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

United States Court of Appeals, First Circuit
465 F.3d 38 (2006)
ELI5:

Rule of Law:

A written contract, including an insurance policy, may be reformed to reflect the true intent of the contracting parties if one party can present full, clear, and decisive proof of a mutual mistake in the writing, even if the contract's language is unambiguous.


Facts:

  • Leasing Associates, Inc. (LAI), a vehicle leasing company, contracted with OneBeacon America Insurance Company (OneBeacon) for a general insurance policy to cover its vehicles.
  • The language of the OneBeacon policy broadly defined an 'insured' to include anyone using a covered vehicle with LAI's permission.
  • LAI's standard lease agreement required lessees to obtain their own liability insurance for the leased vehicles at their own expense.
  • The lease also gave lessees the option to apply to be added to LAI's OneBeacon policy, a process which required a specific application and payment of an additional premium.
  • Capform, Inc., a construction company, leased vehicles from LAI and chose to obtain its own insurance coverage through Travelers Indemnity Company (Travelers), not through LAI's OneBeacon policy.
  • In 2001, a Capform employee, driving a truck leased long-term from LAI, struck and severely injured a pedestrian named Manuel Pedreira.

Procedural Posture:

  • Travelers defended its insured, Capform, and settled the resulting personal injury lawsuit for $5,000,000.
  • Travelers then discovered the OneBeacon policy issued to LAI and demanded OneBeacon contribute the $1,000,000 policy limit.
  • OneBeacon refused and filed a suit for declaratory judgment against Travelers and LAI in the U.S. District Court (a federal trial court).
  • OneBeacon asked the court to declare that Capform was not covered or, alternatively, to reform the insurance contract due to mutual mistake.
  • LAI was dismissed from the suit after signing an 'Agreement for Judgment' stating its policy with OneBeacon did not cover lessees who procured their own insurance.
  • Both OneBeacon and Travelers filed cross-motions for summary judgment.
  • The district court granted summary judgment in favor of Travelers, refusing to reform the policy.
  • OneBeacon, as the appellant, appealed the district court's decision to the U.S. Court of Appeals for the First Circuit.

Locked

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Issue:

Does the unambiguous language of an insurance policy prevent reformation of the contract when there is clear and decisive extrinsic evidence demonstrating a mutual mistake by the original contracting parties regarding the intended scope of coverage?


Opinions:

Majority - Lipez, J.

No. The unambiguous language of an insurance policy does not prevent reformation when there is full, clear, and decisive proof that the writing fails to express the true intent of both parties due to a mutual mistake. The parol evidence rule does not apply in a reformation action, as the court is not interpreting the contract but rather changing it to conform to the parties’ actual agreement. Here, OneBeacon presented compelling evidence of mutual mistake, including LAI's standard lease requiring lessees to obtain their own insurance, affidavits from the insurance broker and underwriter detailing the application process for coverage, and an agreement from LAI itself stating that it never intended for the policy to cover lessees who had not specifically applied and paid for it. This undisputed evidence demonstrates that neither OneBeacon nor LAI intended the policy to provide automatic coverage to lessees like Capform, who had secured their own insurance. Therefore, the contract should be reformed to reflect the parties' original intent.



Analysis:

This decision reaffirms the strength of the equitable remedy of contract reformation, even against a third-party beneficiary attempting to enforce the plain language of a contract. It clarifies that the high evidentiary burden of 'full, clear, and decisive proof' can be met through consistent extrinsic evidence, such as course of conduct, business practices, and affidavits from knowledgeable parties. The ruling establishes that a third party, like Travelers, cannot capitalize on a scrivener's error or an overly broad boilerplate provision when the original contracting parties' contrary intent is overwhelmingly clear. This precedent reinforces that equity aims to correct mistaken writings to align with the actual agreement, thereby preventing windfall recoveries based on contractual language that does not reflect the parties' bargain.

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