount of $1,705.86,

seeking reimbursement under the Penn Central Certificate of Gen Re’s proportionate share of the DJ

expenses Fireman’s Fund incurred defending against the Penn Central declaratory relief actions. That is the

agreed amount in controversy as to the Penn Central DJ expenses. Joint Statement, ¶ 32; see Ex. 213.

40. The May 9, 2000 invoice was sent to Gen Re’s San Francisco office.

41. Gen Re contends that is not obligated to pay the Penn Central DJ expenses and has not

paid any portion of them. Joint Statement, ¶ 33.

4. Oil and Solvent Certificate and DJ Expenses

42. Fireman’s Fund issued a policy of excess liability insurance to Oil and Solvent Process

Company (“Oil and Solvent”), policy number LC 2431174, effective December 1975 (“the Oil and

Solvent Policy”), which provided liability coverage to Oil and Solvent for bodily injury and property

damage. Joint Statement, ¶ 34; see Ex. 214.

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43. Gen Re issued facultative reinsurance certificate number FJ 9871-B (“the Oil and Solvent

Certificate”), effective December 1977, reinsuring a portion of the risk assumed by Fireman’s Fund with

respect to the Oil and Solvent Policy. Joint Statement, ¶ 35; see Ex. 5. 

44. The Oil and Solvent Certificate includes the following provision:

D. All loss settlements made by the Company [Fireman’s Fund],

provided they are within the terms and conditions of the original policy(ies)

and within the terms and conditions of this certificate of reinsurance shall be

binding on the Reinsurer [Gen Re]. Upon receipt of a definitive statement

of loss, the Reinsurer [Gen Re] shall promptly pay its proportion of such

loss as set forth in the Declarations. In addition thereto, the Reinsurer [Gen

Re] shall pay its proportion of expenses (other than office expenses and

payments to any salaried employee) incurred by the Company [Fireman’s

Fund] 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 [Gen Re’s] loss payment bears to the Company’s

[Fireman’s Fund’s] gross loss payment. . . . .

Ex. 5.

45. Waste Management, Inc., a parent corporation of Oil and Solvent, filed a declaratory relief

action against Fireman’s Fund seeking coverage under the Oil and Solvent Policy for claims made against it

by third parties alleging environmental contamination. Joint Statement, ¶ 36.

46. Fireman’s Fund notified Gen Re of the Oil and Solvent declaratory relief actions. Joint

Statement, ¶ 37.

47. Fireman’s Fund incurred DJ expenses defending against Oil and Solvent’s claims for

coverage under the Fireman’s Fund Penn Central Policy. Fireman’s Fund also paid money to Waste

Management, Inc. and/or Oil and Solvent to settle the coverage issues raised by the declaratory relief

actions. Gen Re reimbursed Fireman’s Fund for Gen Re’s proportionate amount of the loss payment. 

Joint Statement, ¶ 38.

48. Fireman’s Fund sent Gen Re two invoices, both dated September 8, 1999, totaling

$67,723.00, seeking reimbursement under the Oil and Solvent Certificate of Gen Re’s proportionate share

of the DJ expenses Fireman’s Fund incurred defending against the Oil and Solvent declaratory relief

actions. Gen Re received the invoices on September 23, 1999. Joint Statement, ¶¶ 39-40; see Exs. 215-

216.

49. The September 8, 1999 invoices both are addressed to Gen Re’s San Francisco office and

state “DUE UPON RECEIPT.” Exs. 215-216.

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50. Fireman’s Fund sent Gen Re two additional invoices, both dated April 12, 2002, in the

amounts of $30,233.16 and $55,233.16. Joint Statement, ¶ 41; see Exs. 217-218.

51. Both of the April 12, 2002 invoices were addressed to Gen Re’s San Francisco office.

52. The agreed upon amount in controversy with respect to the Oil and Solvent DJ expenses is

$89,309.36. Joint Statement, ¶ 42.

53. Gen Re contends that is not obligated to pay the Oil and Solvent DJ expenses and has not

paid any portion of them. Joint Statement, ¶ 43.

