United States Court of Appeals
For the First Circuit
No. 05-2014
ONEBEACON AMERICA INSURANCE COMPANY;
and PENNSYLVANIA GENERAL INSURANCE COMPANY;
Plaintiffs, Appellants,
v.
TRAVELERS INDEMNITY COMPANY OF ILLINOIS,
Defendant, Appellee;
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT MASSACHUSETTS
[Hon. Edward F. Harrington, Senior U.S. District Judge]
Before
Lipez, Circuit Judge,
Cyr, Senior Judge,
and Howard, Circuit Judge.
Peter G. Hermes, with whom Peter C. Netburn, Michael S.
Batson, and Hermes, Netburn, O'Connor & Spearing, P.C. were on
brief, for the appellant.
William A. Schneider, with whom Michael F. Aylward, Richard W.
Jensen, and Morrison Mahoney LLP were on brief, for the appellee.
October 6, 2006
LIPEZ, Circuit Judge. In this diversity case, appellee
Travelers Indemnity Company of Illinois ("Travelers") seeks to
recover under a motor vehicle liability policy that OneBeacon
America Insurance Company and Pennsylvania General Insurance
Company (collectively, "OneBeacon") had issued to Leasing
Associates, Inc. and LAI Trust (collectively "LAI"), a vehicle
leasing agency.1 Travelers settled a vehicle liability suit for
$5,000,000 on behalf of Capform, Inc., which had leased the vehicle
involved from LAI. Citing the OneBeacon/LAI policy, Travelers
demanded that OneBeacon reimburse Travelers $1,000,000, the
policy's limit. Although OneBeacon has admitted that its policy
with LAI may be read to extend coverage to the Capform vehicle, it
protested that the parties never intended such a result.
Accordingly, OneBeacon asked the district court to reform the
policy in light of "mutual mistake."2 On cross-motions for summary
judgment, the district court refused to reform the policy and
ordered OneBeacon to pay the $1,000,000 to Travelers. We reverse.
1
Travelers is now known as Travelers Property Casualty Company of
America.
2
OneBeacon’s complaint sought a declaration that the policy at
issue did not provide coverage for the accident and, alternatively,
requested reformation based on mutual mistake. At least for
purposes of this appeal, OneBeacon concedes that the policy can be
read to provide coverage, and it thus focuses only on its claimed
entitlement to reformation. We likewise focus on that issue.
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I.
OneBeacon is an insurance company headquartered in
Massachusetts. LAI, a Texas-based company that leases cars and
trucks to businesses, contracted with OneBeacon for general
insurance coverage for the company's vehicles.3 The policy defines
an “insured” to include:
a. You for any covered auto.
b. Anyone else while using with your
permission a covered auto you own . . .
Although OneBeacon acknowledges that this language may be read to
extend coverage to LAI’s lessees, it says that neither it nor LAI
intended that coverage.
Capform, Inc. is a Texas and Florida construction company
that leased some of its vehicles from LAI. LAI’s standard lease
required lessees to insure the leased vehicles, at their own
expense, either by applying to be added to the OneBeacon policy or
through another insurer. Capform chose to insure its vehicles with
Travelers. In 2001, a Capform employee in Florida, driving a
Capform truck on long-term lease from LAI, struck and severely
injured a pedestrian, Manuel Pedreira. Travelers defended Capform
3
Technically, LAI is covered under two separate policies
originally issued by Commercial Union Insurance Company, a
predecessor-in-interest to OneBeacon, and under a third policy
issued by Pennsylvania General. OneBeacon provides coverage under
two Massachusetts-specific policies, and Pennsylvania General
issued a “national” policy, the one at issue here, that covered
eligible vehicles leased from all LAI offices other than the one in
Needham, Massachusetts.
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and eventually settled Pedreira's personal injury suit for
$5,000,000.
