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Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc.

653 F.3d 225 (3rd Cir. 2011)

AGREEMENTS; REFORMATION — When a court analyzes whether an agreement should be reformed because of a mutual mistake, it looks to the understanding of the contracting parties at the time the contract was formed and not to the understanding of non-contracting, but otherwise interested, parties.

An insurance company provided coverage to an aviation management company. It also provided coverage to some of the management group’s clients, but only if the management company managed the client’s aircraft and aircraft usage. The insurance policies, negotiated by the insurance carrier and the management company, contained endorsements extending coverage to non-owned aircraft as long as they were operated by, or used at, the direction of the management company. The policy endorsements were later revised. Instead of listing the name of the management company, the phrase “Named Insured” was inserted. The new provision now provided for coverage for non-owned aircraft operated or used at the discretion of the “Named Insured.” The insurance company and management company claimed that they did not intend to extend insurance coverage to third-parties using non-owned aircraft if there was no management company’s involvement with the aircraft.

In 2008, one of the company’s clients rented a plane to travel to a work-related function. The management company had no involvement. The pilot crashed into a house, killing five people. Various parties sued the client for damages, and the client claimed coverage under the insurance policy. The insurance company filed suit seeking a declaratory judgment that its insurance policy with the management company did not cover claims arising out of the plane crash. It argued that the policy, as written, did not provide such coverage, and if it did, then it should be reformed to exclude such coverage since the parties never intended to extend coverage to third-parties using non-owned aircraft that were not operated without the management company’s involvement. The lower court granted the client’s motion for summary judgment, holding that the client was entitled to coverage under the policy. It held that the policy was clear on its face and that the client was entitled to insurance coverage as a matter of law. It refused to reform the contract, finding that since the client was not involved in negotiating the policy, there could be no mutual mistake, a requirement to reform a contract. It determined that the insurance company’s mistake was unilateral, and therefore reformation was not appropriate.

The insurance company appealed, and the United States Court of Appeals reversed. It noted that mutual mistake is evaluated by determining the understanding of the parties to the contract at the time the contract was formed. The understanding of non-contracting parties at the time of the execution of the contract is not relevant. The Court found that, under New Jersey law, a contract may be reformed based on mutual mistake of the parties even when it is to the disadvantage of a third-party, in this case, the client. Here, it found that the insurance company and management company were the only parties who negotiated the insurance policy in question and therefore their intent was dispositive. Both agreed that when the language in the policy was changed to say “Named Insured,” the intent was to limit coverage and not to extend it to third-parties using non-owned aircraft without the management company’s involvement. However, the Court remanded the issue back to the lower court to determine if, under these circumstances, reformation would be inequitable due to negligence or because the remedy was being sought after an accident had occurred.

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