An insurance policy is a contract between the insurance provider (insurer) and the person or property receiving coverage (insured). But what if there are mistakes, can a policy be modified after it was finalized? Reformation may be the answer.
For example, let’s say the the scope of the policy is debated and in dispute between both sides. Can the contract be edited so that it properly reflects the most accurate information? Like many answers in the legal world, the response to that question is that it depends on the circumstances of each case – but if an insurer fails regarding a request for reformation, this may be considered grounds for a bad faith lawsuit.
Reformation is an equitable power of the court or that the insurer can exercise to correct certain types of mistakes like mutual mistakes, also known as mistakes made by both sides, or the insurance agent’s mistakes. The obvious times a contract can be edited, modified or reformed, is when there is fraud, or unequal acts and omissions by one side. There are many other situations in which an insurance policy contract can be reformed, including:
- Failing to name all the right people or entities that were supposed to be named as insured or additional insureds;
- Not providing the extent of coverage that the policy was supposed to provide, whether it is providing too much coverage, or not enough (for example, only providing liability coverage instead of both property and liability, or providing only some locations with coverage);
- Outdated policy limits and / or failing to update the policy limits, special limits or designated limits and other important policy terms during the life of the policy or when the insurance policy is up for renewal;
- Brokers and agents failing to incorporate the insurance policy’s new updates and changes; and
- Underwriting, drafting or processing errors.
In order to reform an insurance policy contract, there still must be a proper investigation to consider a request for reformation. What is a proper insurance investigation?
The investigation must be more than just reviewing records. The investigation should also include interviews with policy negotiators, risk managers, underwriters, brokers, agents and other relevant personnel. Failure to conduct detailed and objective investigation into a reformation request can result the wrongful denial of a claim, and make the insurer responsible for “bad faith” claims and lawsuits.
An insurer is not exposed to bad faith claims if the insurer had a reasonable basis for denying an insurance claim. So if circumstantial evidence, which is evidence that does not necessarily definitively prove a fact but provides logical grounds that you can use to reach a reasonable conclusion or inference, shows that there were facts that made it seem reasonable to deny a claim, this would not be considered bad faith. On the other hand, if the insurer then shows extensive evidence that contradicts the circumstantial evidence, this fact would support a claim for bad faith. There are many examples of bad faith, but failures that are considered bad faith can cost insurance providers millions under the law.
Even if both the insurer and insured agree, courts may deny a request for reformation of an insurance policy contract if it would affect another outside party, also known as a third party. If the person making the claim with the insurer is an outside party rather than the policyholder, that claimant may be a third party. Reformation is not an option where it takes away, or deprives, a third party of benefits under the insurance policy.
For example, if an employee was told that the insurance provider would cover car accidents while the employee was in scope of employment, or on company time, the employer policyholder and insurance company cannot then turn around and reform the policy contract to exclude coverage of the employee. Another example is when a claimant is insured in an insurance policyholder’s store. The store policyholder and the insurer cannot turn around and reform the contract to agree that coverage was only for property, and try to exclude liability coverage. Put simply, reformation cannot be used to take away coverage for someone who should be covered under the insurance policy.
Reformation is proper where a careful investigation shows that the parties’ intentions were so clear and specific that the intended policy terms or limitations are clearly able to be determined and enforced. In other words, after a policy is finalized and set, reformation is a legal tool that allows the parties to edit or modify the policy so that it reflects what both sides initially intended to happen.
If a policyholder says that coverage is less than what he or she believed, it is unlikely that the policy will be reformed, or modified, to add coverage unless evidence clearly shows that reformation is a good option to fix what both sides clearly intended. If it is simply a matter of editing the Declarations page, the insurance contract can be reformed. But without evidence that shows both parties clearly intended a certain amount or type of coverage, it is unlikely that reformation is a viable remedy. If the insurer finds that the investigation shows there was no logical basis for its conclusion of denying a claim, this will support a claim for bad faith. But if it does not find this information, or if it is not clear that both parties intended the policy to have the intended effect, the insurance policy may not be enforced.
Reformation is one of many legal remedies, and the solution to one case may not be the best choice for another case because each case and claimant has unique needs that need to be met.
Contact an experienced personal injury lawyer
Navigating complex personal injury cases and handling insurance companies can make the recovery process even more difficult. Experienced attorneys strategically weigh the cost and benefits of each case to minimize the time and expense involved while maximizing their clients’ compensation.
Are you trying to secure your financial recovery with the help of experienced attorneys? If so, we can help.
The Pusch & Nguyen Law Firm has helped countless Texans handle their insurance disputes. Our experienced trial lawyers have gone up against some of the biggest names in the insurance industry while successfully bringing home payouts for clients. Our successful reputation speaks for itself, and with offices in both Houston and San Antonio, we are well equipped to assist Texans who are in dire need of our services. Register online for a free case evaluation or call us today at 713-528-8108 (Houston) or 210-702-3000 to schedule an appointment with a member of our team.