Court Reforms Policy After Insurer And Insured Concur On Antecedent Agreement

Ever since I got involved in a year-long case in which a key issue was whether a sizable insurance policy should be reformed, I can’t get enough of reformation cases.   OneBeacon America Ins. Co. v. Travelers Indemnity Co. of Illinois, (1st Cir. October 6, 2006) is a good reformation case, although different from most, because in this case both the insurer and the insured agreed the policy did not reflect the intentions of the contracting parties.

A reformation claim hinges on establishing by clear and convincing evidence that the contract reflects a mutual mistake of the parties and that there was a prior agreement, to which the written instrument should be changed to reflect.  So when both parties to an agreement concur on these elements of the claim, almost always it is going to be lights out.  And so it was in this case.

OneBeacon sold a $1 million general liability policy to LAI, a company that leases cars and trucks to other businesses, to cover its vehicles.  Language in the policy said those who drove vehicles with LAI’s permission were also insured by the policy.  However, quite a bit of evidence was presented that neither LAI nor OneBeacon intended that result: LAI required lessees to either apply for coverage under its policy and go through an underwriting process, or get their own insurance.  Capform, a construction outfit, leased some vehicles long-term and got insurance through Travelers. A Capform driver then hit a pedestrian, Travelers settled the case for $5 million and became aware of the OneBeacon policy, and demanded the $1 million limits. 

The court did a good job of analyzing the difference between a mistake as to the result of a contract, which would not justify reformation, and a mistake in the writing of a contract so that it fails to express the parties’ intent, which would justify it.  In this instance, the court said the evidence convincingly showed mutual mistake and a prior meeting of the minds, and reversed the district court, granting summary judgment to OneBeacon on its reformation claim.  The court noted that reformation can be defeated by equitable considerations, such as detrimental reliance on the unreformed contract by an innocent third party.  However, the evidence was that Travelers did not learn of the unreformed policy until the settlement of the personal injury case, so there was no reliance.   An interesting, well-written case.  Hat tip to Appellate Law & Practice via Boston Erisa & Insurance Litigation Blog.

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