Every day insurance agents throughout the United States meet with potential insureds to transact the purchase of insurance. Typically, the insurance agent or broker will cover the main features of an insurance policy but will not discuss many of the details or “what if” scenarios regarding coverage for specific claims. During the purchase transaction, circumstances can arise where both the insurance agent and the insured harbor a belief that the policy being purchased will cover a specific event but the issued policy clearly excludes or limits coverage for the event. In this type of situation, can the insurance policy be reformed to conform to the unexpressed belief of coverage harbored by both the insurance agent and the insured at the time of purchase?
The answer lays in the application of the “mutual mistake doctrine.” A recent opinion by the Supreme Judicial Court of Massachusetts discusses this common scenario.
Caron v. Horace Mann
In Caron v. Horace Mann Ins. Co. (Mass. 2013), a victim of a dog bite brought an action against the dog owner’s insurance company as the assignee of the insured’s claim under the insured’s homeowner’s policy. At the time of the insurance policy purchase, the insured purchased a homeowner’s policy with an overall coverage limit of $500,000. The policy contained an “animal liability” endorsement which limited coverage to $25,000 per occurrence for claims arising from animal bites. It was undisputed that both the insurance company’s agent and the insured mistakenly believed that the policy being issued did not contain an animal liability limitation.
During the application process, the agent met with the insured to complete the application. At that time the insurance agent believed that the homeowner’s policy would contain no specific limitation on animal liability. The insured also believed that the policy did not provide such a limitation. However, neither the agent nor the insured conveyed their mistaken belief to the other during the application process. The policy was issued with a step-down liability limit applicable to animal liability of $25,000.
When the insured received a copy of the policy, she “skimmed” through it. The “animal liability endorsement” limited coverage to $25,000 for claims arising from any animal bites, and precluded any coverage for bites by certain listed breeds of dogs. Because the insured owned an American Bull Dog, which was not among the excluded breeds, the insured assumed that the policy would provide the full $500,000 in liability coverage for claims involving animal bites. The agent also mistakenly believed that the policy would provide full liability coverage for dog bite claims if the dog was not one of the listed excluded breeds. This belief was not conveyed to the homeowner, however. During the application meeting, the evidence established that neither the agent nor the insured discussed coverage for animal bite claims.
After the policy was issued, the homeowner’s dog bit a third-party, resulting in severe injuries. A lawsuit was brought by the victim against the homeowner. A jury verdict was rendered in the case in excess of $250,000. At that point the insurance company paid its $25,000 limit, relying upon its animal liability endorsement which stepped down coverage from the full limits to $25,000. Because the insurance company refused to pay the full judgment, the plaintiff victim and the homeowner entered into a settlement agreement protecting the homeowner with a covenant not to execute and assigning to the victim all rights against the insurance company.
The plaintiff victim, who became now an assignee of the rights of the homeowner, brought a lawsuit against the insurance company alleging “mutual mistake” and attempted to reform the homeowner policy to require $500,000 of coverage for dog bites involving breeds of dogs that were not specifically designated in the endorsement. The issue of “mutual mistake” came before the Supreme Judicial Court of Massachusetts which refused to reform the insurance policy.
Mutual Mistake Doctrine
The Caron court began its analysis by recognizing that the mutual mistake doctrine exists in order to give effect to the agreement that the parties intended by the contract but where the contract language failed to capture the specific agreement and intent of the parties. Central to the mutual mistake doctrine was the fundamental underpinning that the parties had reached an agreement on a specific point, which they intended to enshrine in the written contract. However, for some reason that agreement was mistakenly omitted from the written contract itself.
The court found that the agent’s misunderstanding as to the application of the endorsement could not serve as the necessary prerequisite to a claim of mutual mistake. Although the agent’s misunderstanding was consistent with the insured’s misunderstanding, the unexpressed misunderstanding was not a prior “expressed agreement” because the agent never communicated the misunderstanding to the insured. The fact that the insured silently harbored an assumption that the policy would provide the full $500,000 in liability coverage for any incident, including dog bites, was plainly contradicted by the written policy that the insured read. The written policy indisputably limited liability coverage for claims resulting from a dog bite to $25,000 and the court found that nothing in the record demonstrated that the $25,000 of coverage failed to reflect a previous agreement between the parties to the policy.
The court found that what occurred at the time of the application meeting had been two “independent unexpressed mistakes” as to the coverage being purchased, which did not permit reformation of the contract. The court rejected the claim to reform the homeowner policy to uncap the sublimit applicable to animal bites.
When a loss occurs insureds will oftentimes express that they expected the loss to be covered under the insurance policy. That expectation may not allow the insurance policy to be reformed under the mutual mistake doctrine absent a specific discussion during the insurance purchase transaction between the agent and the insured.
Even though the agent may believe that such claims are covered, if the agent doesn’t express at the time of purchase that such claims will be covered, the agent’s unexpressed misunderstanding of the scope of coverage will not support a policy reformation. For similar reasons, policy reformation will fail under the mutual mistake doctrine where the insured does not express at the time of purchase the belief that a particular type of claim will be covered and the agent does not correct that misunderstanding at that time.
The result in the Caron case would have been different if the insurance agent had expressed that the policy would provide full coverage for dog bites. Also, if the insured had expressed a belief that the policy would provide full animal bite coverage and the agent did not respond by saying the policy had a sublimit, or where the insured specifically requested that type of coverage and the agent was silent on policy limitations or restrictions, the outcome would have been different.
The key is that the agent and the insured must have a discussion on the type of claim in question as a prerequisite to application of the mutual mistake doctrine to insurance purchase transactions in some states.