Mutual Mistake Requires Reformation of Retroactive Date for Additional Insured
Applying Illinois law, the United States District Court for the Northern District of Illinois has held that the retroactive date for an additional insured under claims-made policies should be reformed to the inception date of each policy because of a mutual mistake. Hallmark Spec. Ins. Co. v. Roberg, 2015 WL 5163216 (N.D. Ill. Sept. 2, 2015). The court also held that estoppel, waiver, and laches did not apply to prevent policy reformation because the insurer never defended the insured and promptly filed a lawsuit to reform the policy after first learning of the mutual mistake.
The insured doctor was affiliated with a medical group as an independent contractor. Under the agreement with the medical group, the doctor was required to purchase E&O insurance and name the medical group as an additional insured. When purchasing two consecutive claims-made policies, the doctor requested policies with the retroactive date at the inception date of the policy in exchange for paying a lower premium. The insurer agreed to issue the policies with the retroactive date at inception after the insured acknowledged the limited coverage provided by the policies and that the limitation would apply to the doctor and “additional named insureds.” However, when the policies were issued, the policies included retroactive dates for the additional insured that were before the policies’ inception dates. When a claim was tendered for coverage for wrongful acts allegedly committed before the policies incepted, the insurer learned that the retroactive dates for the additional insured were incorrect and filed a declaratory judgment action to reform the policies based on the parties’ mutual mistake.
The court held that, based on clear and convincing evidence, the policies should be reformed because, as written, the policies’ retroactive dates for the additional insured did not reflect the agreement between the parties. It found that the insurer’s intent was for the retroactive date at policy inception because the underwriter offered testimony that he would never issue a retroactive date for an additional insured that was earlier than for the named insured and that the insurer would have charged a higher premium for an earlier retroactive date. The court also held that the insured doctor intended for the policies to provide no retroactive coverage because the doctor acknowledged in writing that the retroactive date would be the policy inception date for the additional insured and never requested an earlier retroactive date for the additional insured.
The court rejected the insureds’ contention that the insurer could not reform the policies because of estoppel, waiver, or laches. It held that the insurer was not estopped from denying coverage because it never defended the insureds against the claim and promptly sought to reform the policies when it learned of the mistaken retroactive date.