During the settlement process, Travelers became aware of
the policy OneBeacon had issued to LAI and read it to grant
coverage for Pedreira's case. Travelers asked OneBeacon to
contribute $1,000,000, the policy's single-occurrence limit, to the
Pedreira settlement. OneBeacon refused and instead filed suit
against both Travelers and LAI seeking a declaratory judgment that
Capform was not covered by its policy. Alternatively, OneBeacon
asked that the insurance contract be reformed to match the parties’
intent that it would cover only those lessees who had specifically
applied for, and been approved for, coverage under the OneBeacon
policy. LAI was dismissed as a defendant after stating, in an
“Agreement for Judgment” (“the Agreement”), that its OneBeacon
policy did not cover lessees who purchased the required insurance
coverage for their leased vehicles from insurers other than
OneBeacon.
Both parties subsequently moved for summary judgment.
OneBeacon argued that the Agreement, taken together with evidence
of the course of conduct between it and LAI, and of the insurance
obligations LAI imposed on its lessees, established that the
parties were mutually mistaken when they executed a contract that
did not exclude from coverage vehicles that lessees had chosen to
insure independently. Travelers sought summary judgment based
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primarily on the policy language.
The district court initially refused to grant judgment
for either party, prompting the two companies to submit a joint
motion for reconsideration stating their belief that "there are no
material facts that require a trial" and asserting that "this
action can and should be resolved through [the parties’] Motions
for Summary Judgment." In response, the district court issued a
two-page order granting summary judgment for Travelers, concluding
that "OneBeacon has failed to ‘present full, clear, and decisive
proof of mistake.'" Dist. Ct. Order at 2 (quoting Polaroid Corp.
v. Travelers Indem. Co., 610 N.E.2d 912, 917 (Mass. 1993)).
Without elaborating, the court cited three factors for its
decision: the "clear and unambiguous policy language," OneBeacon's
inability to identify "any policy language that was included by
mistake . . . or endorsement that was omitted by mistake," and "the
Massachusetts public policy concerning motor-vehicle liability
insurance."
II.
On appeal, OneBeacon challenges the district court's
conclusion that the evidence was insufficient to warrant
reformation, arguing that the undisputed facts conclusively show
that neither OneBeacon nor LAI intended insurance coverage under
the OneBeacon policy for LAI lessees who did not individually apply
for, and pay for, that coverage. The insurer also contends that
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there was no public policy justification for refusing to reform the
policy to conform to the parties' intent. For reasons we shall
explain, we agree.
A. Jurisdiction and standard of review
The parties agree that the substantive contract law of
Massachusetts applies in this diversity case. We accept that
choice. See Cochran v. Quest Software, Inc., 328 F.3d 1, 6 (1st
Cir. 2003). The district court’s summary judgment ruling is
subject to de novo review. McConkie v. Nichols, 446 F.3d 258, 260
(1st Cir. 2006).
B. Mutual mistake and contract reformation under Massachusetts law
Under Massachusetts law, a written contract may be
reformed if its language “does not reflect the true intent of both
parties.” Polaroid, 610 N.E.2d at 917; see also Berezin v. Regency
Sav. Bank, 234 F.3d 68, 72 (1st Cir. 2000); John Beaudette, Inc. v.
Sentry Ins. A Mut. Co. 94 F. Supp. 2d 77, 142-43 (D. Mass. 1999);
Mickelson v. Barnet, 460 N.E.2d 566, 569 (Mass. 1984).
Massachusetts courts have referenced the approach to mutual mistake
articulated in the Restatement (Second) of Contracts. See, e.g.,
Nissan Autos. of Marlborough, Inc. v. Glick, 816 N.E.2d 161, 165
(Mass. App. Ct. 2004); Howell v. Glassman, 600 N.E.2d 173, 175
(Mass. App. Ct. 1992). The Restatement summarizes the applicable
principles as follows:
Where a writing that evidences or embodies an
agreement in whole or in part fails to express
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the agreement because of a mistake of both
parties as to the contents or effect of the
writing, the court may at the request of a
party reform the writing to express the
agreement, except to the extent that rights of
third parties such as good faith purchasers
for value will be unfairly affected.
