FIFTH CIRCUIT FINDS SUBROGATION CLAUSE ALLOWS SUBROGEE TO SEEK REFORMATION OF INSURANCE CONTRACT

In a matter of first impression under Texas law, the Fifth Circuit recently held that an excess insurer can seek reformation of an underlying co-insurer’s policy to secure additional coverage for the insured. In Associated International Insurance Co. v. Scottsdale Insurance Co., 2017 WL 2889078 (5^th Cir. Tex. July 7, 2017), an assault occurred at an apartment complex and the injured party sued the property manager and the company that owned the apartments. Scottsdale insured the property manager but the apartment complex was not listed on the policy as required, so coverage was denied. The property owner’s primary insurer and Associated, the excess insurer, settled the underlying claim. Associated then sought recovery from Scottsdale, asserting the insured’s subrogation rights. Associated claimed that the property was not listed on the Scottsdale policy due to a mutual mistake between the property manager and Scottsdale. The district court concluded that Associated had no standing as a subrogee, to seek reformation of the contract between a third party, the property manager, and its insurer Scottsdale, because it was not in privity with that separate agreement.  This appeal followed.

The Fifth Circuit, as a matter of first impression under Texas law, noted longstanding efforts by Texas Courts to recognize insurer’s subrogation rights and then, examined whether those rights include the right to seek reformation of the contract.  The court determined that the subrogation clause in Associated’s policy with its insured, provided the necessary connection to establish privity and standing to seek reformation, as could its insured who would be an additional insured under the reformed Scottsdale policy. Because the reformation claim was dismissed at the pleading stage, and there was no evidence to evaluate it, the court reversed and remanded the case to the district court for further proceedings to address the reformation claim on its merits.