## Facts

- OneBeacon issued a motor vehicle liability policy to Leasing Associates, Inc. and LAI Trust (LAI), a vehicle leasing company.
- The policy’s liability endorsement defined an “insured” to include LAI and, by its terms, “Anyone else while using with your permission a covered auto you own,” subject to exceptions.
- LAI’s standard leases required lessees to secure their own liability insurance, either by applying to be added to LAI’s insurance program for specified vehicles (with added rent) or by obtaining coverage from another insurer approved by LAI.
- A lessee obtained separate insurance from Travelers rather than being added to LAI’s OneBeacon policy.
- The leased vehicle was involved in an accident; Travelers paid $5 million to settle claims on behalf of its insured.
- After paying, Travelers learned of OneBeacon’s policy and sought reimbursement up to the $1 million limit, asserting the lessee qualified as an insured under the permissive-user language.
- OneBeacon denied liability and filed suit seeking a declaration of no coverage for lessees or, alternatively, reformation of the policy to reflect the asserted mutual intent that lessees not be covered.
- The district court granted summary judgment to Travelers, requiring OneBeacon to pay up to the $1 million limit; OneBeacon appealed.

## Issues

1. Whether the policy should be reformed where the written “insured” definition appeared to cover lessees, but extrinsic evidence indicated the insurer and named insured mutually intended to exclude lessees.
2. Whether a non-party insurer (Travelers), seeking reimbursement after paying a settlement, could rely on the policy’s literal wording to defeat reformation.
3. Whether any public policy barred reformation under the circumstances.

## Decision

- The First Circuit reversed the grant of summary judgment to Travelers.
- The court held reformation was warranted because the written policy did not reflect the mutual intent of OneBeacon and LAI.
- The court concluded Travelers could not prevent reformation by invoking the uncorrected policy language; its claim could rise no higher than the lessee’s rights under the properly reformed contract.
- The court found no sufficient public policy reason to deny reformation and thereby allow reimbursement based on an unintended term.

## Legal Principles

- A court may reform a written contract when, due to mistake, the writing fails to reflect the parties’ actual agreement, and equity supports correction.
- In determining mutual intent for reformation, courts may consider consistent course of dealing and other extrinsic evidence showing how the parties structured the transaction.
- Standard-form insurance language may be reformed when clear evidence shows the insurer and named insured agreed to a narrower scope of coverage than the printed terms suggest.
- A third party seeking to benefit from an unintended contractual term cannot defeat reformation absent a countervailing public policy or equitable reason.

## Conclusion

The First Circuit ordered reformation of LAI’s auto liability policy to exclude lessees because the record showed OneBeacon and LAI intended lessees to obtain separate insurance, and Travelers—having insured the lessee and paid the settlement—could not shift loss to OneBeacon based on policy language that did not reflect the contracting parties’ mutual intent.


OneBeacon Am. Ins. Co. v. Travelers Indem. Co. of Ill., 465 F.3d 38 (1st Cir. 2006)