[31 ASR2d 201]
v.
NATIONAL PACIFIC
INSURANCE CO., Defendant
High Court of
Trial Division
CA No. 39-92
March 31, 1997
[1]
Contracts of insurance are, as a rule, construed in
accordance with general principles of contractual
construction.
[2]
Terms in an insurance contract are taken in their plain, ordinary
and popular sense.
[3]
When the language of an insurance policy is plain and
unambiguous, the court must refrain from application of rules of construction in
order to find coverage for a risk of loss not intended or contemplated within
the contract.
[4] If the
language of an insurance contract is plainly ambiguous on the issue of coverage,
the court can consider parole evidence.
[5] The proof to reform a policy on the ground of mutual mistake must be more then a mere preponderance of the evidence. At the same time, the mistake warranting reformation must be harbored by both parties, and not just one, and must be proven by more then a mere preponderance of evidence.
[6]
Absent special circumstances, a party may attack a contract on the
grounds of fraud only when he has exercised due diligence in protecting himself
from that fraud.
[7] Generally, where the failure to read the contract is induced by carelessness alone, no grounds exist for reformation or rescission.
Before KRUSE, Chief Justice, and LOGOAI, Associate Judge.[31 ASR2d 202]
Counsel: For Plaintiff, Marshall Ashley and Mason Martin
For Defendant, Brian M. Thompson
Opinion and Order:
Plaintiff, American Samoa Power Authority ("ASPA"), brought this action to recover monies for a damaged turbine, purportedly insured by defendant, National Pacific Insurance ("NPI").
ASPA
is the local power authority in
In
1988 a problem developed with one of ASPA's turbines which required its shipment
off-island. ASPA rented a
replacement turbine from U.S. Turbine.
Its rental agreement with U.S. Turbine required ASPA to insure the rented
turbine with All Risk Physical Insurance ("All Risk"). In pursuance of its rental obligations,
ASPA sought a number of bid proposals from the various insurance companies and
brokers on-island at the time, including NPI. NPI's initial bid, put together by its
reinsurer Munichre New Zealand Services Limited ("Munichre"), was not initially
taken up by ASPA. Subsequently,
however, ASPA did procure insurance for the rented turbine from NPI beginning in
1988, and renewed its policy with NPI on several occasions. However, neither ASPA nor NPI produced
the 1988 version of the insurance policy.
On May
24, 1991, the insured turbine broke down.
On June 3, 1991, ASPA notified NPI of its imminent claim. NPI denied the claim on the basis of
limiting language contained in the 1991 version of the policy which states that
NPI was responsible for damage "due solely to the negligence of the American
Samoa Power Authority or their employees." Both parties agree that the
turbine break down was not due to the negligence of either ASPA or its
employees.
Although the 1991 insurance policy clearly contains the
limiting language which would preclude ASPA's claim, ASPA argues that 1991
policy did not embody the insurance agreement it had concluded with NPI. Accordingly, ASPA asserts three
different basis for reformation of[31 ASR2d 203] the policy: ambiguity,
mutual mistake, and a quasi-fraud claim that the 1991 contract was changed from
the initial policy which ASPA renewed.
[1-2] First
it must be stated that contracts of insurance are, as a rule, construed in
accordance with general principles of contractual construction. See Asifoa v.
I.
Ambiguity
[3] When the language of an insurance policy is plain and
unambiguous, the court must refrain from application of rules of construction in
order to find coverage for a risk of loss not intended or contemplated within
the contract. See Robertson v.
Fowler, 475 S.E. 2d 116, 121 (W.Va. 1996). ASPA argues that the 1991 policy is
ambiguous. Specifically, it argues
that the limiting language discussed above is in conflict with Condition 3 of
the policy which states that "the Insured shall at his own expense take all
reasonable precautions and comply with all reasonable recommendations of the
insurers . . . and comply with statutory requirements and manufacturer's." ASPA argues that these two provisions,
when read together, cover ASPA for its own negligence and that of its
employee's, yet requires ASPA to "take all reasonable precautions. . . to prevent loss or
damage."
[4] The language is plainly ambiguous, and as such the court can
consider parole evidence on the issue of coverage. The oral parole evidence offered at
trial was conflicting. ASPA's
witnesses testified that they had originally asked for and received an "All
Risk" policy in 1988. NPI's
witnesses, on the other hand, stated that the coverage given in 1988 was the
same as the coverage indicated in the 1991 policy. Specifically, Martin Kreft of Munichre, testified that he had issued the limited coverage
that NPI's manager at the time, Arnold Carter, had asked him to issue, and that
the premium charged and paid was commensurate with the limited risk
insurance. Mr.