5. Chem Trol Certificate and DJ Expenses

54. Fireman’s Fund issued a policy of excess liability insurance to Chem Trol Industrial Sales,

Inc. (“Chem Trol”), policy number LC 193 83 57, effective September 1972 (“the Chem Trol Policy”),

which provided liability coverage to Chem Trol for bodily injury and property damage. Joint Statement,

¶ 44.

55. Gen Re issued facultative reinsurance certificate number FA 2314 (“the Chem Trol

Certificate”), effective September 1972, reinsuring a portion of the risk assumed by Fireman’s Fund with

respect to the Chem Trol Policy. Joint Statement, ¶ 45; see Ex. 6. 

56. The Chem Trol Certificate includes the following provision:

D. All loss settlements made by the Company [Fireman’s Fund],

provided they are within the terms and conditions of the original policy(ies)

and within the terms and conditions of this certificate of reinsurance shall be

binding on the Reinsurer [Gen Re]. Upon receipt of a definitive statement

of loss, the Reinsurer [Gen Re] shall promptly pay its proportion of such

loss as set forth in the Declarations. In addition thereto, the Reinsurer [Gen

Re] shall pay its proportion of expenses (other than office expenses and

payments to any salaried employee) incurred by the Company [Fireman’s

Fund] 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 [Gen Re’s] loss payment bears to the Company’s

[Fireman’s Fund’s] gross loss payment. . . . .

Ex. 6.

57. Waste Management, Inc., a parent corporation of Chem Trol, filed a declaratory relief

action against Fireman’s Fund seeking coverage under the Chem Trol Policy for claims made against it by

third parties alleging environmental contamination. Joint Statement, ¶ 46.

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 The Court overrules Gen Re’s objections to this testimony. According to Gen Re, Davis has not

established that he has personal knowledge of these communications. The Court disagrees. Davis states in

his RebuttalDeclaration that “[a]s Senior Vice President of Discontinued Operations and President of SFRe

[a wholly owned subsidiary of Fireman’s Fund], one of my responsibilities is supervising a staff who present

claimsforreimbursement toreinsurersthathave afforded facultative and treatyreinsurance infavor ofFireman’s

Fund and Fireman’s Fund-related entities.” Davis Rebuttal Decl., ¶ 3. Davis’s employment in this capacity

is sufficient to establish his personal knowledge in this area.

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58. Fireman’s Fund notified Gen Re of the Chem Trol declaratory relief action. Joint

Statement, ¶ 47.

59. Fireman’s Fund incurred DJ expenses defending against Chem Trol’s claims for coverage

under the Chem Trol Policy. Fireman’s Fund also paid money to Waste Management, Inc. and/or Chem

Trol to settle the coverage issues raised by the declaratory relief actions. Gen Re reimbursed Fireman’s

Fund for Gen Re’s proportionate amount of the loss payment. Joint Statement, ¶ 48.

60. Fireman’s Fund sent Gen Re an invoice dated April 12, 2002 for $76,594.66, seeking

reimbursement under the Chem Trol Certificate of Gen Re’s proportionate share of the DJ expenses

Fireman’s Fund incurred defending against the Chem Trol declaratory relief action. Joint Statement, ¶ 49;

see Ex. 219.

61. The April 12, 2002 invoice was sent to Gen Re’s San Francisco office. See Ex. 219.

62. The agreed upon amount in controversy, notwithstanding the April 12, 2002 invoice, is

$34,467.60 with respect to the Chem Trol DJ expenses. Joint Statement, ¶ 50.

63. Gen Re contends that is not obligated to pay the Chem Trol DJ expenses and has not paid

any portion of them. Joint Statement, ¶ 43.

D. Choice of Law

64. None of the Certificates contains a choice of law provision.

E. Timeliness of Claims

65. In response to invoices from Fireman’s Fund that included DJ expenses, Gen Re asked

Fireman’s Fund why it was required to pay these invoices. See Rebuttal Declaration of Earl C. Davis

(“Davis Rebuttal Decl.”), ¶ 5. Fireman’s Fund employees responded by stating Fireman’s Fund’s position

that such expenses were covered under the Gen Re Certificates. Id.

