REFORMATION - CORRECTING MISTAKES
Sometimes, you can accomplish the seemingly impossible. Reformation of the policy of insurance is one important tool to help you recover for your client against apparently insurmountable odds.
Reformation is an equitable remedy which changes the written contract to conform to the actual understanding of the parties. It can be used to correct mistakes when the policy of insurance as written is not what one or both of the parties intended. The concept is available to re-write the policy in two different situations: (1) when both parties have made the same mistake, or (2) when one party has made a mistake and the other party engages in fraud or unconscionable conduct. Martinez v. John Hancock Mutual Life Ins. Co., 145 N.J.Super. 301, certif. den. 74 N.J. 253 (1976); Portella v. Sonnenberg, 74 N.J. Super 354 (App. Div. 1962). Success in obtaining reformation of a policy of insurance is fact-sensitive.
Recently, I had the opportunity to invoke this principle to obtain additional mold remediation coverage for an insured. The policy covered a high-end home at a hefty premium with mold remediation coverage subject to a limit of $10,000. The policy had been in effect for 16 years and the mold provisions had undergone several revisions. While the carrier would have written the mold coverage up to $50,000 if requested, the agent did not so advise the insured and the insurer did not provide any such notice among the several notices included with each renewal of the policy. During Tropical Storm Irene, the insured suffered a sump pump back-up. The damage to the built out basement was not recognized until mold started appearing over a month later. The insured then butted into the mold limit. He had remediation costs of $51,000 but only $10,000 in coverage, leaving $41,000 uninsured. After consulting with the agent to confirm that the increased limit had not been offered, we were able to convince the carrier to reform the policy to extend the mold coverage to the full amount of $50,000 that the insured would easily have requested for the nominal additional premium had he known of its availability. The carrier also returned the previously assessed deductible.
Reformation can assist if there is a problem with the names on a policy. Suppose that a business owner's policy is issued in the name of a corporation and covers the building, but the principals of the corporation are the actual owners of the building and are not named on the policy. If the insurer would have added the owners as additional insureds at no additional premium, a common occurrence, then reforming the policy to cover the interests of the individual owners can be appropriate. Conversely, if the insurer would not have issued the coverage to the individuals or would have done so only at an increased premium, reformation could allow the insurer to avoid the coverage or to collect the additional premium.
The Courts of New Jersey are loath to allow an insurer to obtain a windfall simply because the names on a policy, but not the interests, are expressed incorrectly. 495 Corp. v. New Jersey Insurance Underwriting Association, 86 N.J. 159 (1981). The Courts focus on the risk undertaken for which a premium is charged and collected rather than details of how that is expressed, where the details do not change the risk itself. So long as there is no evidence of intent to deceive the carrier and if the insurer would have written the policy as requested had the true facts been understood, reformation is available to correct the mistake.
Several caveats are warranted. Mistakes by a broker will not support a claim of reformation, since the broker is not an agent of the insurer in placing the policy and cannot bind the insurer. Not every mistake will support reformation. Issues of waiver and estoppel come into play. For example, if the mistake would have been obvious to an average insured, but the insured did not read the policy and thus did not learn of the mistake in time to correct it, reformation may not be available.
These situations can be tricky as there are many moving parts. If you find yourself needing assistance with this type of situation, please feel free to contact me by telephone at 973-538-4100 or by email at firstname.lastname@example.org. We are here to help!