A recent decision from the United States Court of Appeals for the Fifth Circuit underscores two important pieces of advice policyholders should follow to ensure that their insurance policies cover the entities that the policyholder intends to insure.
First, policyholders should read and review their insurance policies upon receipt because untimely discovery of a mistake may preclude a later claim for reformation of the policy.
Second, policyholders, especially those who operate through subsidiaries or affiliated entities, should ensure that their insurance policies include all such
Who is Insured?
In AIG Specialty Ins. Co. v. Tesoro Corporation, No. 15-50953, the Fifth Circuit considered whether a transfer endorsement transferring an excess insurance policy was effective as to the named insured’s subsidiary. Tesoro Refining, a subsidiary of Tesoro Corporation, purchased a refinery, and the purchase and sale agreement specified that the seller was to secure an endorsement to a $100 million Chartis excess policy adding the buyer as an additional insured or assigning the policy directly. Chartis issued a transfer endorsement for the policy naming Tesoro Corporation, not Tesoro Refining, as the named insured. Tesoro Corporation’s “corporate practice” was to name just the parent on insurance policies.
After the refinery transaction closed, Tesoro Refining sued the refinery’s original owner for fraud alleging that it had concealed the severity of environmental liabilities at the refinery. This litigation lasted from 2003 until 2007, when Tesoro Refining sent a letter to Chartis regarding the progress of the litigation. In its reservation-of-rights letter, Chartis acknowledged the matter as a potential claim and identified Tesoro Corporation as the named insured.
Insured or Third Party?
In 2009, Tesoro Corporation sent a letter to Chartis demanding coverage for certain cleanup liabilities allegedly owed by Tesoro Refining. Ultimately, Chartis and the Tesoro parties litigated the issue of which Tesoro entity was insured under the Chartis policy. The Tesoro parties sought reformation of the Chartis policy to name Tesoro Refining. They also argued that Chartis breached the parties’ contract under California law on the theory that Tesoro Refining was a third-party beneficiary.
The Fifth Circuit rejected the third-party beneficiary argument and then considered whether, under Texas law, summary judgment was proper on the Tesoro parties’ reformation claim. The court first noted the four-year statute of limitations for reformation claims under Texas law; the Tesoro parties argued that limitations did not run until they discovered a mistake in the policy, the failure to name Tesoro Refining in the transfer endorsement.
The court noted that Texas law provides that “receipt of a policy containing a mistake does not bar a later claim for reformation if the insured offers proof that when he received it he put it away without examination, or that he relied upon the knowledge of the insurer and supposedly he had correctly drawn it,” and noted that “receipt of a policy without protest is not an absolute bar to a reformation claim.”
Timing is Everything
However, the court noted that whether the Tesoro parties may have a meritorious reformation claim was “distinct from the statute of limitations inquiry.” The court considered the merits and found that the Tesoro parties had provided no evidence that they had put the policy away without examination or that they had relied on Chartis to know that Tesoro Refining, not Tesoro Corporation, owned the refinery.
With respect to limitations, the court held that the Tesoro parties’ claim for reformation was brought several years after the 2002 alleged mistake was made and rejected the Tesoro parties’ argument that the discovery rule applied. Noting that the discovery rule applies where “the nature of the injury is inherently undiscoverable and the injury itself is objectively verifiable,” the court then concluded that there was no basis to find that “the injury in this case—the alleged mistake over which entity was covered—is inherently undiscoverable.” Accordingly, the court affirmed summary judgment in favor of Chartis on the reformation claim.
Lessons for Policyholders
The result might have been different if the Tesoro parties had recognized that the transfer endorsement did not name Tesoro Refining when the endorsement was issued or within four years of the mistake.
While reformation of an insurance policy is one potential remedy to extend coverage for an entity not otherwise named under that policy, it is far simpler and less expensive to try to work with an insurer or insurance broker to fix such mistakes at the outset.
Moreover, policyholders should ensure that all entities, including subsidiaries and affiliates, are covered by their insurance policies. Who is an insured under a policy can be defined in several ways, including naming entities on the declarations, including them as additional insureds, or including them through a policy’s definitions or endorsements.
The simplest solution may be to ensure that every entity is specifically included as a named or additional insured. If there are questions, policyholders should work with their insurance brokers or coverage counsel to review their policies to ensure that their insurance program provides the coverage they have requested.
Amy Stewart Law exclusively represents business policyholders at every step of the insurance process, from risk assessment, purchase, and renewal, all the way to claims, mediation, and litigation. Our lawyers and paralegals are experienced in insurance law, including many prior years spent working on behalf of insurance companies, so we know the system and speak the language, fluently. Contact us if we can be of assistance.
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