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 Gen Re objectsto thistestimony onthe basis that evidence of settlement discussions is inadmissible

to establishliabilityunderRule 408 ofthe FederalRules ofEvidence. The Court overrules this objection. Rule

408 expressly permits evidence of settlement discussions that is offered for a purpose other than establishing

liability, such as “negativing a contention of undue delay.” F. R. Evid. 408;see also 23 Charles Alan Wright,

KennethW. Graham, Jr., FederalPractice and Procedure § 5312 (explaining thatRule 408 generally permits

the use of compromise evidence to account forfailure to meet deadlinessuchas a statute oflimitations because

“it is the fact of such compromise negotiations, not the details of the various offers, that is relevant to explain

delay”).

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66. Beginning in 1998, Gen Re and Fireman’s Fund began discussing the possibility of a global

settlement of the outstanding DJ costs. Davis Rebuttal Decl., ¶ 7.2

67. Although there were “long lapses in time” between discussions, Fireman’s Fund continued

to send Gen Re regular billing reminders as to the outstanding DJ expenses. Davis Rebuttal Decl., ¶ 8.

68. In 2003, Senior Vice President of Discontinued Operations Earl Davis became directly

involved in the settlement discussions with Gen Re concerning outstanding DJ expenses. Davis Rebuttal

Decl., ¶ 10.

69. On March 25, 2003, in response to Gen Re’s request, Fireman’s Fund provided Gen Re

with a spread sheet showing all outstanding DJ expenses Fireman’s Fund sought from Gen Re. Davis

Rebuttal Decl., ¶ 11.

70. A meeting between representatives of Gen Re and Fireman’s Fund (in which Davis

participated) was held on March 28, 2003, to discuss the outstanding DJ expenses. The parties were able

to agree on the amounts in dispute but were not able to agree on a settlement. Davis Rebuttal Decl., ¶ 17. 

At the meeting, Davis stated that because the parties were unable to reach a settlement, Fireman’s Fund

intended to file a lawsuit. Davis Rebuttal Decl., ¶ 18. According to Davis, Gen Re’s representative agreed

that a lawsuit would be the best way to resolve the dispute and did not raise the possibility that the claims

might be time-barred. Davis Rebuttal Decl., ¶ 18.

71. Prior to March 2003, Gen Re did not, to the knowledge of Earl Davis, expressly refuse to

pay the DJ expenses. Davis Rebuttal Decl., ¶ 9. Nor is there any other evidence in the record that prior

to March 2003 Gen Re expressly refused to pay the DJ expenses.

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72. In the reinsurance industry, the reinsurer and the insured have a relationship of “utmost

good faith.” Davis Rebuttal Decl., ¶ 21. “It is not unusual for the parties to a reinsurance contract to

conduct their business informally with extensive time lapses between billings and collections.” Id. 

F. Custom and Practice

73. The parties disagree as to the prevailing custom in the reinsurance industry at the time the

Certificates were issued as to payment of DJ expenses. Fireman’s Fund presents evidence that DJ

expenses were routinely and knowingly paid by reinsurers. Gen Re disputes that these expenses were

routinely paid across the industry, arguing that Fireman’s Fund’s evidence is based on the practice of a

single company. Further, Gen Re argues that even if DJ expenses were routinely paid by reinsurers,

payment of those expenses was not knowing. 

The Court reviews the evidence of custom and practice below and makes specific credibility

findings.

74. Fireman’s Fund relies heavily on the testimony of William J. Gilmartin in support of its

position. Gilmartin is qualified as an expert witness under Rule 702 of the Federal Rules of Evidence,

based on his knowledge, skill and experience in the insurance industry. In particular, Gilmartin worked for

CNA insurance company from 1950 until his retirement in 1986. See Declaration of William J. Gilmartin

(“Gilmartin Decl.”), ¶ 3. During his time at CNA, Gilmartin founded CNA’s reinsurance division, where he

worked in a managerial capacity until his retirement. Id. Gilmartin supervised many aspects of the

reinsurance division, included the ceded reinsurance of CNA and CNA’s participation in voluntary pools. 

