The most reasonable inference to be drawn is that both Caliber One and Cook intended the terms of the original 1998-99 contract to carry over into the contracts governing policy years 1999-2000 and 2000-01. Because Caliber One has provided no contemporaneous evidence to refute that reasonable inference that both parties shared an identical intent that the 2000-01 contract provide $5 million in earthquake coverage, and because the parties' mutual mistake in providing only $500,000 in coverage does relate to a basic assumption on which both parties relied when making the contract, ... reformation is warranted.

Reformation can also be appropriate when a mutual mistake has been made with respect to the identity of a named insured or the property to be covered. If, however, an error was made but there was no prior agreement between the insured and insurer about the extent of coverage, or who or what was to be covered, there wouldn't be a mutual mistake and reformation would not be available.

Royal Insurance Company of America v. Duhamel Broadcasting Enterprises, 2005 U.S. Dist. LEXIS 42153 (D. Neb. 2005), involved a dispute over coverage for a television tower that was undergoing alterations when it collapsed. The alteration work was underway during the time that Duhamel (DBE) and Royal negotiated the purchase of a commercial policy that was to include the Hemingford tower as a scheduled property. DBE provided all the relevant information regarding the work on that tower to Royal in a questionnaire attached to the insurance application. Royal's underwriter requested confirmation that all contractors performing work or maintenance on DBE's towers, in particular the Hemingford tower, provide certificates of insurance providing adequate limits and name DBE as an additional insured.

The insured, its agent, and a representative from Royal met on June 27, 2002, to review Royal's insurance proposal. Royal presented the policy as one providing flexible solutions to satisfy each insured's specific needs, based on Royal's knowledge of the insured's operations. The only property insurance exclusions listed in the proposal were for war, military action, and terrorism. The proposal did state, however, that the insurance policy, not the proposal, would form the contract, and that the policy would dictate the terms of coverage if there was a discrepancy between the two.

A binder was issued on June 28, 2002, and the policy was delivered on Sept. 17, 2002, one week before the tower collapsed. The binder did not outline the specific coverage to be provided, stating that the insurance was subject to the terms and conditions of Royal's policies in use at that time. The insured filed a claim for the collapse of the tower, without having read the policy. Royal denied coverage and filed a declaratory judgment action against the insured. The court agreed that the policy provided no coverage because it stated that it did not cover towers that were undergoing alteration, other than routine maintenance or emergency repairs, if the loss was caused by or resulted from the alteration. In addition, coverage was excluded for damage resulting from faulty or inadequate workmanship or remodeling. The court had no problem determining that the work involved the tower alteration. Also, there was no question that the collapse was the result of the contractor failing to use temporary bracing to maintain the structural integrity of the tower while performing its work on it.

DBE sought reformation of the policy to include only the exclusions that were in the proposal, arguing that there was a mutual mistake because both DBE and Royal intended the policy to cover the Hemingford tower at the time it collapsed. DBE argued that reformation was appropriate because it had provided Royal with truthful information in the application, including information pertaining to the work being performed on the Hemingford tower, and that Royal represented the policy as being tailored to meet DBE's specific needs. The court found that DBE failed to prove the elements necessary to support reformation, stating:

The evidence in the present case does not clearly and convincingly indicate that both DBE and Royal had the same understanding concerning the exact exclusions to be used in the insurance policy and that the policy fails to express some common belief or understanding of the parties. Rather, the evidence indicates that the parties never had any discussions about whether the Hemingford tower would be covered while undergoing alterations or without any of the additional exclusions as were contained in the policy. Neither party ever communicated with the other about what each party's expectations in this regard were; however, the insurance proposal and binder unequivocally stated the policy would dictate the terms of coverage and Royal required outside certificates of insurance related to the work being done on the Hemingford tower. There is no evidence DBE either requested or Royal believed DBE wanted, in addition to standard property insurance, insurance to cover the type of work being performed to the Hemingford tower on Sept. 24, 2002. This is not to say the Hemingford tower was uninsured at the time of the collapse. Although DBE would have the Court believe Royal received the premium, but provided no coverage whatsoever for the period of July 1, 2002, through the time of collapse, the insurance policy did provide coverage with certain exceptions and exclusions contained in the policy. Accordingly, the Court finds DBE has failed to meet its burden of proving the elements to support a reformation claim.

In Caliber One, the insured proved a mutual mistake and the court reformed the policy according to what it concluded was the parties' original intent. In Duhamel, the insured was unable to prove the parties intended anything but what was contained in the policy. Without the necessary proof of mutual mistake, the court refused to reform the policy.

This article was written by the Editorial Staff at American Educational Institute. AEI is a provider of self-study claims law courses which lead to professional designations, including the Senior Claim Law Associate (SCLA). They can be reached at 800-631-8183, [email protected], www.aeiclaimslaw.com.