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Reasonable Belief as to Mutual Mistake in Coverage Limit Results in Summary Judgment for Insurer

Article by Daniel Inadomi, Esq.

A federal court in the Eastern District of Pennsylvania recently granted an insurer’s motion for summary judgment, in part, and dismissed a bad faith claim after finding that the insurer had a reasonable basis for denying the insured’s property damage claim because the insurer reasonably believed there was a mutual mistake regarding the amount of coverage under the policy.  See Acuity v. Stone Haven Services, LLC, 2021 WL 6113378 (E.D. Pa. Dec. 27, 2021).

In Stone Haven, the insured maintained an insurance policy with the insurer for one of the buildings it owned and the personal property in it.  The insured requested an increase in personal property coverage up to $75,000.  Per the insured’s request, the insurer drafted an amended policy.  In the amended policy, however, the insurer mistakenly covered the insured’s personal property up to $750,000 and increased the insured’s premium commensurately.  While the insurer’s broker described the policy as covering the insured’s personal property up to only $75,000, the policy itself clearly provided for $750,000 of coverage and contained an integration clause.  The insured executed the policy and paid the policy’s premium.  Just over three weeks later, a fire damaged the insured’s personal property.  The insureds filed a property damage claim with the insurer pursuant to the policy.  Rather than honor the claim, the insurer issued an amendment to the policy reducing its personal property coverage to $75,000 and refunded the insured’s premium commensurately.  The insured rejected the policy amendment.  The insurer subsequently sought a declaratory judgment that the policy provided $75,000 in personal property coverage, and the insured filed counterclaims for breach of contract and bad faith.  The insurer moved for summary judgment on all claims.

The insurer argued that reformation of the policy was appropriate because the parties were mutually mistaken in executing the contract since the parties intended to contract for $75,000 of personal property coverage, but the written contract’s provision of $750,000 of personal property coverage reflected a scrivener’s error that was not noticed until after the fire.  The Court held that it could not enter summary judgment in the insurer’s favor on the reformation and breach of contract claims because there remained a genuine dispute as to whether there was a mutual mistake in executing the contract.  The Court pointed to the fact that the insured paid a higher premium for the insurance policy than it would have paid for only $75,000 of coverage, which could support an inference that the insured noticed the scrivener’s error and assented to it when it executed the insurance contract.

On the bad faith claim, the insured argued that the insurer acted in bad faith by bringing the declaratory judgment action rather than honoring the written policy’s provision of $750,000 of personal property coverage.  The Court rejected this argument and dismissed the bad faith claim after finding that there was no genuine dispute about whether the insurer had a reasonable basis for denying the insured’s claim since the insurer reasonably believed there was a mutual mistake regarding the amount of coverage.  The Court noted that the only evidence in the insurer’s possession that suggested the insured had not been mistaken about the policy’s higher coverage was the insured’s payment of the policy’s commensurately higher premium.  The Court held that this lone piece of evidence, when considered in the context of the fact that all the parties’ communications had discussed only $75,000 of coverage, would not make it unreasonable for the insurer to litigate the issue of mutual mistake.