OneBeacon America Insurance Co. v. Travelers Indemnity Co. of Illinois

Brief Fact Summary.

OneBeacon America Insurance Co. (Plaintiff) was the general insurer for vehicles owned by Leasing Associates, Inc. (LAI). One of LAI’s lessees was insured by Defendant and was in an accident that led to Defendant paying a $5 million settlement. Defendant sought reimbursement from Plaintiff based upon language in the insurance policy and Plaintiff sought reformation of the policy to reflect the intent of the parties not to cover lessees.

Synopsis of Rule of Law.

When a contract’s written language does not reflect the intent of the parties and there is no public policy reason to keep it as written, a court will reform the contract. 

Facts.

Plaintiff was the insurer for vehicles owned by LAI, a vehicle leasing agency. The insurance policy defined an “insured” to include LAI and “Anyone else while using with your permission a covered auto you own. . . .” Despite this language, LAI’s standard leases required lessees to provide their own insurance for leased vehicles, either by applying to be added to the Plaintiff’s policy or through another insurer. The lease also set minimum coverage limits and required that LAI be named as an additional insured and the first loss payee, and that the insurer be approved by LAI. The lease left the option of obtaining insurance through LAI to LAI. If this option was provided, the lessee would pay extra rent to cover the additional premium. A lease supplement regarding this coverage also stated that LAI would obtain insurance coverage only for specifically identified vehicles and that the monthly rent due under the lease could be increased by LAI to cover premium increases. One of LAI’s vehicles was insured, at the lessee’s option, by Defendant. The vehicle was involved in an accident and Defendant paid $5 million on behalf of the lessee as part of a settlement. Defendant became aware of the LAI policy with Plaintiff and sought reimbursement from Plaintiff for the policy limit of $1 million. Plaintiff refused and brought suit for a declaration that its policy did not cover lessees, or in the alternative, for reformation of the policy to reflect the parties’ intent that the policy not cover lessees. At trial Plaintiff acknowledged that the language of the policy could be read to cover lessees, but provided evidence that this was not the intent of the parties. The district court granted summary judgment to Defendant and Plaintiff appealed.

Issue.

When a contract’s written language does not reflect the intent of the parties to the contract and there is no public policy to refuse, will the contract be reformed?

Held.

(Lipez, J.) Yes. When a contract’s written language does not reflect the intent of the parties and there is no public policy reason to keep it as written, a court will reform the contract. A written contract may be reformed when its language does not reflect the intent of the parties. In a reformation case, a party is asking the court to change the language of the contract to reflect the parties’ actual intent. This party has the burden to prove fully, clearly, and decisively that the language in the contract was a result of mutual mistake by the parties. Plaintiff, must show with a great deal of certainty that the language in the contract is not reflective of the parties’ intent. The mutual mistake must be the language in the contract, not as to any factual understanding that led to the contract. In some cases, even where mutual mistake is shown, a court may deny a request for reformation on public policy grounds. Here, Plaintiff has shown sufficient evidence that the parties did not intend for the insurance policy to cover lessees. LAI clearly intended for lessees to bear the responsibility of providing coverage during the term of the lease and that Plaintiff would not insure those vehicles unless the lessee applied for it and it was paid for by the lessee. LAI’s lease agreement and lease supplement are compelling evidence that LAI intended that Plaintiff’s coverage of the vehicles ended when the vehicle was leased. Plaintiff has met its burden to show mutual mistake, and there are no public policy reasons, such as detrimental reliance, to refuse reformation. Reversed and remanded for entry of judgment for Plaintiff. 

Discussion.

Section 155 of the Restatement (Second) of Contracts states: “Where a writing that evidences or embodies an agreement in whole or in part fails to express the agreement because of a mistake of both parties as to the contents or effect of the writing, the court may at the request of a party reform the writing to express the agreement, except to the extent that rights of third parties such as good faith purchasers for value will be unfairly affected.” A party moving for reformation of a contract is not asking for the court to interpret the contract, but to change it to match the intent of the parties. Even where the language of the contract is unambiguous, the court will accept extrinsic evidence in determining whether the parties intended something other than what is written in the contract.