Id. During the time the Certificates in this case issued – between 1969 and 1977 – Gilmartin was Vice

President in charge of reinsurance assumed and reinsurance ceded. Id., ¶ 4. In that position, Gilmartin was

responsible for purchasing both property and casualty facultative reinsurance from Gen Re and other

insurers and regularly reviewed facultative certificates issued to CNA by those insurers. Id. 

Following his retirement from CNA, Gilmartin has continued to be involved in the insurance

industry, serving on the boards of several CNA companies and other reinsurance industry organizations and

as acting President of the Brokers and Reinsurance Markets Association. Id. Gilmartin is currently

Chairman of the Board of Aioi Insurance Company of American. Id. In addition, Gilmartin has testified as

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an expert witness on reinsurance issues in numerous actions, including six separate actions in the past four

years. Id., ¶¶ 6-7. 

75. In his declaration, Gilmartin testified that the language used in Section C of the Texaco,

SoCal Edison and Penn Central Certificates, providing that Gen Re is liable for “its proportion of expenses,

other than Company salaries and office expenses, incurred by the Company in the investigation and

settlement of claims or suits . . .” is “substantially similar to that commonly used in most facultative

reinsurance certificates issued to cedents during the same period.” Gilmartin Decl., ¶ 19. Similarly,

Gilmartin testifies that the language used in Section D of the Oil & Solvent and Chem Trol Certificates,

which provides that Gen Re is liable for “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 . . .” is “substantially similar to that commonly used in most facultative reinsurance certificates issued

to cedents during the same period.” Gilmartin Decl., ¶ 20.

76. Gilmartin testified further that “during the period from the late 1960s through the early

1980s there was an industry custom and practice of reinsurers reimbursing cedents for payment of

declaratory judgment expenses under facultative reinsurance certificates including wording substantially

similar to wording in Sections C and D of the Gen Re certificates.” Gilmartin Decl., ¶ 39. According to

Gilmartin, “[d]uring that time period, neither Gen Re, nor any other reinsurer to which CNA submitted

expenses, required that CNA break out or separately identify which expenses were for defense of the

original insured and which expenses related to coverage or declaratory costs. Gilmartin Decl., ¶ 25. Nor

did Gilmartin recall, during this time period, “a reinsurer ever denying a claim, or any part of a claim, which

CNA submitted on the basis that declaratory judgment expenses or coverage related expenses included in

that claim were not covered by facultative reinsurance.” Id. Finally, Gilmartin testified that the question of

reimbursement for DJ expenses was first raised by reinsurers in the early 1980s – well after the Certificates

were issued – in response to rising costs associated with asbestos and pollution claims. Gilmartin Decl., ¶

28.

77. The Court finds that Gilmartin’s testimony on custom and practice is highly credible. 

Gilmartin has extensive experience in the reinsurance industry and, by virtue of his employment in CNA’s

reinsurance department, was aware of the custom and practice during the relevant time period – not only of

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CNA but also of the reinsurers to which CNA ceded risk, including Gen Re. Further, Gen Re has not

identified any evidence showing that during the period when the Certificates were issued Gen Re – or

indeed, any reinsurance company – denied payment under a reinsurance certificate on the basis that DJ

expenses were included. Accordingly, the Court finds that at the time the Certificates issued, there was a

nearly universal custom and practice in the reinsurance industry of paying DJ expenses under certificates

containing language substantially the same or similar to the language contained in the Certificates here.

