1.12 Reformation of the Policy

• Jurisdiction: Arizona

Generally, it is not within the power of the court to "revise, modify, alter, extend, or remake" an insurance policy to include terms not agreed upon by the parties.^[166] However, where the written policy fails to express the terms agreed upon by the insured and carrier, the appropriate remedy is to seek reformation of the policy.^[167]

The courts have rather zealously guarded the rights of the insured and have indulgently overlooked the careless way in which the ordinary person leaves his rights to the protection of the insurer who cannot be unaware thereof. The practice is very common for the insured to leave the matter of his insurance very largely in the care and protection of the insurer, who usually better understands his requirements and the opportunities that are available. There is plenty of precedent to show that the courts have been liberal in the reformation of insurance contracts, to carry out the intention of the parties, which by reason of a mutual mistake has not been correctly reduced to writing in the policy.^[168]

An action for reformation rests on the theory that the parties came to an understanding as to the coverage that would be provided, but in reducing the agreement to writing some mistake of language was made, either omitted, inserted, or incorrectly worded.^[169] The type of "mistake" that is used in connection with reformation is a state of mind not in accord with the facts.^[170] Before reformation will be appropriate, it must be shown that the mistake was material to the rights of the parties.^[171] The remedy of reformation is unavailable where the complaining party has access to all facts surrounding the questioned transaction and merely makes a mistake as to the legal consequences of the agreement.^[172]

Where mistake is relied upon as a ground for reformation of the policy, the mistake must be mutual;^[173] if unilateral, it is essential that fraud or inequitable conduct be found in the other party.^[174]

Inequitable conduct, which justifies reformation, occurs when one party has knowledge of the other party's mistake.^[175] If a party to the policy is mistaken, and fraud or inequitable conduct is not a factor, the remedy for unilateral mistake, under the proper circumstances, is rescission.^[176]

Failure to plead reformation as a remedy is not fatal to recovery.

Where the pleadings and evidence in an action upon an insurance policy are such as would warrant the court in reforming the policy, the court may give effect to the true contract and enforce the policy as if it were reformed, without making a formal decree of reformation.^[177]

A party seeking reformation must show by clear and convincing evidence either that a mistake was mutual...