Travelers Insurance Co. v. Bailey
197 A.2d 813 (1964)
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Rule of Law:
When a written contract contains a clerical error that misstates the parties' prior, proven agreement, a court may reform the contract to correct the error, even if the error resulted from one party's negligence, provided the other party has not prejudicially changed their position in reliance on the mistake.
Facts:
- When the defendant was nineteen, his mother helped him submit an application to the plaintiff insurance company for a life insurance policy.
- The application requested a $5,000 life insurance policy with an annuity that would pay $500 per year upon reaching age 65.
- The plaintiff's home office accepted the application but mistakenly prepared the policy on the wrong form.
- The issued policy correctly provided for $5,000 of life insurance but erroneously stated the annuity would pay $500 per month, a twelve-fold increase.
- For thirty years, the defendant paid a semi-annual premium of $40.90, the exact premium for the policy as applied for ($500/year annuity), not the policy as written.
- The plaintiff did not offer or sell a policy with the terms described in the erroneously issued document.
- The defendant did not gain possession of the physical policy document until 1961, approximately thirty years after it was issued.
- After a third party questioned the policy's terms, the defendant inquired with the plaintiff's agent, leading to the discovery of the clerical error.
Procedural Posture:
- The plaintiff insurance company filed a suit in equity against the defendant insured.
- The plaintiff sought the remedy of reformation of the insurance policy contract.
- The trial court chancellor found in favor of the plaintiff and granted reformation of the policy.
- The defendant, as appellant, appealed the chancellor's decree to the Vermont Supreme Court.
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Issue:
Does a clerical error in an insurance policy, resulting from the insurer's own negligence, prevent the court from reforming the policy to conform to the parties' original agreement when the error was not discovered for thirty years?
Opinions:
Majority - Barney, J.
No, a clerical error resulting from the insurer's negligence does not prevent reformation. Where a specific contractual agreement has been established beyond a reasonable doubt, and a subsequent written instrument erroneously renders the terms of that agreement, the party penalized by the error is entitled to reformation if the other party has not prejudicially changed position in reliance on the mistake. The court reasoned that the true agreement was formed when the plaintiff accepted the defendant's application for a policy with a $500 annual annuity. The subsequent issuance of a policy with a $500 monthly annuity was a mere transcription error, often called a 'scrivener's error.' In such cases, the concept of 'mutual mistake' is not helpful; the crucial error is the parties' mistaken belief that the writing was correct. The plaintiff's negligence in making the error does not bar reformation unless the defendant was prejudiced by it. The mere passage of time does not constitute a prejudicial change of position, as the defendant did not act in reliance on the mistaken term and was unaware of it for nearly 30 years.
Analysis:
This decision clarifies the doctrine of reformation by distinguishing between mistakes made in the formation of a contract and clerical errors made in transcribing an already-formed agreement. It de-emphasizes the traditional, and often confusing, 'mutual vs. unilateral' mistake analysis for scrivener's errors, focusing instead on the provability of the prior agreement and the absence of prejudicial reliance. This makes it easier for parties to correct clear documentary mistakes that do not reflect their true bargain. The ruling prevents a party from receiving an unearned windfall due to another's clerical error, reinforcing the principle that equity will conform a written instrument to the actual intent of the parties.
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