Restatement (Second) of Contracts § 155 (2006). When a party asks
for reformation of a contract, it is not asking the court to
interpret the contract but rather to change it to conform to the
parties’ intent. See id. cmts. a, b. Accordingly, the usual
restrictions on contract interpretation, such as the parol evidence
rule, do not apply to a court’s inquiry into the parties’ intent.
See Berezin, 234 F.3d at 72; Polaroid, 610 N.E.2d at 917. In a
reformation case, it does not matter that a contract unambiguously
says one thing. A court still will accept extrinsic evidence in
evaluating a claim that both parties to the contract intended it to
say something else.
The critical limitation in a contract reformation case is
the burden of proof: to be entitled to reformation, a party must
“establish that the undisputed material facts fully, clearly, and
decisively show[] a mutual mistake," Polaroid, 610 N.E. 2d at 918;
see also Lordi v. Lordi, 820 N.E.2d 813, 814 (Mass. 2005).
Although “[t]he classic case for reformation” is when the mutual
mistake can be traced to a typo or transcription error, a
scrivener's error is not a prerequisite for reformation. E. Allan
Farnsworth, Farnsworth on Contracts § 7.5 (2001). Mutual mistakes
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justifying contract reformation may result simply from the parties’
inattention. See, e.g., Polaroid, 610 N.E.2d at 917 (discussing
mistaken omission of a pollution exclusion from policies); De
Vincent Ford Sales, Inc. v. First Mass. Corp., 146 N.E.2d 492, 494
(Mass. 1957) (basis for equitable relief sufficiently set forth
where allegations claim mistake resulting from “inadvertence of the
parties”). Such is the mistake urged by OneBeacon, which claims
that neither it nor LAI realized – or intended – that the policy’s
broad definition of an “insured” extended coverage to LAI’s lessees
who had not independently insured the vehicles with OneBeacon.
The mistake that OneBeacon must demonstrate – to a high
degree of certainty – is not that the outcome of its agreement
differed from its expectations, but rather that the contract
language did not express the agreement as originally intended. See
Restatement 2d § 155 cmt. a (“The province of reformation is to
make a writing express the agreement that the parties intended it
should.”). The distinction is between a contract that does not
accurately reflect (hence misrepresents) the agreement of the
parties and a contract that accurately reflects the intent of the
parties but is premised on some mistaken fact. Reformation is not
available to correct mistaken factual assumptions about the
parties’ bargain, but may be used to correct misrepresentations of
the parties’ contractual intent. The distinction is perhaps best
understood through an illustration. If, for example, two parties
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intended their agreement to cover the sale of 100 acres in Boston,
but the contract erroneously identified a different piece of
property in Providence, their mutual mistake could provide the
basis for reformation. If, however, the contract correctly
referred to the intended sale of 100 acres in Boston, but the
parcel turned out to be only 90 acres, the mistake would not
concern the representation of their intent – and reformation could
not be used to amend the original agreement. See Restatement 2d §
155 cmts. a, b. In short, reformation fixes a mistaken writing; it
is not meant to fix a mistaken agreement.
Even if a mutual mistake in representation is proven,
however, reformation may not necessarily be awarded. "Since the
remedy of reformation is equitable in nature, a court has the
discretion to withhold it . . . on grounds that have traditionally
justified courts of equity in withholding relief." Restatement 2d
§ 155 cmt. d; see also Howell, 600 N.E.2d at 175; Farnsworth on
Contracts, supra, § 7.5. For example, where the "rights of third
parties such as good faith purchasers for value will be unfairly
affected," reformation may be withheld even if otherwise
appropriate. Restatement 2d § 155.
C. The evidence of mutual mistake
The parties have both asserted that the facts are
undisputed, and Travelers has offered no evidence beyond the policy
language concerning the intent of OneBeacon and LAI at the time
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they entered into that agreement. Consequently, in reviewing the
grant of summary judgment for Travelers, our inquiry must focus on
whether the court properly concluded that the undisputed facts on
intent presented by OneBeacon were insufficient to establish “full,
clear, and decisive proof of mistake,” Polaroid, 610 N.E.2d at 917;
in other words, given the undisputed facts, did the district court
err in concluding that OneBeacon fell short of meeting the legal
standard for reformation?
