Quickly dashed off e-mail sent from hand-held devices whilst we are listening to voices on speaker phones in “other matters” seem par for the multitasking that efficiency gurus mandate in our business lives. Sometimes, when one reads what one wrote a year ago, one gets the queasy feeling that it did not convey exactly what one had intended. The operative word here is “exactly” as, most times, linguistic imprecision does not lead to business disaster. Other times, doom comes knocking.

In the insurance world, words are important. There is a tension in our industry between using too many words and using too few to convey meaning or record agreements. So-called standard forms are said by some to be the easiest way to avoid misunderstandings. Even with the use of those instruments, there are times when the agreement between insurer and broker (representing the insured) is not fully or accurately conveyed.

Certainly, if no loss or claim comes about, the imprecision (OK, the goof) is never seen and it sleeps in the darkness of the closed file. What if a loss occurs, however, and it fits all too beautifully into the area of agreement not expressed? In the clear light of after-the-fact reviews, the question sometimes is asked of the coverage lawyer, “Since I didn’t mean that, can we fix it now?” The answer is, “Maybe.”

Here are a few rules, as developed in New York, on trying to change what the contract says or does not say to what the parties actually meant. New York courts will permit reformation of an insurance contract in two situations. The first is when the writing, as executed, contains a mutual mistake of fact. The second is when an insurance contract does not conform to the real agreement because of the fraud of one of the parties.

Fraud is such a specific thing that I will not deal with those cases of falsehood, lies, cheating, misrepresentation, and the like. Instead, many of the reformation cases seem to involve commercial hurriedness, the “let’s write it on the back of the bar napkin for now” business approach rather than deceit. It is in this more commercial context that many reformation issues are litigated.

A mutual mistake occurs when the parties have reached an agreement and, unknown to either, the subsequent writing memorializing the agreement does not express that agreement. It is well settled that a unilateral mistake is insufficient to merit reformation of an insurance policy. See, for example, Town of German Flats v. Aetna Cas. & Sur. Co., 572 N.Y.S.2d 819 (4th Dept. 1991), in which the insured’s mistaken belief that the policy insured damaged personal property was unilateral in nature, and not the basis for reformation absent proof of fraudulent misrepresentation by the insurer.

In Loyalty Life Ins. Co. v. Fredenberg, 632 N.Y.S.2d 902 (3d Dept. 1995), the insured accepted a life insurer’s promise that the reduction of the face amount of the policy from $1.5 million to $1 million would eliminate the need for further premium payments. Accordingly, the policy was rewritten and the insured ceased making premium payments. The insurer subsequently determined that its promise to forego the receipt of additional premium payments in exchange for reduction of face value was a mistake. Accordingly, the insurer filed an action to reform the contract and have the policy declared lapsed due to non-payment of premiums. The court refused to reform the policy, holding that, because there was no evidence that the insurer’s mistake was the product of any fraudulent misrepresentation by the insured, the mistake was clearly unilateral and insufficient to merit reformation.

The Best Intentions

Under New York law, there is a “heavy presumption that a deliberately prepared and executed written instrument manifest[s] the true intention of the parties and a correspondingly high order of evidence is required to overcome that presumption” (Chimart Assoc. v. Paul, 498 N.Y.S.2d at 347, and New York First Avenue CVS, Inc. v. Wellington Tower Assoc., 750 N.Y.S.2d 586, 587 [1st Dept. 2002]). To overcome that presumption, the party seeking the reformation must, by clear and convincing evidence, establish that the writing in question had been executed under mutual mistake. Cases illustrating this include Koskey v. Pacific Indemnity Company, 704 N.Y.S.2d 656 (2d Dept. 2000), in which the party seeking reformation of the contract was required to demonstrate entitlement to such relief by clear and convincing evidence; and German Flats, in which the court required clear and convincing proof to overcome the presumption that the written instrument correctly set forth the intention of the parties.

When seeking to prove mutual mistakes, New York courts generally allow the introduction of extrinsic evidence as to the intent of the parties, even if there is no ambiguity in the contract language. In Gramercy 222 Residents Corp. v. Gramercy Realty Assoc., 618 N.Y.S.2d 275, 276 (1st Dept. 1994), an action to reform a lease agreement based on mutual mistake, the court allowed extrinsic evidence including the offering plan, the parties’ pattern of performance subsequent to the date of the lease, and the testimony of the attorney who drafted the relevant documents. In Van Tuyl v. Westchester Fire Ins. Co., 55 N.Y. 657 (1873), the plaintiff testified that the policy was to have been made according to the form of another insurance company, and the court found that the form of the other company’s insurance policy was admissible in the reformation action. Evidence that a lessee had told a broker that the vehicle owner was to be named as an additional insured was admissible, but not persuasive, in Ford Motor Credit Company v. Atlantic Mutual Insurance Company, 742 N.Y.S.2d 236 (1st Dept. 1996), an action to reform an automobile insurance policy.

