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March 27, 1995


The opinion of the court was delivered by: BERNARD NEWMAN

BERNARD NEWMAN, Senior Judge: *fn1"

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).


 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 Micheal 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.


 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. *fn2" 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 ...

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