On August 23, 2011, in the case of Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc. (No. 10-3833), the Third Circuit Court of Appeals reversed the the District Court for the District of New Jersey, which had dismissed the insurer's action for declaratory judgment and granted summary judgment to the claimant upon holding that reformation based upon mutual mistake can never be sought against a third-party who did not participate in the negotiation of the contract.
The underlying claim arose out of a plane crash involving a Wyndham employee, and several others. Wyndham had rented the plane from Jet Aviation. Following the incident, Jet Aviation's insurer filed suit for declaratory judgment and Wyndham counterclaimed, demanding coverage under Jet Aviation's policy, which also covered Jet Aviation's clients where Jet Aviation where the place was under Jet Aviation's management. The plane at issue was not under Jet Aviation's management at the time of the incident. However, Jet Aviation and its insurer negotiated a re-wording of the policy prior to the incident which, they intended, would make clear that all Jet Aviation-affiliated companies would be covered by policy. Instead, as a result of a drafting error, the policy arguably extended coverage to non-affiliated entities even where the plane was not under Jet Aviation's management.
The insurer sought to disclaim coverage based on a theory of mutual mistake which, under New Jersey law, allows a court to reform a contract to reflect the mutual intent of the parties if it "was created by the negotiations of the parties, but by mutual mistake is wanting in formal expression or execution, so as to evince the actual intent of the parties." Wyndham argued that reformation based upon mutual mistake was not proper under the circumstances because Wyndham was not a party to the negotiations leading to the change in policy wording. The district court agreed, concluding that the policy was clear on its face and covered the claim; and further holding that reformation based on mutual mistake was inapplicable as Wyndham was not a party to the negotiations. On appeal, the Third Circuit reversed, holding that "[r]eformation on the basis of mutual mistake can be granted even when it is to the disadvantage of a third party." Thus, the Third Circuit reversed the district court and remanded the case for further adjudication, directing the lower court to properly address the insurer's reformation claim based upon mutual mistake.
A copy of the decision can be found here.