OneBeacon America Insurance v. Travelers Indemnity Co.

          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.

                                      -2-
                                       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.

                                      -3-
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


                                    -4-
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


                                        -5-
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

                                     -6-
              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


                                          -7-
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


                                   -8-
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


                                       -9-
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.”


                               -10-
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


                                -11-
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.”

                               -12-
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


                                     -13-
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).

                                     -14-
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.

                                     -15-
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.

                                  -16-
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.




                                   -17-
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


                                      -18-
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.




                              -19-