78. This finding is supported by the testimony of Earl C. Davis that during the time he has

worked for Fireman’s Fund, Fireman’s Fund has paid “the vast majority” of DJ expenses sought be

cedents of risk under facultative reinsurance certificates issued by Fireman’s Fund. See Declaration of Earl

C. Davis (“Davis Decl.”), ¶ 7. Although Davis did not begin his employment in the insurance industry until

1976, and did not begin working for Fireman’s Fund until 1985, his employment as Senior Vice President

of Discontinued Operations has allowed him to gain exposure to Fireman’s Fund’s policies with respect the

certificates issued by Fireman’s Fund during the relevant period, which used language similar to that at issue

here. See Davis Decl., ¶ 9. The Court, however, places much less weight on Davis’s testimony than it

does on Gilmartin’s. First, Davis’s testimony establishes that he is familiar only with the practices of

Fireman’s Fund with respect to DJ expenses, whereas Gilmartin’s experience encompasses the entire

industry, including Gen Re. Second, Davis has a vested interest in the outcome of this litigation and

therefore is somewhat less credible as a witness than Gilmartin.

79. The testimony of Thomas S. Orr on Gen Re’s practices regarding DJ expenses is not

inconsistent with the above finding. Orr testified in his declaration that “[i]n the twenty-four years [he has]

been employed at Gen Re, it has been Gen Re’s position that DJ expenses are not covered under its

facultative reinsurance certificates, unless there is specific language expressly providing coverage for DJ

expenses.” Declaration of Thomas S. Orr (“Orr Decl.”), ¶ 25. Because Orr’s employment with Gen Re

began in 1981, this statement is consistent with Gilmartin’s testimony that reinsurers began to question

whether DJ expenses were included under reinsurance certificates such as those at issue here in the early

1980s. 

80. The Court does not find credible the testimony of Gen Re’s Senior Vice-President, William

Thiele, that at the time the Certificates were issued, “it was the intention of involved underwriters that the

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coverage afforded under the certificates was limited to the risk assumed by the cedent under policies issued

to insureds . . . .” Thiele Decl., ¶ 16. As senior vice president of Gen Re, Thield has a strong vested

interest in the outcome of this action and thus the Court finds this testimony unconvincing. In any event, this

statement is both unconvincing and inadmissible for lack of personal knowledge because Thiele has not laid

a factual foundation in support of his statement purporting to describe the “intention of involved

underwriters.” 

81. Gen Re has presented evidence that during the period in which the Certificates were issued

cedents and reinsurers generally did not discuss the question of whether DJ expenses were covered. See

Revised Declaration of William E. Thiele (“Thiele Decl.”), ¶ 15. Fireman’s Fund has presented no

evidence to the contrary. Nor is there any evidence in the record that this issue was discussed by the

parties when the Certificates were issued. Accordingly, the Court finds that the issue generally was not

discussed by cedents and reinsurers during the relevant period and was not discussed by the parties in this

case at the time the Certificates were issued. 

82. The Court finds, based on Gen Re’s stipulation at trial, that until coverage is actually

denied, it is the policy of Gen Re to include the cost of coverage counsel’s fees and expenses for

investigation as an “expense” under its facultative reinsurance certificates where a loss ultimately is incurred. 

II. CONCLUSIONS OF LAW

A. Jurisdiction and Venue

83. This Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C.

§ 1332 as the amount in controversy exceeds $75,000.00 and the parties are citizens of different states. 

Fireman’s Fund is a California Corporation with its principal place of business in California. Gen Re is a

Delaware Corporation with its principal place of business in Connecticut.

84. Venue is proper in this District because both parties are present and doing business here.

B. Choice of Law

85. Because jurisdiction is based on diversity, the Court looks to California’s choice of laws

rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487(1941).

86. In contract actions in which no choice of law is specified in the contract, California courts

apply the laws of the state that has the most significant relationship to the conflict. See ABF Capital Corp.

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v. Berglass, 130 Cal. App. 4th 825, 30 Cal. Rptr. 3d 588, 596 (2005); see also Strassberg v. New

England Mutual Life Ins. Co., 575 F.2d 1262, 1263 -1264 (9th Cir. 1978). Here, Fireman’s Fund

asserts – and Gen Re does not dispute – that California has the most significant relationship to the dispute

because Fireman’s Fund is a California Corporation and most of the bills for DJ expenses were sent to Gen

Re’s San Francisco office. Accordingly, the Court applies California law.