OneBeacon submitted various forms of evidence, including
affidavits, the Agreement for Judgment, and lease documents that
reflected the course of conduct between LAI and its lessees.
Together, they paint a consistent picture showing that LAI intended
to shift responsibility for liability coverage on its vehicles to
the long-term lessees of those vehicles and that OneBeacon also
operated on the assumption that it provided such coverage only when
a lessee individually applied and was approved.
Paragraph 12 of LAI’s standard lease agreement, labeled
“Insurance,” states that “Lessee shall at its sole cost keep each
vehicle insured against liability for bodily injury, death and
property damage.” The provision then goes on to set minimum
coverage limits and to require that LAI be named as an additional
insured and the first loss payee, and that the coverage be with
insurers acceptable to LAI. Paragraph 12 also addresses the option
of obtaining insurance through LAI, “at Lessor’s sole discretion.”
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If insurance is so provided, the lessee must agree “to pay the
premium as may from time to time be established by Lessor as
Additional Rent.” The record also contains a document entitled
“Lease Supplement – Insurance,” which states that the lessor will
obtain insurance coverage only for specifically identified vehicles
and that the monthly rent payable under the lease may be increased
in the sole discretion of the lessor to cover a premium increase.
The logical inference from these documents – that
insurance under LAI’s OneBeacon policy was limited to lessees who
chose that option and paid for it – is reinforced by affidavits
from the vice chairman of the insurance brokerage that handled
LAI’s coverage, Jane Calley, and from a OneBeacon underwriter,
William Keen. Calley explained in detail the process by which LAI
lessees obtained insurance under the OneBeacon policy by applying
through her company, Brewer & Lord, and a copy of the application
was attached to her affidavit. She reported that none of the
application procedures had been followed by Capform, and she stated
unequivocally that no coverage was afforded “if the lessee did not
apply for insurance, meet the underwriting criteria and receive
acceptance into the LAI Insurance Program.”
To be approved for coverage, a lessee was required to
provide Brewer & Lord with information on the driver or drivers and
the vehicle to be insured, and the broker would check driving
records and review vehicle-type information. Approved vehicles
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would be included on lists that LAI provided monthly to Brewer &
Lord, and which were then submitted to OneBeacon with premium
calculations. Calley said it was her “understanding” that lessees
were required to complete the lease supplement if approved for
coverage under the OneBeacon policy. She further averred that
OneBeacon and LAI
did not intend that the . . . policies would
afford coverage to lessees under long-term
lease agreements where the lessee did not
apply for such coverage under the LAI
Insurance Program, did not meet [OneBeacon’s]
underwriting criteria and where the lessee was
not accepted for coverage and did not pay a
premium for the coverage.
Keen’s much briefer affidavit repeated Calley’s assertion
that Capform did not apply for coverage through OneBeacon and also
reiterated that, when the relevant policy was issued, OneBeacon
intended that it would afford coverage only to lessees who had
applied and been approved for coverage. He further stated that, to
the extent the policy language did not reflect OneBeacon’s intent,
“it was a mistake.”
Essentially the same representations were contained in
the Agreement for Judgment between LAI and OneBeacon. It included
an assertion that lessees were provided coverage through LAI’s
policies with OneBeacon “only if the lessee executed, in addition
to the Standard Form Lease Agreement, the LEASE SUPPLEMENT –
INSURANCE and a DRIVER APPLICATION, and if the application was
accepted by or on behalf of OneBeacon or Pennsylvania General.”
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The Agreement further stated that Capform executed neither the
lease supplement nor the driver application and that OneBeacon and
Pennsylvania General “at no time” undertook to provide coverage to
Capform for the vehicle involved in the Pedreira accident.
