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L.e. Myers Co. v. Harbor Insurance Co.





APPEAL from the Circuit Court of Cook County; the Hon. ARCHIBALD J. CAREY, JR., Judge, presiding.


This is an action by the L.E. Myers Co. (Myers) against the Harbor Insurance Company (Harbor) seeking an order that a certain excess insurance policy issued by Harbor affords coverage to Myers for an event which occurred in Madison, Wisconsin, on January 11, 1975. The parties filed cross motions for judgment on the pleadings, pursuant to section 45(5) of the Civil Practice Act (Ill. Rev. Stat. 1977, ch. 110, par. 45(5)). After a hearing on the motions the court entered an order in favor of Myers which stated that the Harbor policy is controlled by its terms by the underlying primary policy, as voluntarily reformed by the parties thereto, Myers and the Continental Insurance Company (Continental), and that Harbor owes Myers coverage up to the excess of its policy over the amount of the underlying Continental policy. From this portion of the order, Harbor appeals. *fn1

• 1 Because the parties have filed cross motions for judgment on the pleadings, all well pleaded facts in the pleadings will be taken as true. (Zipf v. Allstate Insurance Co. (1977), 54 Ill. App.3d 103, 369 N.E.2d 252.) The facts of the case are as follows:

Myers is in the business of constructing electric transmission towers and lines and was so engaged under contract with the Madison Gas & Electric Company (Madison). Prior to beginning construction, Myers, through its broker, Marsh & McLennan, Inc. (Marsh), sought to obtain liability insurance. Myers was issued a primary insurance policy in the amount of $100,000 by Continental and an excess policy in the amount of $1,000,000 by Harbor, with the provision that Harbor's "umbrella liability" policy afforded Myers the same coverage as Continental's underlying primary policy. The premium for Harbor's coverage for three years came to $81,405, $27,135 per year.

Myers embarked upon its contract with Madison and erected the towers and installed the lines, but on January 11, 1975, within the period covered by the policies involved, some 63 miles of transmission lines and towers toppled during a windstorm, resulting in the filing of an action by Madison against Myers seeking damages in the amount of $10,000,000. *fn2

Upon being served with process on February 21, 1975, Myers gave notice of the Madison lawsuit to Continental, who in turn engaged the services of counsel pursuant to its underlying policy. Within a few days, Marsh, acting on behalf of Myers, forwarded a copy of the summons and complaint to Harbor's general agent, Leslie H. Cook, Inc. On August 11, 1975, Harbor wrote to Myers acknowledging its umbrella liability coverage up to the excess of its policy over the primary policy. However, on September 15, 1975, Harbor again wrote to Myers, this time denying coverage. Sometime during the period between the two letters, Harbor, admittedly for the first time, saw a copy of the underlying Continental policy and noticed that endorsement no. 7 of that policy excludes liability for property damage to work performed by the insured. *fn3 Since the Madison lawsuit was seeking to recover the cost of reproducing the transmission lines and towers, Harbor informed Myers that there was no coverage for the occurrence under the primary policy and that therefore there was no coverage under Harbor's excess policy. *fn4

Upon receipt of the foregoing distressing information, Myers consulted with its broker, Marsh, and on December 22, 1975, Marsh sent a letter to Continental pointing out that Continental had erred in issuing the primary policy in that the parties had agreed that the exclusion was to be limited to a certain job in Columbus, Nebraska. Instead, an unrestricted exclusion was erroneously inserted and Marsh missed the error when Marsh reviewed the policy before sending it on to Myers. Marsh requested of Continental that the policy be reformed to reflect the intent of the parties, Myers and Continental. By a letter dated January 28, 1976, Continental acknowledged to Marsh that a mistake had been made and agreed to reform the policy to reflect the true agreement of the parties. Continental then caused to be issued endorsement no. 7A, limiting the exclusion to the Columbus, Nebraska, job and superseding endorsement no. 7.

Harbor refused to be bound by endorsement no. 7A, whereupon Myers instituted this lawsuit and prayed the court to reform the Harbor policy "to express the intent of the parties, or, in the alternative, to declare that the HARBOR policy is controlled by its terms by the reformed underlying Continental policy, and that HARBOR owes coverage to MYERS * * *."

Harbor initially argues that the Harbor policy by its terms does not afford coverage. The vehicle by which Harbor agreed to insure Myers on the same terms as Continental is known as a "broad as primary" endorsement, by which the excess insurer agrees to be bound by the terms of the underlying primary policy, notwithstanding any more restrictive terms in the excess policy. Although it had never seen the primary policy, Harbor originally refused to approve the "broad as primary" endorsement submitted to it by Marsh. Rather, Harbor returned the endorsement to Marsh, requesting that it be amended by insertion of the word "now." The endorsement (variously referred to as rider no. 1 or endorsement no. 6 of the Harbor policy) was accordingly amended to read as follows:

"It is understood and agreed that in the event of loss for which the Insured now has coverage under the Underlying Insurances set out in the attached schedule, the excess of which would be recoverable hereunder, except for terms and conditions of this policy which are not consistent with the underlying, then, notwithstanding anything contained herein to the contrary, this policy shall be amended to follow the terms and conditions of the applicable underlying insurances in respect of such loss."

As the Harbor policy itself excludes liability for the loss for which recovery is sought (exclusions (d) and (e) of Harbor policy), the Harbor policy would only afford coverage to Myers if the loss that occurred was one "for which the Insured now has coverage under the Underlying Insurances * * *." (Emphasis supplied.) As it is conceded that the underlying Continental policy contained an exclusion at the time the above endorsement became effective, Harbor argues that there is no coverage under its policy.

On appeal, as in the court below, Harbor argues that it insisted on the insertion of the word "now" just to prevent such subsequent revision, amendment, or reformation of the underlying policy as Myers and Continental have engaged in. Harbor further argues that even if reformation of the Continental policy would be proper as between Myers and Continental, the policy could not be reformed as against Harbor. In support, Harbor relies upon Pulley v. Luttrell (1958), 13 Ill.2d 355, 148 N.E.2d 731, which held that equity would not reform a deed predicated upon a mutual mistake of fact as against subsequent bona fide purchasers for value, without notice of the mistake or of facts which should put them on inquiry. Harbor contends that the same logic should apply in the case at bar and that it should prevail because it had no notice or knowledge of the mistake. Harbor submits that to allow Continental, Myers, and Marsh to reform the underlying policy in such a manner that Harbor is now required to afford coverage retroactively is contrary to Harbor's specific contractual undertaking, Illinois law, and all possible equitable considerations.

Myers initially takes umbrage to Harbor's description of the instant action as one to reform the Continental policy. Myers points out that the action was brought to reform the Harbor policy or to declare, as the trial court eventually did, that the Harbor policy is bound by its terms by the previously reformed Continental policy. Myers further observes that Harbor does not dispute that the erroneous insertion of the exclusion was such a mutual mistake of fact as to constitute a classic case for application of the doctrine of reformation, as stated by our supreme court in Harley v. Magnolia Petroleum Co. (1941), 378 Ill. 19, 28, 37 N.E.2d 760, as follows:

"An action to reform a written agreement rests upon a theory that the parties came to an understanding, but in reducing it to writing, through mutual mistake, * * * some provision agreed upon was omitted, and the action is to so change the instrument as written as to conform it to the contract agreed upon, by ...

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