C. Obligation to Reimburse for Declaratory Judgment Expenses

87. Under California law, insurance contracts are subject to the same basic rules of

construction as other contracts. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 666

(1995). California’s statutory rules of contract interpretation provide that the mutual intentions of the

parties at the time the contract was formed govern interpretation. Id. (citing Cal. Civ. Code § 1636). 

Intent is to be inferred, if possible, solely from the written terms of the contract. Id. 

Generally, words in a contract are to be construed according to their plain and ordinary meaning. 

Hayter Trucking, Inc. v. Shell Western E & P Inc., 18 Cal. App. 4th 1, 15 (1993). “However,

particular expressions may, by trade usage, acquire a different meaning in reference to the subject matter of

a contract. If both parties are engaged in that trade, the parties to the contract are deemed to have used

them according to their different and peculiar sense as shown by such trade usage and parol evidence is

admissible to establish the trade usage even though the words in their ordinary or legal meaning are entirely

unambiguous.” Id.; see also Larwin-Southern California, Inc. v. JGB Investment, Inc., 101 Cal. App.

3d 626, 635 (1979) (noting that “custom and usage . . . may properly be used in clarifying what, on the

face of a contract, appears to be an ambiguity”). “The knowledge [of trade usage] may be actual or

constructive, and it is constructive if the custom is of such general and universal application that the party

must be presumed to know of it.” Heggblade-Marguleas-Tenneco, Inc. v. Sunshine Biscuit, Inc. 59

Cal. App. 3d 948, 956-957 (1976). 

“The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it

appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant

to prove a meaning to which the language of the instrument is reasonably susceptible.” Pacific Gas & E.

Co. v. G.W. Thomas Drayage etc. Co., 69 Cal. 2d 33, 37 (1968).

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88. The disputed language in this case, found in Section C of the Texaco, SoCal Edison and

Penn Central Certificates and in Section D of the Oil & Solvent and Chem Trol Certificates, provides for

coverage of “expenses” incurred in the “investigation and settlement of claims or suits.” The Court finds

that this language can reasonably be read as either covering DJ expenses or excluding them. The court

agrees with the court in Affiliated FM Ins. Co. v. Constitution Reins. Corp. that:

“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. 

416 Mass. 839, 844 (quoting Pittsfield & N. Adams R.R. v. Boston & Albany R.R., 260 Mass 390, 397

(1927)). In Affiliated FM, the plaintiff sought coverage for DJ expenses under a facultative reinsurance

certificate that contained language virtually identical to the language at issue here. In particular, the

certificate covered “expenses [other than office expenses and payments to any salaried employee] incurred

by the Company in the investigation and settlement of claims or suits . . . .” Id. at 880 n. 4. The

Massachusetts Supreme Court held that the language was ambiguous, reversing a lower court decision

granting summary judgment in favor of the reinsurer. Id. at 844. Accordingly, the case was remanded for

consideration of evidence of custom and usage to determine the meaning of the ambiguous language.

89. In the face of ambiguous language, and in the absence of any contemporaneous evidence of

the parties’ intentions, the Court looks to the custom and practice in the industry at the time the Certificates

were issued to “arrive at an interpretation which appears to be in accord with justice and common sense

and the probable intentions of the parties.” Affiliated FM, 416 Mass. at 846 (citation omitted). Based on

the Court’s finding that at the time the Certificates were issued there was a widespread custom and practice

among reinsurers, including Gen Re, of paying DJ expenses under facultative reinsurance certificates

containing language similar to or the same as the language at issue here, the Court concludes that the

disputed language covers the DJ expenses sought by Fireman’s Fund in this case. 

