Appeal from the Appellate Court for the First District; heard
in that court on appeal from the Circuit Court of Cook County,
the Hon. Archibald J. Carey, Jr., Judge, presiding.
MR. JUSTICE WARD DELIVERED THE OPINION OF THE COURT:
The plaintiff, L.E. Myers Co., filed an action in the Circuit Court of Cook County against the defendant, Harbor Insurance Co., for a declaratory judgment that an insurance policy issued by the defendant provided coverage for damages sought in a lawsuit brought against the plaintiff by a third party in the courts> of Wisconsin. The plaintiff and the defendant each moved for judgment on the pleadings, the circuit court granted the plaintiff's motion, and the appellate court affirmed (67 Ill. App.3d 496). We granted the defendant's petition for leave to appeal. The facts, as framed by the pleadings and by certain admissions of fact by the parties, may be summarized as follows:
The plaintiff is in the business of constructing facilities for electric utilities. In 1974 the plaintiff, acting through its insurance broker, Marsh & McLennan, Inc., purchased a comprehensive general liability policy from Continental Insurance Company ("Continental"), in the amount of $100,000, to become effective September 30, 1974, covering liability for certain types of property damage arising out of work performed by the plaintiff. Although the plaintiff did not attach a copy of the Continental policy to its complaint, the parties agree that as originally written the policy contained an endorsement (Endorsement No. 7) excluding certain situations from liability, among which was the following:
"With respect to the completed operations hazard, to property damage to work performed by the named insured arising out of the work or any portion thereof, or out of the materials, parts or equipment furnished in connection therewith."
Continental is not a party to the present suit.
The plaintiff, again acting through Marsh & McLennan, also purchased an "umbrella" policy from the defendant, also effective September 30, 1974, under which the latter provided coverage for damages in excess of $100,000 covered by the underlying Continental policy, but not over $1,000,000. The policy issued by the defendant contained the following provision, known in the trade as a "broad as primary" endorsement:
"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."
The umbrella policy also provided excess damages for several other underlying policies of insurance of various kinds, some of them issued by carriers other than Continental.
In 1975 certain transmission lines and towers being constructed by the plaintiff under a contract with Madison Gas and Electric Co. ("Madison") were toppled during a windstorm, and Madison brought suit against the plaintiff to recover damages of $10,000,000. Timely notice of the suit was given to both Continental and the defendant. Although no copy of Madison's complaint is included in the record, the parties agree that the damages claimed under it were for the replacement cost of the transmission lines and towers. The parties also agree that such damages would fall within the exclusion mentioned above.
Continental did not disclaim liability, but the defendant wrote the plaintiff calling attention to the exclusion found in Endorsement No. 7, and stating that the defendant would therefore assume no liability for the damages sought. While the umbrella policy issued by the defendant specifically identifies the underlying policy with Continental, the complaint does not allege and it does not otherwise appear that a copy of that policy was furnished to the defendant. On the contrary the defendant admitted that it did not see the underlying policy at the time the umbrella policy was issued, and saw it only after learning of the suit filed by Madison.
Following receipt of the defendant's disclaimer of liability, the plaintiff, Marsh & McLennan, and Continental engaged in correspondence with respect to the preparation of Endorsement No. 7, as reflected by exhibits attached to the complaint. From these exhibits it appears that the exclusion found in the endorsement resulted from a failure on the part of Continental to follow a specific instruction given by Marsh & McLennan on behalf of the plaintiff. The instruction was that the exclusion should be no broader than that contained in a comparable liability policy under which the plaintiff was at that time insured by a different carrier. In that policy the exclusion was limited to a specific job with a Nebraska public power district, wholly unrelated to the contract between the plaintiff and Madison. Continental agreed that it had erred in failing to limit the exclusion in that way, and Marsh & McLennan in turn conceded that it had failed to notice this omission when it received the policy. The plaintiff does not maintain that the defendant knew of the 1974 discussions about the exclusion when they took place. One may also infer that neither the plaintiff nor its broker examined Endorsement No. 7 of the Continental policy until after receiving the defendant's disclaimer.
As the defendant admitted, Continental agreed to incorporate in the policy the limitation referred to above, and accordingly issued a revised endorsement which did so. Upon being advised of the reformation of the policy agreed upon between the plaintiff and Continental, the defendant nevertheless persisted in its disclaimer, and this suit followed. We were advised by counsel for the defendant in oral argument that the suit brought against the plaintiff by Madison was settled for $300,000.
The parties are in agreement that the insertion of the exclusionary provision was a mutual mistake of fact for which reformation is a proper remedy as between the contracting parties, that reformation may be effectively accomplished by agreement of the parties without a court decree, and that if the endorsement as corrected is part of the policy, then the claimed loss is covered. The only issue is whether the defendant, which was neither a party to the contract between the plaintiff and Continental, nor privy to it, is bound by the reformation.
The defendant's argument that it is not, and that its liability must be determined from the language of the policy as originally written, rests in part upon the following circumstance regarding the negotiation of the umbrella policy with Marsh & McLennan, which the plaintiff admitted: The "broad as primary" endorsement initially proposed by Marsh & McLennan did not contain the word "now", which presently appears in that endorsement just before the words "has coverage," and ...