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Extrinsic Evidence Admissible to Demonstrate Mutual Mistake in Policy Formation; Post-Accident Reformation Permitted

Wednesday, December 7, 2011

Cherilyn Zavatsky | Bloomberg Law Fruge v. Amerisure Mut. Ins. Co., No. 10-31178, 2011 BL 299036 (5th Cir. Nov. 22, 2011) The Fifth Circuit held that an insurer could offer extrinsic evidence to support its claim that its policies should be reformed based on a mutual mistake of the parties. The court interpreted for the first time section 22:1262 of the Louisiana Revised Statutes and concluded that the statute was irrelevant to a reformation action.

Policies Name Two Insureds

Rockbit Holdings, owner of Ulterra Drilling Technologies, which in turn owns Ulterra MWD, manufactures and sells drill bits. Ulterra MWD performs onsite installation and drilling. Chubb Custom Insurance Company issued a commercial general liability (CGL) insurance policy and an umbrella policy to Ulterra MWD. Amerisure Mutual Insurance Company issued a CGL and an umbrella policy to Ulterra Drilling. The Amerisure policies also named Ulterra MWD as an insured. In August 2006, in an individual was severely injured when a drill sensor installed by Ulterra MWD exploded. In May 2007, both Chubb and Amerisure assumed the defense of Ulterra MWD in the resulting lawsuit. However, to correct a purported clerical error by its broker, Amerisure subsequently issued two policy change forms on September 6, 2007 that deleted Ulterra MWD as a named insured. Amerisure then ceased its defense of Ulterra MWD. Chubb filed a cross-claim against Amerisure, seeking a declaration of Amerisure’s duty to defend Ulterra MWD. In support of its contention that Ulterra MWD was never intended to be a named insured under the policies it issued to Ulterra Drilling, Amerisure submitted the affidavits of the chief financial officer of the Ulterra entities, the broker’s vice president, and an Amerisure underwriter. The affidavits stated that Ulterra MWD was not an intended insured because no premiums were paid to insure it, nor was an application submitted for it. The district court refused to consider this evidence, ruling that Louisiana law prohibited the use of extrinsic evidence of mutual mistake when a contract is unambiguous. Amerisure appealed this ruling.

Louisiana Law

Although it acknowledged that reformation is permitted when the true intent of the parties is not reflected in the written document, the district court nonetheless rejected the use of extrinsic evidence in a post-accident reformation action. The court instead applied the general rule of contract interpretation that states that the interpretation of the parties’ intent shall not be used when the contract is unambiguous. The district court then relied on section 22:1262 and Washington v. Savoie, 634 So. 2d 1176 (La. 1994). Section 22:1262 states:
No insurance contract insuring against loss or damage through legal liability for the bodily injury or death by accident of any individual . . . shall be retroactively annulled by any agreement between the insurer and the insured after the occurrence of any such injury, death, or damage for which the insured may be liable, and any such annulment attempted shall be null and void.
The Fifth Circuit found the district court’s reliance on section 22:1262 and Washington misplaced, noting that the statute clearly applied to instances where the insurer and the insured agreed to rescind or annul the policy. Because Amerisure did not seek to annul the contract by agreement, section 22:1262 was irrelevant to a reformation action. Further, there was a wealth of Louisiana cases that have allowed post-accident reformation in case of mutual mistake. The court concluded that the Louisiana Supreme Court would not likely interpret section 22:1262 as precluding post-accident reformation in light of these cases, none of which, the court noted, address section 22:1262. In Washington, the court refused to reform a clerical mistake because it would limit the recovery of injured third parties. The court noted that there were no injured third party’s rights at stake here. Rather, at issue was which insurer must bear the loss of settlement. Therefore, the Fifth Circuit held that extrinsic evidence could be considered in the present case and reversed and remanded the judgment of the district court. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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