90. This construction is consistent with Gen Re’s policy of including coverage counsel as an

“expense” until coverage is denied where a loss is ultimately incurred. The cost of coverage counsel is

similar to DJ expenses to the extent that both are expenses that go beyond the risk assumed in the

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 Although the Court need not reach the question, the Court also concludes that, as a factualmatter,

Gen Re had actual knowledge of the custom and practice. As Gen Re itself notes, “[t]he parties to the

Certificates are large, sophisticated business entities very familiar with the business of reinsurance.” Pretrial

Brief of Gen-Re Reinsurance Corporation (“Gen-Re Pretrial Brief”) at 5. It simply is not credible that

reinsurers were unaware for decades that they were paying DJ expenses along with their share of the loss,

especially in light ofthe fact that where a DJ actionhas beenfiled,settlement and investigationof the underlying

claims can only occur within the context of the DJ action. See Davis Decl., ¶ 10. 

17

underlying policies and are incurred in connection with the threshold determination of whether the insurer is

obliged to afford coverage under the policy. 

91. The Court’s interpretation is also consistent with common sense and the principles of

reinsurance. In particular, insurers and reinsurers owe each other a duty of “utmost good faith.” Unigard

Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1054 (2d Cir. 1993). In light of the common interest

of the cedent and reinsurer in the outcome of DJ actions, it makes little sense to draw a distinction between

DJ expenses and other types of expenses. Indeed, such a distinction might well create a disincentive for

cedents to challenge coverage on the part of the insured in a DJ action, potentially to the detriment of both

the reinsurer and the cendent. See Employers Ins. Co. of Wasau v. American Re-Insurance Co., 256 F.

Supp. 923, 926 (W.D. Wisc. 2003). 

92. The Court rejects Gen Re’s contention that custom and usage should not be considered

because the custom and usage of paying DJ expenses was not “knowing.” Where a custom and usage is

essentially universal, as the evidence shows it was here, a party is presumed to have knowledge of it. See

Heggblade-Marguleas-Tenneco, Inc. v. Sunshine Biscuit, Inc. 59 Cal. App. 3d 948, 956-957 (1976);

Restatement (Second) of Contract § 221 com. b (stating that “[t]he more general and well-established a

usage is, the stronger is the inference that a party knew of or had reason to know of it”). Such constructive

knowledge, by itself, provides a sufficient basis on which to conclude that the word “expenses” includes DJ

expenses.3

93. The Court rejects Defendant’s assertion that Gilmartin’s deposition testimony constitutes an

acknowledgment that the practice of paying DJ expenses was not knowing. In his deposition, Gilmartin

was asked whether payment of DJ expenses by Gen Re during the relevant period could be knowing, in

light of his testimony that cedents did not itemize DJ expenses in their bills to reinsurers. See Gilmartin

Depo. at 27 - 30. Gilmartin responded that he would only agree that payment of such expenses was not

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knowing if he saw evidence that a DJ expense had been denied by a reinsurer and he had seen no such

evidence. Further, he noted, “it’s impossible for me to believe that [no DJ expenses] were presented.” Id.

at 30. Far from admitting that DJ expenses were not knowingly paid, Gilmartin’s testimony supports the

conclusion that Gen Re had constructive knowledge (if not actual knowledge) of the custom and usage in

the industry.

94. This case is distinguishable from British Int’l Ins. Co. Ltd. v. Seguros Republica, S.A.,

342 F.3d 78 (2d Cir. 2003), in which the court concluded that the language contained in the reinsurance

certificates unambiguously did not cover DJ expenses. There, the language was significantly different from

the language here. In particular, it did not refer to “expenses.” Instead, the cedent sought to recover DJ

expenses under language providing that “[t]his Certificate of Reinsurance is subject to the same risks,

valuations, conditions and endorsements . . . as are or may be assumed by the reinsured, and loss, if any,

hereunder is payable pro rata with the reinsured and at the same time and place . . .” 342 F.3d at 80. The

court reasoned that the cedent in that case had not demonstrated that there was any ambiguous term – that

is – a term that could reasonably be read to suggest more than one meaning. Id. at 83. The court

distinguished Affiliated FM on the basis that in that case, the word “expenses” was susceptible to more

than one meaning. Id. at 83. 

