Federal Insurance Company and Zurich American Insurance Company were parties to a co-surety agreement providing excess professional liability coverage to the Hartford Financial Services Group. An endorsement designated Federal as the “Controlling Company” with respect to the investigation and adjustment of Hartford’s claims and provided that both parties “shall be liable for their proportionate share of allocated loss expense incurred by [Federal] associated with any claim made under the policy.”

Having settled a class action claim against it, Hartford sought coverage under the co-surety agreement. Federal contested coverage and initiated an arbitration in Bermuda. The arbitration panel found in Hartford’s favor, and ordered Federal to pay $3.5 million in attorneys’ fees and costs incurred by Hartford in the coverage dispute. Federal looked to Zurich to contribute its proportionate share of the $3.5 million as an “allocated loss expense.” Zurich declined and Federal initiated a coverage action in federal court.

Based on the parties’ letter to the court indicating that they considered discovery unnecessary and the dispute to be ripe for summary judgment, and after some further letter briefing by both parties, the court granted summary judgment to Federal sua sponte.

Zurich appealed, arguing both procedural impropriety by the court’s sua sponte grant of summary judgment, and that the court misinterpreted the policy. The Second Circuit Court of Appeals affirmed, however, noting that trial courts have discretion to enter summary judgment sua sponte, so long as it is not an “unfair surprise.” It also affirmed the trial court’s analysis of the undefined policy term “allocated loss expense,” finding that the term “allocated” modified “loss expense,” and that the attorney’s fees and costs were allocable to the loss at issue, and therefore a covered expense for which Zurich owed reimbursement.