Court Holds Failure To Read Policy Doesn't Bar Reformation
July 2007
In W.N. McMurry Constr.
Co. v. Community First Insurance, Inc. (Wyoming June 15, 2007), the Wyoming
Supreme Court ruled that the insured's failure to read the policy does not bar
a claim for reformation of the policy.
by Kevin
Merriman
Ward Norris Heller
& Reidy LLP
A construction company obtained a contract to construct two buildings, a
livestock pavilion and multipurpose show center, at the state's fairgrounds.
The state sought separate bids—one for each building, and one composite bid.
A composite bid of $5,521,299 was accepted, which included $3,368,761 for the
livestock pavilion and $2,298,759 for the multi-purpose show center.
The contract required that the construction company obtain a builders risk
policy covering 100 percent of the contract amount. The premium cost of the
coverage was estimated by insurance broker to be $8,415 for the builders risk
insurance on the originally estimated contract price of $4.5 million, which
was factored into the bid. After the construction company was awarded the contract,
its broker applied for the coverage, seeking "blanket" builders risk coverage
for the two buildings, which meant that one limit would apply to both buildings.
The contract amount was stated in the application to be $5.524 million.
The insurer did not issue "blanket" builders risk policies, and therefore
required that the broker break out the values of the two buildings. The broker
sought those figures from the construction company; however, there was a misunderstanding,
and the broker was given the cost of the steel building packages to construct
the buildings, which figures were significantly less than the contract price.
The incorrect figures were then used by the insurer as the coverage amounts
in the builders risk policy, and the premium was reduced accordingly.
The broker mailed a certificate of insurance to the construction company
showing the amount of builders risk coverage, and the policy was later mailed.
It also reflected the reduced limits for each building. Thereafter, another
copy of the insurance certificate was faxed to the construction company at its
request, as well as the policy's declarations page, which also showed the reduced
limits. The company conceded that nobody in its offices ever read the certificate,
the declarations page, or the policy.
The Claim
As the project neared completion, the livestock pavilion collapsed due to
improper bracing by a subcontractor. The construction company reached a proposed
settlement with the subcontractor's insurer, and reconstructed the building
using its own employees. Its insurer's claims analyst estimated the damage amount,
applied the policy's underinsured coinsurance penalty, and advanced the sum
of $150,000 before any claim was presented. The insurer eventually calculated
the total policy benefit to be $176,543.19, and, after deducting a $1,000 deductible,
sent an additional $25,543.19.
The contractor then filed suit against its broker and insurer, alleging breach
of contract, negligence, imputed liability, and reformation of the policy. It
argued that it reached agreement with its insurer, through its broker, for builders
risk coverage for the full replacement value of the two buildings, and that
that the policy was not written to reflect that agreement. Further, the mistake
occurred in the process of breaking out the values between the two buildings.
On motion for summary judgment, both broker and insurer admitted negligence
and breach of contract. Thus, the sole issue was whether the insured construction
company's claims were barred by its failure to read the builders risk policy
or by its failure to mitigate damages.
The Ruling
The court considered the narrower issue "whether the equitable doctrine of
reformation survives in the face of a clear violation of the failure-to-read
rule and the failure to mitigate damages." The court concluded it does. The
court acknowledged numerous state and federal court decisions which hold that
an insured has the duty to read its policy ("a rule which faults the insured
for failing to gain necessary information by not reading its policy"), and distinguished
this principle from the general rule of mitigation of damages, pursuant to which
a plaintiff is precluded from recovering damages which the plaintiff might have
avoided with reasonable effort and without undue risk, expense, or humiliation
("a rule which faults the insured for failing to act upon information obtained
by reading the policy or otherwise"). Both principles, the court observed, are
intended to prevent the insured from recovery where, but for a simple act, the
insured could have protected itself from harm.
Therefore, the duty-to-defend and duty-to-mitigate defenses have been upheld
in breach of contract and tort cases, i.e., legal claims. The court observed,
however, that these defenses have never been applied by Wyoming courts to a
reformation action. Reformation, the court explained:
is an equitable remedy … [which] acknowledges the fact that for one reason
or another written instruments do not always accurately memorialize the
antecedent agreement of the parties. [Citations omitted]. Accordingly, a
court acting in equity may reform a written instrument upon clear and convincing
evidence of the following elements: (1) a meeting of the minds—a mutual
understanding between the parties—prior to the time a writing is entered
into, (2) a written contract, or agreement, or deed (3) which does not conform
to the understanding, by reason of mutual mistake.
The remedy is dependent on showing that the mistake occurred in the drafting
of the instrument, and that the mistake was common to both parties.
The Precedent
The court reviewed a number of Wyoming decisions, as well as the treatment
of this issue by other jurisdictions, noting the contrasting viewpoints, as
summed up in one well-known treatise:
Two views are represented by these cases. The majority view apparently permits
the insured to rely upon the thought that the oral intention of the parties
was expressed in the written contract, and does not require him to examine
the policy. Those cases permit recovery, as an examination of their facts
will show, though the suit for reformation is not brought for several months,
and perhaps even several years, after the policy was delivered. The minority
view requires that the insured act diligently in examining the policy and
notify the insurer if the contract is not satisfactory, and holds reformation
to be barred by the insured's own laches if he fails so to do. The latter
view is certainly the more logical, but it is decidedly questionable whether
the average layman who is insured would ever comply with such a legal duty.
(Citing 4A John Alan Appleman & Jean Appleman, Insurance Law and Practice
§ 2913, at 636 (1969)).
The court concluded that:
the majority view is the correct view—where effectuation of an antecedent
agreement is thwarted by mutual mistake in reducing that agreement to writing,
justice is not served by judicial enforcement of the mistaken writing, rather
than the intended agreement, just because one of the parties did not read
the writing.
Thus, the court held that, while the failure-to-read and failure-to-mitigate
defenses bar legal claims for breach of contract and tort, they will not bar
the equitable remedy of reformation.
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