The Third Circuit recently held, under New Jersey law, that an insurer's policy may be reformed for mutual mistake, even against a potentially-covered insured who was not part of the negotiating process. In Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc., No. 10-3833, 2011 U.S. App. LEXIS 15894 (3d Cir. Aug. 3, 2011), Jet Aviation Business Jets, Inc. ("Jet") purchased aircraft fleet insurance coverage from Illinois National Insurance Company ("Illinois National") for itself and for clients, but initially that coverage applied to clients only when Jet managed clients' aircraft and aircraft usage. Jet later sought, and Illinois National agreed, to revise and broaden the policy's managed aircraft endorsement. While Illinois National claimed that it and Jet intended for the revised endorsement to provide broader coverage only to Jet's affiliates (and not third parties), the plain language of the endorsement extended coverage to Jet's clients, whether or not they were using aircraft under Jet's management. Id. at *7-*8.
Following a fatal crash involving an aircraft rented from a company other than Jet, Jet's client, Wyndham Worldwide Operations, Inc. ("Wyndham"), sought coverage from Jet's insurer. Illinois National filed suit, seeking declaratory judgment that its policy did not cover Wyndham's claims arising from the crash. It argued, in the alternative, that if the policy did provide coverage, it should be reformed based on its and Jet's mutual mistake. Id. at *8-*9.
The district court granted Wyndham summary judgment, finding that the policy clearly extended coverage to Wyndham and that Illinois National was not entitled to reformation, because Wyndham had not participated in the negotiation and drafting of the policy. The court, therefore, concluded there could be no mutual mistake. Id. at *10. Jet appealed, and the Third Circuit reversed the trial court's decision, holding that a contract may be reformed for mutual mistake "even when [reformation] is to the disadvantage of a third party." Id. at *16. It explained that the court's equitable power to remedy mistakes "is not limited to the original parties to the contract, but extends to all those standing in privity with them." Id. at *15 . The Third Circuit therefore remanded the matter for consideration of Illinois National's and Jet's intent, as well as whether reformation, even in light of a mutual mistake, would be inequitable in these circumstances.