Contract Reformation and Mutual Mistake of the Parties
On June 3, 2016, the Supreme Court of Alabama decided the matter of Scottsdale Insurance Company v. Har-Mar Collisions, Inc. [Ms. 1141267], — So.3d — (Ala. 2016), wherein it reinstated the jury verdict of $101,054.40 in favor of Har-Mar Collisions against Scottsdale, and overturned the setoff against the jury verdict that was entered against Scottsdale. The trial court had offset the jury verdict by the amount Har-Mar had recovered in separate settlement agreements with Auto-Owners and CRC Insurance Services; because the amount of the settlement agreements was greater than the amount of the jury verdict, the trial court entered a judgment against Scottsdale for $0.00.
Har-Mar Collisions, Inc. is an auto paint-and-body shop in Mobile, Alabama, owned by Wayne Hartung and operating as Marshall Paint & Collision. In December 2010, Har-Mar obtained insurance coverage from (1) Auto-Owners for garage-liability and umbrella coverages, and (2) Scottsdale for commercial property coverage. On January 24, 2011, a fire destroyed the body shop. The following day, Har-Mar had its broker notify the insurance carriers of the loss, and requested an advance of $50,000 for lost business income. On January 27, 2011, Scottsdale sent a letter to Har-Mar notifying Har-Mar that it was engaging an independent adjuster to investigate the loss and enclosed in the letter a check for $50,000.00.
Over the course of the next six months, a coverage question arose when Scottsdale determined that it had as its named insured “Harmar, Inc. d/b/a Marshall Paint & Collision” and did not insure any entity named “Har-Mar Collisions, Inc.” Scottsdale did not formally deny the claim but refused to make any additional payments on the claim on the basis that its investigation was ongoing.
Thereafter, Scottsdale contacted First National Bank, who was the mortgagee of the insured property, so that Scottsdale could provide payment to First National. Scottsdale provided payment in the amount of $473,268.60, which was about $39,000.00 less that Har-Mar’s mortgage indebtedness; Scottsdale explained that it had already made a payment of $50,000.00 to Har-Mar, which payment should have been applied to the mortgage. First National then liquidated Har-Mar’s certificate of deposit, in order to make up the difference, thereby extinguishing the mortgage and satisfying First National’s interest in the body shop.
On August 10, 2011, Har Mar sued Scottsdale and CRC asserting claims (1) for bad faith and breach of contract against Scottsdale, and (2) for negligence and fraud/misrepresentation against CRC for its alleged failure to procure insurance for the auto shop. Auto-Owners moved to intervene on April 2012, indicating that Hartung Commercial Properties, Inc. (“Hartung”), the entity that leased the buildings to Har-Mar, had brought a separate suit against Har-Mar for negligently/wantonly causing the fire. Wayne Hartung was the principal of both Hartung and Har-Mar. Auto-Owners determined there were questions concerning its coverage as a result, and asked the trial court to determine Auto-Owners’ obligations. Har-Mar later amended to add the following claims and defendants: negligence claims against International Assurance and Kahalley for their alleged failure to obtain insurance for the body shop and breach of contract and bad faith claims against Auto-Owners.
In August 2014, Har-Mar and CRC entered into a settlement agreement for $12,500.00. On November 18, 2014, Auto Owners settled its claims with Har-Mar and Hartung for $135,000.00. At trial, the jury was not advised either of the settlements or of the possibility of a setoff. Outside the presence of the jury, the Court reformed the contract between Scottsdale and Har-Mar to reflect that Scottsdale insured “Har-Mar Collisions, Inc. d/b/a Marshall Pain and Collsion”. The jury returned a verdict Har-Mar for the breach of contract claim, in the amount of $101,054.40, and in favor of Scottsdale as to the bad faith claim. The trial court then applied a setoff in the amount of $147,500.00 and entered a final judgment of $0.00 against Scottsdale. Har-Mar moved the court to amend its order and tax costs against Scottsdale; the Court denied both motions. Har-Mar appealed the setoff, and Scottsdale cross-appealed, arguing that the trial court committed error in reforming the contract, and that (assuming the correction of the reformation error) Har-Mar lacked standing to sue Scottsdale.
Reformation of the Contract
Contract reformation is governed by Alabama Code (1975) § 8-1-2, which allows (in pertinent part) that when, through a mutual mistake of the parties, a written contract does not truly express the intention of the parties, it may be revised by a court on the application of the party aggrieved so as to express that intention. The trial court found that there had been a mutual mistake by the parties in misidentifying the named insured. The Supreme Court determined that “the undisputed evidence in this case indicates that Scottsdale and Har-Mar Collisions intended for the Scottsdale policy to insure the auto shop, regardless of under what name the auto shop is incorporated,” and furthermore that “both Scottsdale and Har-Mar Collisions, at the time Wayne purchased the Scottsdale policy, believed that the Scottsdale policy as written insured the auto shop.” Therefore, the Supreme Court of Alabama affirmed the trial court’s judgment in reforming the Scottsdale policy to reflect Har-Mar Collisions was the named insured based on a finding of mutual mistake. As such, Scottsdale’s “standing” argument was nullified.
Whether Scottsdale is entitled to a setoff is a question of law. Har-Mar argued, “[W]hen an insured enters into a settlement agreement with one of its insurers, the nonsettling insurer is not entitled to a setoff if the two insurers ‘owe separate and distinct contractual obligations’ to the insured.” Alabama Farm Bureau Mut. Cas. Ins. Co. v. Williams, 530 So.2d 1371 (Ala. 1988). The Alabama Supreme Court determined from its analysis of Williams that “the relevant inquiry as to whether Scottsdale is entitled to a setoff is whether the obligations Scottsdale owed Har-Mar Collisions under the Scottsdale policy are ‘separate and distinct’ from the obligations Auto-Owners and CRC owed Har-Mar Collisions.” Upon applying the law to the facts, the Court found that Scottsdale and Auto-Owners had separate obligations, and Scottsdale was not entitled to a set-off. Additionally, CRC did not have any insurance obligations to Har-Mar and had contracted only to procure insurance for Har-Mar; accordingly, CRC did not undertake a joint obligation as to Har-Mar with Scottsdale. As a result of the foregoing, the trial court committed error in applying the setoff to Scottsdale, and should have entered a judgment in the amount of the jury verdict.