The court in Seguros went on to address whether the evidence of custom and usage was sufficient

to find an implied term in the contract requiring the reinsurer to pay DJ expenses. Id. The court found that

it was not, rejecting testimony by the same expert who has testified in this case – William Gilmartin – of

custom and usage. Gilmartin testified in that case that “between 1976 and 1983, “[i]t was the custom and

practice for reinsurers to pay [their reinsureds’ declaratory judgment] expenses due to the common interest

they shared with their reinsureds arising from the defense or prosecution of a declaratory judgment action.”

Id. at 84. The Second Circuit found Gilmartin’s testimony unpersuasive, concluding the plaintiff had not

established actual or constructive knowledge of the alleged custom and usage. Id. Specifically, the court

pointed to three shortcomings in the evidence: 1) “Gilmartin did not aver . . . that these . . reinsurers always

and invariable paid these costs . . . and his testimony can be read to say that the payments were made ex

gratia when reinsurers believed that the coverage litigations advanced their common interest, but not

otherwise”; 2) Gilmartin did not testify that the language contained in the reinsurance certificates issued by

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other reinsurers was similar to the language in the certificates at issue in that case; and 3) there was “no

allegation of actual or constructive knowledge” on the part of the reinsurer or evidence that the practice was

“so notorious” in the industry that the reinsurer must have been aware of it. Id

This Court places greater weight on Gilmartin’s testimony than did the Seguros court for three

reasons. First, Gilmartin’s declaration in this action cannot reasonably be read to say that reinsurers only

paid DJ expenses when it suited their interests. To the contrary, Gilmartin states that in all of his decades of

experience in the reinsurance industry, he is unaware of a single instance in which a reinsurer denied DJ

expenses to a cedent. Thus, the possibility that a reinsurer might have done so is sheer speculation. 

Second, in this case, in contrast to Seguros, Gilmartin has clearly stated that his opinion concerning the

custom and practice of other reinsurers is based on his experience regarding payment of DJ expenses under

facultative reinsurance certificates containing the same or similar language to that at issue here. Finally, the

evidence offered by Gilmartin that he never encountered a single instance in which DJ expenses were

denied under similar language is sufficient to establish constructive knowledge based on a notorious custom

and usage in the industry.

D. Statute of Limitations

95. Where a written contract between the parties does not specify when payment is due, the

breach does not occur upon the making of demand for payment but rather, at the expiration of a reasonable

time. Caner v. Owners Realty Co., 33 Cal. App. 479, 481 (1917). The question of what is a reasonable

time is a fact question to be determined based on the particular circumstances of the case. Hoppin v.

Munsey, 185 Cal. 678, 684 (1921). 

96. The statute of limitations for breach of a written contract is four years. Cal. Civ. Proc.

Code § 337.

97. Here, the Court considers the ongoing discussions between Fireman’s Fund and Gen Re

concerning possible settlement of the outstanding DJ expenses, the common practice among reinsurers of

paying cedents after long delays, and the fact that Gen Re did not expressly refuse to pay the disputed

amounts until March 2003. Considering these circumstances, the Court concludes that a reasonable time

for accrual from the time of billing is no less than four years. The earliest invoice was received by Gen Re

on December 17, 1996. Thus, the cause of action accrued no sooner than December 17, 2000. Because

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this action was filed on September 30, 2003, within four years of that date, Fireman’s Fund’s claim for DJ

expenses is timely as to all disputed amounts.

E. Liability

98. Gen Re is liable to Fireman’s Fund in the amount of $238,282.65, the agreed amount of

the Texaco, SoCal Edison, Penn Central, Oil and Solvent and Chem Trol DJ expenses.

99. In addition, Gen Re is liable to Fireman’s Fund for prejudgment interest pursuant to Cal.

Civ. Code § 3289.

IV. CONCLUSION

The parties are instructed to meet and confer on the question of the amount of prejudgment interest

to which Fireman’s Fund is entitled and submit a stipulation as to that amount. In the event the parties are

unable to agree on the amount of prejudgment interest, a telephonic case management conference will be

conducted on August 19, 2005, at 1:30 p.m., to discuss what further briefing may be necessary to resolve

that issue.

IT IS SO ORDERED.

Date: August 5, 2005

JOSEPH C. SPERO

United States Magistrate Judge

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