Pennsylvania Court Addresses Application of Retroactive Date

In its recent decision in A.P. Pino & Associates, Inc. v. Utica Mutual Ins. Co., 2012 U.S. Dist. LEXIS 92472 (E.D.Pa. July 3, 2012), the United States District Court for the Eastern District of Pennsylvania had occasion to consider the application and enforceability of a retroactive date in a professional liability policy.

Utica Mutual insured A.P. Pino & Associates (“APA”) under two consecutive Life Insurance Agents and Brokers Errors and Omissions policies for the periods October 15, 2009 through 2010 and October 15, 2010 through 2011.  Both policies contained an October 15, 2009 retroactive date and stated that coverage was unavailable for wrongful acts that took place prior to this date.  

Prior to October 15, 2009, APA’s principal, Pino, was insured under a professional liability policy issued by a different carrier.  The named insured was Pino rather than APA.  It was only when Pino decided to grow his business and hire a number of producers that he decided to switch carriers and purchase a policy in APA’s name.  He claimed to have selected Utica because Utica offered prior acts coverage.  Such coverage, however, was not automatically granted.  Utica determined whether to offer prior acts coverage, or use a retroactive date, based on whether the insured was a new business entity or an entity with prior errors and omissions coverage.  Because APA had not previously been insured under a professional liability policy (i.e., because Pino’s prior coverage was in his name only), Utica decided to treat APA as a new business and thus issued the policies with a retroactive date concurrent with the inception of the first policy issued to APA, i.e., October 15, 2009. 

Although the retroactive date was fully disclosed in all phases of the underwriting for both policies (i.e., the quotes, binders, etc.) and was clearly identifiable in the policies themselves, Pino later claimed that he was not aware of the retroactive date, or its effect, until he later sought coverage for a loss.  The loss involved a lawsuit filed in November 2010 by an APA client arising out of Pino’s advice concerning life insurance.  Because the advice was given in Spring 2009, Utica denied coverage based on the October 15, 2009 retroactive date.  APA, nevertheless, argued that Utica had a duty to defend and indemnify APA based on its reasonable expectations that the policies issued by Utica provided prior acts coverage, or in the alternative, that the policies should be reformed to reflect these expectations.

The court agreed as an initial proposition that the retroactive date was clearly and unambiguously stated in the policy.  Pino’s assertion that he “did not read the policies” did not require the conclusion that Utica could not enforce the retroactive date.  As the court explained, “if a policy is ‘plain and free of ambiguity, and could have been readily comprehended by [an insured] had he chosen to read them,’ then the parties are bound by the signed agreement.” The court further held that the doctrine of reasonable expectations did not compel a different result, since the doctrine is limited to “unsophisticated non-commercial insureds” and only to protect insureds from deceptive language.  Noting that Pino was not an unsophisticated insured and that the retroactive date was not the result of insurer deception, the court found the doctrine inapplicable.

APA also argued that the policies should be reformed to provide the prior acts coverage it had requested when it applied for the initial policy.  Specifically, APA argued that a mutual mistake existed because APA was mistakenly treated by Utica as a new business enterprise.  The court rejected this argument on the basis that Utica’s treatment of APA as a new business was not based on a mistake, but rather based on APA’s lack of prior insurance coverage.  The court further rejected APA’s argument that there was a unilateral mistake on Utica’s part, explaining that:

While Plaintiffs may have been unilaterally mistaken that APA would receive prior acts coverage, Plaintiffs have not presented a scintilla of evidence that Utica engaged in either active fraud or had good reason to know of Plaintiff’s unilateral mistake, thereby precluding reformation of the policy.

Third Circuit Court of Appeals Addresses Reformation of Insurance Policy

In Illinois National Ins. Co. v. Wyndham Worldwide Operations, 2011 U.S. App. LEXIS 15894 (3d Cir. Aug. 3, 2011), the United States Court of Appeals for the Third Circuit had occasion to consider whether the doctrine of mutual mistake allows for reformation of an insurance policy against a party that was not part of the insurance procurement process.

Illinois National had issued several years of successive aircraft fleet insurance policies to Jet Aviation, an aircraft maintenance and charter services company.  While the policies were negotiated exclusively between Illinois National and Jet Aviation, the policies extended coverage to certain qualifying Jet Aviation clients, but only when Jet Aviation managed the client’s aircraft and aircraft usage.  In the fifth year of the program, Jet Aviation and Illinois National negotiated a revised managed aircraft endorsement, which was the endorsement extending coverage to third parties such as Wyndham.  While Jet Aviation and Illinois National intended for the endorsement to provide broader coverage for entities affiliated with Jet Aviation, the actual wording of the endorsement also had the unintended effect of providing broad coverage to clients of Jet Aviation, such as Wyndham, even when using aircraft without Jet Aviation’s management.  Wyndham was not aware of the change to the endorsement when issued.

During the period of the policy with the revised endorsement, a Wyndham employee rented a Cessna aircraft from a company other than Jet Aviation.  The aircraft subsequently crashed, resulting in the death of five people on the ground.  While Jet Aviation had no involvement with the involved plane, the wording of the revised management aircraft endorsement  nevertheless would have provided liability coverage to Wyndham for the matter.  Illinois National subsequently brought a declaratory judgment action against Wyndham arguing, among other things, that the policy should be reformed to reflect the mutual intent of Illinois National and Jet Aviation.  Wyndham argued, and the United States District Court for the District of New Jersey agreed, that because Wyndham was not involved “in the negotiation and drafting” of the policy, the standard for reformation would not be one of mutual mistake, but rather the more stringent standard of unilateral mistake under which a party’s own negligence cannot serve as a basis for reformation.

In a majority panel decision, however, the Third Circuit concluded that notwithstanding the fact that Wyndham did not participate in the underwriting process, “[r]eformation on the basis of mutual mistake can be granted even when it is to the disadvantage of a third party.”  In light of the testimony from Illinois National and Jet Aviation that their mutual intent was to limit coverage for non-owned aircraft to aircraft used by or at the direction of Jet Aviation, the Third Circuit held that the lower court erred by analyzing Illinois National’s claim under the unilateral mistake standard rather than the less severe standard of mutual mistake.  Accordingly, the Third Circuit remanded the matter for further evaluation of Illinois National’s and Jet Aviation’s intent, as well as Wyndham’s argument that reformation, even in light of a mutual mistake, would be inequitable under the circumstances.