Reformation of Insurance Policies Due To "Mutual Mistake"
Back in the 1980s, when we were all fighting over the meaning of the “sudden and accidental” pollution exclusion, it became fashionable for coverage lawyers to quote “Alice in Wonderland.” If memory serves, there was even a battle of law review articles (sponsored by the insurance industry on one side and corporate policyholders on the other) in which the dueling parties tried to out-Lewis-Carroll one another.
The most favored quotation was the following exchange:
“When I use a word,” Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master - - that’s all.”
I thought of that quote for the first time in a long time when I read the recent Third Circuit decision in Illinois National Insurance Co. v. Wyndham Worldwide Operations, Inc.
First, the facts: Illinois National sold aircraft fleet management insurance coverage to an aircraft maintenance company called Jet Aviation for successive one-year periods from 2004 through 2008. The policies provided coverage for Jet Aviation and some of Jet Aviation’s clients, so long as Jet Aviation managed the particular client’s aircraft and aircraft usage. Wyndham was one of Jet Aviation’s clients (and a named insured under the policy).
In the 2008 renewal, the requirement that Jet Aviation manage the client’s aircraft was deleted and replaced by language stating that the aircraft simply had to be operated or used by a named insured - not necessarily by Jet Aviation.
You can guess what’s coming next. Plane crash, five dead, plane rented by Wyndham (a named insured under the policy) - but not managed by Jet Aviation. Naturally, Humpty Dumpty – er, Illinois National – denied the resulting claim, on the ground that “a word means just what I choose it to mean – neither more nor less.” Specifically, Illinois National contended that the reason for the wording change was “to make it more clear that entities affiliated with Jet Aviation were covered,” and not to delete the requirement that Jet Aviation manage the aircraft.
The trial court, able to read English, disagreed, holding that there could be no reformation of the contract based on “mutual mistake,” since Wyndham had not even been involved in the contract negotiations.
Unfortunately, in a 2-1 decision, the appeals court reversed, and bought the Humpty Dumpty argument, writing: “Jet Aviation and Illinois National agree that their intent, at the time the contract was drafted, was to limit coverage for non-owned aircraft to aircraft used by or at the direction of Jet Aviation.”
Who cares what Jet Aviation (out to protect its policy limits and not wanting a premium increase) or Illinois National (out to protect its profits) “agreed”? To operate its business, Wyndham – a named insured - was relying on the coverage that Illinois National sold. If it had known that the coverage was worthless in some circumstances, it might have gone out and bought other, supplemental coverage. At least Wyndham should have had that opportunity. But unless and until courts make insurance companies answer to a higher standard (and also make them behave like the fiduciaries they’re supposed to be), insurance companies will continue to make spurious arguments and get away with it.
On the positive side (such as it is), Justice Nygaard (also able to read English) dissented rather vociferously, writing that there “is simply no support in state law for the conclusion that the insurer’s failure to read the plain language of its own policy before issuing it to the insured justifies [disregarding the plain meaning of a contract].” Sounds like he was inviting a petition for en banc review.
As for the logic of the majority decision, I guess the best thing to do is to quote from the Mock Turtle: “Well, I never heard it before, but it sounds uncommon nonsense.”