Travelers disparages virtually all of this evidence –
challenging the basis for the affiants’ knowledge and criticizing
the “self-serving judgment” against LAI as unworthy of the court’s
consideration. We note initially that while Travelers properly may
debate the potency of OneBeacon’s proffered evidence on the issue
of mutual mistake, arguing that it does not constitute “full,
clear, and decisive proof of mistake,” Polaroid, 610 N.E.2d at 917,
Travelers’ representation to the court that no material factual
disputes existed forecloses it from challenging the factual
assertions made by the affiants and contained in the Agreement for
Judgment. Indeed, in keeping with this protocol, Travelers does
not offer conflicting evidence, but attempts only to diminish the
significance of OneBeacon’s offerings.
In our view, however, the affiants were sufficiently
involved in LAI’s acquisition of insurance from OneBeacon to be
considered reliable. Calley was a high level administrator for the
insurance broker, and her statements conveyed a depth of knowledge
about the relevant coverage procedures. She stated without
qualification that the LAI insurance program did not provide
coverage to lessees such as Capform, who had not applied to and
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been approved by OneBeacon.
Keen likewise had a basis for personal knowledge because
he oversaw the underwriting of the relevant policy. Given Calley’s
and Keen’s roles, we believe that both affidavits, at least in the
parts relevant here, satisfied the standards of Fed. R. Civ. P.
56(e), which provides that affidavits submitted in support of
summary judgment must set forth admissible facts based on personal
knowledge.4 Moreover, the affiants’ statements are consistent with
the undisputed documentary evidence – the standard lease forms –
showing that LAI and OneBeacon operated in the belief that the
policy extended only to lessees who specifically applied for
coverage.
As for the Agreement for Judgment, Travelers argues in
its brief that the court should not consider any of its content,
claiming that Travelers cannot be bound by the agreement because it
was not a party to it. Travelers further argues that the
Agreement’s content does not constitute admissible evidence by
individuals with personal knowledge of LAI’s intent, and it
emphasizes that the Agreement does not speak to LAI’s intent
4
In any event, any objection to our consideration of the affidavits
has been waived because Travelers did not move to strike them in
the district court, and the exception allowing belated objection to
prevent “a gross miscarriage of justice” is without question
inapplicable here. See Perez v. Volvo Car Corp., 247 F.3d 303,
314-15 (1st Cir. 2001); Casas Office Machs., Inc. v. Mita Copystar
Am., Inc., 42 F.3d 668, 682 (1st Cir. 1994); Lacey v. Lumber Mut.
Fire Ins. Co. of Boston, 554 F.2d 1204, 1205 (1st Cir. 1977).
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concerning coverage at the time it obtained the policy at issue.
Travelers’ argument that it is not “bound” by the statements
contained in the Agreement is beside the point. The Agreement
nevertheless is relevant on the question of the parties’ intent.
LAI is bound by the representations it made in the Agreement, see
BIW Deceived v. Local S6, Indus. Union of Marine And Shipbldg.
Workers, 132 F.3d 824, 828 (1st Cir. 1997); Coughlin v. Regan, 768
F.2d 468, 469-70 (1st Cir. 1985) (“[A] party to a consent judgment
is thereby deemed to waive any objections it has to matters within
the scope of the judgment.”),5 and LAI’s assertions about the
operation of its insurance program are – like the supporting
documents – revealing on LAI’s and OneBeacon’s expectations
regarding the policy.
Travelers also attempts to discredit the Agreement by
declaring in its brief that “it stretches the boundary of
believability that LAI would agree that too much coverage was
afforded under the polic[y] and that it had an intent to obtain
less coverage than was explicitly afforded under the unambiguous
language . . . .” We find nothing inherently implausible about
LAI’s declarations, however. LAI’s representation is that its
leased vehicles were fully insured in ways other than under the
5
An “agreed judgment” – another name for a consent judgment –
“binds the parties as fully as other judgments” when it has been
sanctioned by a judge. Black’s Law Dictionary 858-59 (8th ed.
2004). The district court entered an order approving the LAI-
OneBeacon Agreement.