Kreft's produced copies of correspondence bearing 1988 dates between his office
and Arnold Carter, which revealed discussions pertaining to a limited--ASPA
negligence only--coverage proposal.
Coupled with the fact that the only actual policies in
evidence all contain the limiting language, we are inclined to accept Mr.
Kreft's testimony as more persuasive regarding the extent of coverage initially
issued by NPI to ASPA. In contrast,
we find the somewhat vague recollections of ASPA's contracting officer, Victor
Stanley, to be less convincing. Mr.
Stanley alluded to a written solicitation he had sent to NPI at the outset for
"all risk" insurance, but as it turns out, this writing is also non existent[31 ASR2d 204] at this time. In these circumstances, we conclude that
ASPA has failed to show by a preponderance of the evidence that the original and
subsequent policies issued for the turbines were for "All Risk"
insurance.
II.
Mutual Mistake
[5] ASPA also argues that the policy should be reformed based on
mutual mistake. The proof required
to reform a policy on the ground of mutual mistake must be more then a mere
preponderance of the evidence.
See e.g. Hanes v. Roosevelt Nat. Life Ins. of
America, 452 N.E. 2d 357, 360 (Ill.App. 5 Dist.
1983); Polaroid Corp. v. Travelers Indem. Co., 610 N.E. 2d 912, 917 (Mass.
1993). At the
same time, the mistake warranting reformation must be harbored by both
parties, and not just one. The
Restatement (Second) of Contracts
§ 155 (1981) states:
[w]here a writing that evidences or embodies an agreement
in whole or in part fails to express the agreement because of a mistake of both
parties as to the contents or effect of the writing, the court may . . . reform
the writing to express the agreement.
Thus,
reformation for mutual mistake requires a mistake by both parties, and must be
proven by more then a mere preponderance of evidence.
NPI
offered sufficient evidence, through the testimony of Martin Kreft, that the
premium ASPA paid was commensurate with the level of protection under the 1991
policy, and that the limited coverage issued by Munichre was the one asked for
by NPI's Arnold Carter. Full
coverage would have apparently cost three times what ASPA was paying. It seems clear that NPI purposefully
issued the 1991 policy at the level of protection, and for the premium, which
appears in that written policy.
ASPA, on the other hand, has not met its burden of proof on the issue of
mutual mistake. If a mistake
existed, it was unilateral, and the written terms of the policy will not be
reformed to reflect ASPA's proffered revision.
III.
Original Contract
ASPA
also argues that, when renewing the policy, it was renewing the original "All
Risk" policy. ASPA claims that NPI
changed the terms of the policy without notifying ASPA and that the contract
should be reformed to reflect the original policy which ASPA had believed that
it was renewing.
The
problem with this submission is again one of proof. Since ASPA has the burden of proof, it
was incumbent upon ASPA to satisfactorily show[31 ASR2d 205] that the original policy
purchased was for "All Risk" insurance.
However, as discussed above, ASPA failed to meet this burden. There was conflicting oral testimony
about whether the original policy contained the limiting language; however, all
of the written policies offered at trial contain the limiting language. The weight of evidence tips in favor of
NPI.
[6-7] Moreover, even if the policy had been changed, and we have no
reason to believe that this was the case, NPI's failure to read its policy does
not warrant reformation. Absent
special circumstances, a party may attack a contract on the grounds of fraud
only when he has exercised due diligence in protecting himself from that
fraud. See
e.g. Vickers v. Roadway Exp., Inc., 435 S.E.2d
253, 254 (Ga.App. 1993).
Here, ASPA failed to read, at the very least, its 1991 policy. At the same time, ASPA failed to offer
any evidence that it had relied upon representations by NPI to the effect that
the policy was "All Risk."
Generally, where the failure to read the contract is induced by
carelessness alone, no grounds exist for reformation or rescission. See e.g. Dombrowski v. City of
Omer, 502 N.W. 2d 707, 710 (Mich. App. 1993), appeal denied, 506 N.W.
2d 871 (Mich. 1993). Only where it
is shown that an insurer has agreed to renew a policy but in fact issues a new
policy containing different terms, may the policy be reformed to read the same
as the original policy. See Maryland Casualty Co. v. Kramel, 80 So.2d 897, 900 (La. App.
1955). However,
as discussed above, ASPA failed to prove that the initial 1988 policy issued was
for "All Risk" insurance.
There
being insufficient evidence to find that the initial 1988 policy issued was for
"All Risk" insurance, and since all of ASPA's arguments rely on this
presumption, they all fall with the finding that ASPA failed to prove that it
originally contracted with NPI for "All Risk" insurance. Judgement will therefore enter for
NPI.
It is
so ordered.
********