New Jersey Federal Court Permits Reformation Over Additional Insured’s Objection

The United States District Court for the District of New Jersey recently granted summary judgment to an insurer seeking to reform an aircraft fleet insurance policy based on mutual mistake of the parties to the contract.  Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc., 2015 U.S. Dist. LEXIS 9468 (D.N.J. Jan. 28, 2015).

Illinois National issued a series of policies to an aircraft management company, Jet Aviation International, Inc., from 2004 to 2008.  Jet managed and operated Wyndham’s aircraft fleet and provided flight planning, staffing, and maintenance.  Under its agreement with Wyndham, Jet would arrange for a substitute airplane from its own fleet if necessary for a particular flight.  Jet also promised to maintain insurance covering Wyndham’s aircraft.

The Illinois National policies afforded blanket coverage for aircraft operated by or used at the direction of Jet.  From 2004 to 2007, the policies included a “non-owned” aircraft exclusion which meant that Wyndham could not seek coverage for damages in connection with an aircraft it did not own, and where Jet had no involvement.  In 2008, Jet requested a small modification to the policy which had the unintended effect of expanding coverage to apply to Wyndham’s “non-owned” aircraft, even without a connection to Jet.

Two Wyndham employees were killed in a 2008 accident involving a rented airplane, neither owned by Wyndham nor operated by Jet under the management agreement.  Wyndham maintained separate insurance covering its use of non-owned aircraft without Jet’s involvement, and that insurer defended and settled the claims arising from the accident.  Nevertheless, Wyndham contended that the 2008 Illinois National policy also applied based on its terms.  Illinois National filed this coverage action seeking a declaration of no coverage or, in the alternative, equitable reformation based on mutual mistake.

The court initially granted a motion to dismiss Illinois National’s complaint, but the Third Circuit reversed.  On remand (and before a different judge), the court considered the issues through cross-motions for summary judgment.  To justify reformation, Illinois National had to demonstrate: (1) at the time of the 2008 modification, Jet did not intend to grant Wyndham coverage for non-owned aircraft unrelated to Jet; (2) Illinois National shared this intent; and (3) the 2008 policy did not reflect their agreement.

The court weighed various factors to determine whether a shared intent existed.  These factors included evidence of the reason for the change, prior policy terms, Wyndham’s reasonable expectations, the substance of the Jet/Wyndham agreement, the amount of premium, and the alleged absurdity of Wyndham’s interpretation.  The court noted that Wyndham’s interpretation of the exclusion would render it meaningless.  Thus, on balance, the factors reflected a shared intent which the 2008 policy did not express.  The court rejected Wyndham’s attempt, as an interloper, to dictate the contracting parties’ intent.

Finally, the court concluded negligence, even gross negligence, of Illinois National or Jet did not bar reformation where there was a meeting of the minds not expressed in the policy.  Nor did the fact that the accident had already occurred preclude post-loss reformation absent a showing of any prejudice.