Contracts I, first semester, first year of law school, teaches contract reformation. My professor, Cleveland Ferguson, III, lectured on this topic and I remember it well. This basic principle of contract law is tested on the multi-state bar examination but policyholders may not know of this common remedy for property insurance contract changes.

Foremost, readers should remember that the insurance policy is a contract. The policy is an agreement by two parties (although one party has superior bargaining power and writes up the contract). Each party has duties and benefits under the policy once there is an agreement. In simple terms, you pay the premium and insurance company covers certain losses that happen at the property.

But what happens if both parties make a mistake when the policy is being purchased? What happens when the agreement reduced to writing fails to express the agreement of the parties? An easy to understand example: the insurance policy lists an address with a typo. Instead of listing 444 1st Avenue, the policy lists 444 1st Street. The client pays for the insurance and provides a copy of prior insurance coverage for the house on 1st Avenue. The contract can be reformed to reflect the true intent of the parties and correct the address to 444 1st Avenue. However, beware to avoid these mistakes before the policy is issued because changing even an address can be a legal battle. The best advice is to read all applications and policies and make sure the product is the same as what you were promised and planned on purchasing.

In a nutshell, contract reformation happens when the former contract is rewritten in a manner that reflects the true intentions of the parties more accurately. There can also be a reformation of a policy when one party makes a mistake coupled with fraud. (Look for more on misrepresentation reformations in future posts.)

Let’s look back to a case in New Mexico that outlines an insurance policy reformation.1 This case is from a long time ago but it serves as a good example of reforming the policy. Both the agent and the insured planned that the insurance would cover fire damage for items the insured was transporting from Texas to New Mexico but the policy issue excluded coverage because of one key detail.

Back in the 1963, Mr. Buck was in Albuquerque, New Mexico and wanted to buy coverage from Mountain States for $8000 insuring him for loss or damage to goods he explained he would transport from Texas to Albuquerque. The goods included household items and 50 trash receptacles.

Mr. Buck and Mr. Huff (Buck’s boss) met with the agent and Mr. Buck and the agent discussed the specific insurance Mr. Buck was requesting and an oral agreement was reached. Mr. Buck paid $48.00 and the agent gave Mr. Buck a binder he said was in conformity with their agreement. It is undisputed that Mr. Buck never read the document but placed it in his pocket. Mr. Buck went right to Bryan, Texas, with his boss, Mr. Huff, in Huff’s car. Once in Texas, Mr. Buck loaded the household goods and trash receptacles on to a rented trailer and attached this to Mr. Huff’s car.

It was August 19, 1963, en route to Albuquerque when all the items were destroyed by fire. Mountain States denied coverage and said that the insurance only covered shipment by truck.

The trial court found that the policy should have been reformed to meet the agreement of the parties:

The court further found that the insurance policy issued by the appellant pursuant to the order of its agent neither conformed to the oral agreement nor to the binder issued by its agent; that the appellee was never advised by either the appellant or its agent that the policy as issued differed in its terms from the oral agreement although the appellant knew that the terms of the policy were materially different from the agreement between the agent and the appellee. The court then concluded that the policy should be reformed to provide coverage of the household goods and effects against loss by fire while in transit from Bryan, Texas to Albuquerque, by whatsoever means of transportation chosen by the appellee. Judgment was entered accordingly and the insurance company appealed.

According to the insured, the agreement had always been for transportation of the goods by automobile, trailer, truck or other means of conveyance but the agent issued a binder that covered the household goods being “shipped by truck”. The policy actually issued only provided coverage for the goods while in transit on a rental truck under the control of certain shippers like a common carrier or railway company. It is important to note that the agent, a representative of the insurance company, knew that Mr. Buck was moving these goods with the car. The policy issued also specifically didn’t cover the 50 trash receptacles and those were discussed with the agent at the time of purchase.

Mr. Buck did not get a copy of the policy until the trial and the agent didn’t get a copy until after the fire loss.

Was the reformation upheld on appeal? Yes, the appellate court agreed with the lower court and also found that the policy should have been reformed to reflect the agreement of the parties:

It is well established in this jurisdiction, and generally, that a court of equity may grant reformation of a contract where either by mutual mistake of the parties, or through mistake on the part of one party and fraud or inequitable conduct on the part of the other party, the written instrument drafted to evidence a contract fails to express the real agreement and intentions of the parties.2

Keep following our blog for more posts on the reformation of an insurance policy and as always, feel free to comment below or contact us directly anytime.

1 Buck v. Mountain States Inv. Corp., 1966-NMSC-090, 76 N.M. 261, 414 P.2d 491 (N.M. 1966).
2 Buck, at 493, citing to Dearborn v. Niagara Fire Insurance Company, 17 N.M. 223, 125 P 606; First National Bank of Elida v. Hartford Fire Insurance Co., 17 N.M. 334, 127 P. 1115; Cleveland v. Bateman, 21 N.M. 675, 158 P. 648; Points v. Wills, 44 N.M. 31, 97 P.2d 374; Collier v. Sage, 51 N.M. 147, 180 P.2d 242; 13 Appleman, Insurance Law and Practice, s 7609, p. 33; 76 C.J.S., Reformation of Instruments, ss 29, 30; 29 Am.Jur., Insurance, ss 340, 341.