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policy language on which Travelers relies – and, indeed, the
Travelers coverage purchased by Capform met LAI’s stated
requirement that lessees insure their vehicles independently if
they chose not to apply for the OneBeacon coverage.
In our view, LAI’s lease agreement, particularly when
taken together with the lease supplement specifically addressing
insurance, is compelling evidence that LAI intended that its own
insurance coverage for a particular vehicle would terminate once
the vehicle was leased. The process put in place to ensure
continuing coverage by the lessee – either through another insurer
or through OneBeacon – supports the inference that OneBeacon also
assumed the policies would cover LAI-owned vehicles after they were
leased only if the requisite application steps had been completed.6
Thus, the course of conduct revealed by LAI’s standard forms,
together with the elaboration and affirmation provided by
knowledgeable individuals, persuades us that the parties shared an
intent to exclude vehicles from coverage once they were leased –
unless the lessee followed the requisite procedures for obtaining
6
As noted earlier, a successful application process resulted in
a leased vehicle being included on a monthly list of insured
vehicles submitted by LAI to Brewer & Lord, which in turn provided
the list to OneBeacon. Consistent with that procedure, the policy
contained an endorsement amending the definition of “insured” to
include “any person or organization leasing a vehicle or vehicles
from the named insured per monthly report filed with the company.”
Although this endorsement does not by its terms exclude lessees not
on the list, it nonetheless can be read to provide support for
LAI’s and OneBeacon’s position.
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coverage under LAI’s policy.
Travelers has identified no evidence that undermines the
uniform picture painted by OneBeacon’s evidentiary submissions. It
asserts that OneBeacon has not pointed to “any specific
endorsement, exclusion or other limiting language that they contend
was mistakenly omitted when these policies were issued to LAI,”
noting that “[t]his is hardly surprising, inasmuch as the language
in the policies” providing coverage to specified “insureds” is part
of the boilerplate contained in standard auto industry policies.
However, OneBeacon does, in fact, claim a critical omission of
limiting language that would have excluded from coverage vehicles
operated by long-term lessees who had not directly sought and
obtained coverage under the policy.
In sum, the evidence submitted by OneBeacon is both
ample and persuasive, and we therefore conclude that it has met its
burden to provide “full, clear, and decisive proof of mistake,”
Polaroid, 610 N.E.2d at 917. Accordingly, barring any equitable
concerns, OneBeacon is entitled to reformation of the relevant
policies to exclude coverage for LAI-owned vehicles on long-term
leases, unless the lessee has followed the requisite application
procedures and obtained its own coverage under the OneBeacon
policy.
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D. Equitable considerations
We see no equitable barriers here. Travelers makes a
strained argument that reforming the insurance policy as OneBeacon
requests would leave vehicles uninsured in violation of
Massachusetts law and public policy. LAI’s general lease form does
not permit a vehicle to be acquired and operated by a lessee,
however, unless the lessee has secured insurance coverage, either
independently or under LAI’s policy with OneBeacon. Assuming that
Massachusetts law were to apply to vehicles under long-term lease
that are registered and operated outside the state, Massachusetts’
requirement that motor vehicle operators carry liability insurance
would in no way be frustrated by the OneBeacon/LAI system.
In addition, the record contains no evidence showing
detrimental reliance on an assumption that the OneBeacon policy
covered Capform’s leased vehicles. A representative for Travelers,
Shirong Chen, testified in deposition that the company was unaware
of the OneBeacon policy during the underwriting process for
Capform, and Capform did not look to OneBeacon for coverage after
the accident. From all that appears in the record, this was a case
where everyone’s expectations were the same – until Travelers read
the boilerplate in the OneBeacon policies. In this instance,
equity favors reforming the policy to reflect the contracting
parties’ intent.
Therefore, the district court’s summary judgment for
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appellee Travelers is reversed, and the court is directed to enter
summary judgment for appellant OneBeacon providing for reformation
of the policy consistent with our ruling.
So ordered.
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