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When Do Inconsistent Contract Interpretations Preclude Reformation?

June 8, 2016
Thomas E. Hanson Jr
Delaware Business Court Insider

In Underwriters at Lloyd's, London v. DynCorp, No. 5421-JJ (Del. Ch. Mar. 24, 2016), Underwriters at Lloyd's sought reformation of certain aviation liability insurance policies issued to DynCorp. In a prior related action involving the same policies, DynCorp had obtained summary judgment on the issue of Underwriters' duty to defend certain tort actions arising out of DynCorp's aerial spraying of herbicide in South America. In Underwriters' reformation action, DynCorp moved for summary judgment arguing, among other things, that, during the course of the parties' litigation, Underwriters had offered six different coverage positions that should act as a bar to the grant of reformation. According to DynCorp: "The fact that Underwriters have repeatedly changed their position as to what the terms of the purported prior agreement are, demonstrates that Underwriters, themselves, do not know what their own purported intent was with respect to the key provision they seek to reform." Distinguishing the decision in Lions Gate Entertainment v. Image Entertainment, C.A. No.2011-N (Del. Ch. June 5, 2006), the court found that Underwriters consistently took the position that the policies at issue did not cover "chemical liability" resulting from aerial herbicide spraying. Thus, the court denied DynCorp's motion for summary judgment.

Analysis

In Lions Gate, the court found that the plaintiff could not prove a necessary element of its reformation claim—a specific prior understanding of the provision at issue—because it argued "two different versions" of the language. Citing this decision, DynCorp argued that Underwriters could not prove entitlement to reformation, because it had offered numerous interpretations of the insurance policies. Most notably, DynCorp pointed out that the prayer for relief in Underwriters' first amended complaint differed from its second amended complaint. In the first amended complaint, Underwriters sought to reform the policies to exclude "liability for bodily injury or property damage caused directly by drifting compounds." In its second amended complaint, Underwriters sought to exclude "bodily injury or property damage caused directly or indirectly by directing compounds." Prior to litigation, Underwriters provided other reasons for denying coverage, including that an aerial exclusion applied to DynCorp, and DynCorp had failed to declare its spraying operations to Underwriters.

In response to DynCorp's position, Underwriters argued that it "consistently asserted throughout [the] litigation the same prior specific agreement ... that the policies at issue were not intended to provide coverage for any liability arising out of the intentional spraying of chemicals from aircraft." The court agreed with Underwriters' position and found that Underwriters had been consistent in its assertion that the policies excluded coverage for any liability arising out of the chemicals aerially sprayed by DynCorp. In reaching this conclusion, and denying summary judgment, the court also noted that the special master appointed in the case had previously found that DynCorp had been on notice since 2002 that "Underwriters interpreted the additional insured provision [the aerial application exclusion] to unambiguously and unequivocally exclude coverage for any liability for all insureds, including DynCorp."

The court's holding in this matter, which distinguishes the earlier Lions Gate decision, is instructive. In Lions Gate, the plaintiff offered two different interpretations that would have resulted in substantive differences in the parties' rights under the applicable language. In contrast, although Underwriters' descriptions of the policy exclusions were not always identical, the import of the descriptions was clear—there was no coverage for harm caused by aerial spraying of chemicals. As such, while consistency is clearly preferred, it is particularly important when an inconsistency can result in a substantive change in how the contract terms are applied.

Thomas E. Hanson Jr. is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He has more than 15 years of experience representing large and medium-size companies in a wide range of business law disputes.

Delaware Business Court Insider  l  June 8, 2016