Illusory Coverage

Under New York law, courts can scrutinize language in an insurance contract that might render a contract illusory and, “foreclos[e] an insured from coverage for precisely the damages he reasonably thought himself insured” (Slayko v. Sec. Mut. Ins. Co., 728 N.Y.S.2d 282, 286 [3d Dep't 2001]). Some courts have found that an insurance policy is illusory if “a premium was paid for coverage which would not pay benefits under any reasonably expected set of circumstances” (Fid. & Guaranty Ins. Underwriters, Inc. v. Everett I. Brown Co., 25 F.3d 484, 490 [7th Cir. 1994]).

However, in Schwartz v. State Farm Mut. Auto Ins. Co., 174 F.3d 875 (7th Cir. 1999), the court found that the policy was not illusory because it covered a loss reasonably anticipated by the parties. If the policy provision does not cover a risk anticipated by the parties, the “illusory provision should be enforced in a way that protects the insured’s reasonable expectations,” according to the Schwartz court. Of course, if a policy provision covers a reasonably anticipated risk, courts do not consider it to be illusory.

Courts have not hesitated to enforce the terms of insurance policies in a manner that avoids rendering portions of the policies illusory. For example, in Madawick Contracting Co., Inc. v. Travelers Ins. Co., 307 N.Y. 111 (1954), the court found that the word “trial” in an insurance contract included arbitration proceedings. The court determined that this was the only plausible reading, as any other reading would render coverage illusory. Moreover, the court quoted People ex rel. New York Cen. & H.R.R.R. Co. v. Walsh, 211 N.Y. 90, 100 (1914): “The ascertainment of the substantial intent of the parties is the fundamental rule in the construction of all agreements.”

Likewise, in Lipton Inc. v. Liberty Mutual Insurance Co., 34 N.Y.2d 356 (1974), the court found that Liberty Mutual had a duty to defend Lipton, who had suffered losses arising from the withdrawal and recall of products. It concluded that the exclusion in the policies only extended to claims arising from the withdrawal and recall of products of the named insured. Again, the court noted that any other interpretation would render the policy illusory. Moreover, the Lipton court stated, “Given the economic and factual setting in which these policies were written, an ordinary businessman, in applying for insurance and reading the language of these policies when submitted, would not have thought himself covered against precisely the damage claims … asserted by Lipton.”

Other courts, however, have noted that they may not disregard the clear provisions of the insurance policy if the provisions were inserted in the contract and accepted by both parties, and “equitable considerations will not allow an extension of coverage beyond its fair intent and meaning” (Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 724 N.Y.S2d 107, 111 [N.Y. App. Div. 3d Dep't 2001], quoting Caporino v. Travelers Ins. Co., 62 N.Y.2d 234, 239 [1984]).

A slight variation on the concept of illusory coverage is the doctrine of reasonable expectations. It is another judge-made doctrine to protect the objectively reasonable expectations of insureds even though the policy wording does not support such an expectation. In Jostens, Inc. v. Northfield Ins. Co., 527 N.W.2d 116 (Minn. Ct. App. 1995), the court examined the doctrine and found that, in view of the exclusions in the policy, the doctrine did not provide coverage.

However, the court also considered the concept of illusory coverage “as an independent means to avoid an unreasonable result when a literal reading of a policy unfairly denies coverage.” The court found that Jostens could not recover under illusory coverage because of the language of the policy. Rather, the court held that the illusory coverage doctrine, like reasonable expectations, “operates to qualify the general rule that courts will enforce an insurance contract as written.” See also Monticello Ins. Co. v. Mike’s Speedway Lounge, Inc., 949 F. Supp. 694 (S.D. Ind. 1996), in which the court stated, “When a policy provides only illusory coverage, Indiana courts will give effect to the reasonable expectation of the insured.”

The Jostens court also held that the doctrine is best applied when part of the premium is allocated specifically “to a particular type or period of coverage, and that coverage turns out to be functionally nonexistent.” Thus, because there was no extra-contractual evidence indicating that Jostens had thought that the insurance premium was allocated to different things, the court held that, under the usual rules of insurance contract interpretation, “an insurer’s liability is governed by the parties’ contract and the court’s function is to enforce that agreement.”

What is the moral of these cases? Agree and then write it down, or at least read what someone sends you to make sure that it is as you said. If you don’t have the time in this frenetic world, well, that’s ok, the courts will fix it later. Right?

Costantino P. Suriano is a senior partner at Mound Cotton Wollan & Greengrass, in New York, N.Y.