Line Lexington Lumber & Millwork Co., Inc. v. Pennsylvania Pub. Corp.

• Decision Date: 16 March 1973
• Citation: 301 A.2d 684,451 Pa. 154
• Parties: LINE LEXINGTON LUMBER & MILLWORK COMPANY, INC., Appellant, v. PENNSYLVANIA PUBLISHING CORP. et al.
• Court: Pennsylvania Supreme Court

301 A.2d 684

451 Pa. 154

LINE LEXINGTON LUMBER & MILLWORK COMPANY, INC., Appellant, v. PENNSYLVANIA PUBLISHING CORP. et al.

Supreme Court of Pennsylvania.

March 16, 1973.

Victor Wright, Fox, Rothschild, O'Brien &amp Frankel, Philadelphia, for appellant.

Joseph Head, Swartz, Campbell & Detweiler, Philadelphia, for appellee, March & McLennan, Inc.

Stephen A. Cozen, Orlofsky, Cozen & Begier, Philadelphia, for appellees, Aetna Casualty & Surety Co., and others.

Before JONES C.J., and EAGEN, O'BRIEN, ROBERTS, POMEROY, NIX and MANDERINO, JJ.

OPINION

NIX, Justice.

This is an appeal from an order of the Court of Common Pleas of Philadelphia sustaining preliminary objections in the nature of a demurrer to the amended complaint and dismissing the action against the appellees herein. Appellant contends that his amended complaint stated a cause of action for reformation of contract. We agree and reverse the order below.

Line Lexington and Millwork Company, Inc., appellant (hereinafter referred to as 'Line'), filed a complaint in equity against Pennsylvania Publishing Corporation, (hereinafter referred to as 'Publishing') not a party to this appeal, Marsh & McLennan, Inc., appellee (hereinafter referred to as 'Marsh'), and various insurance companies, appellees (hereinafter referred to as 'Insurers'). Preliminary objections in the nature of a demurrer and also raising additional questions not pertinent to this appeal were filed. Appellant filed an amended complaint and, after the entry by the court below of an order dismissing the amended complaint, an appeal was taken to this court. ^[1]

Line, by way of a written lease dated April 5, 1971, leased an Industrial building which it owned to Publishing. Inter alia, the lease required Publishing to pay as additional rent, all fire insurance premiums on the demised premises and/or the building of which the demised premises was a part. By an oral agreement between Line and Publishing, the latter undertook to obtain fire insurance in the amount of $70,000.00 in order to protect fully Line's ownership interest in the building. ^[2]

Publishing contacted Marsh as broker and as agent for Insurers and secured fire insurance policies containing $70,000.00 coverage on the building. ^[3] In each of the several policies obtained, Publishing was listed as the insured party. A fire occurred on June 15, 1971, destroying the building in question, and the Insurers paid Publishing in return for a release of all of its claims under the policies. ^[4]

A review of the complaint forces the conclusion that it alleges facts justifying reformation of the insurance policies to name appellant as the insured party with respect to the building. ^[5] The pertinent paragraphs in the complaint are as follows:

'12. Pursuant to the said oral agreement defendant (Publishing) applied to defendant MARSH, an insurance broker and agent for each of the remaining defendants, for fire insurance on the said building in the amount of $70,000. . Plaintiff does not know whether the said applications were oral or in writing, the content thereof (other than the allegations set forth in Paragraph 13 hereof), nor precisely when they were made by defendant PUBLISHING to defendant MARSH. The facts relating thereto are in the exclusive knowledge of defendants PUBLISHING and MARSH. . . .

'13. . . . defendant PUBLISHING disclosed to defendant MARSH at the time of its application for said insurance that it was lessee of said building, that plaintiff was the owner thereof, and that defendant PUBLISHING was applying for insurance on the said building on behalf of plaintiff pursuant to its obligation under the lease and its oral agreement to do so.

'19. Defendant MARSH, well knowing that plaintiff was the owner of the said building and that plaintiff was intended to be designated in the said policies as the insured party with respect thereto, caused each of the said policies of insurance to be issued to defendant PUBLISHING as the insured party as to both the building and the contents and failed to cause plaintiff to be designated in the several policies of insurance as the insured party with respect to said building.'

Ordinarily, a mistake must be mutual to the parties to the contract in order to justify reformation of a written instrument on the basis of mistake. Bugen v. New York Life Insurance Co., 408 Pa. 472, 475, 184 A.2d 499, 500 (1962). Since the complaint suggests that Marsh intentionally caused Publishing to be named as the insured party, the lower court was correct in noting that this is not a case of mutual mistake.

Apart from the doctrine of mutual mistake, authorities have recognized that a mistake by one party, and knowledge of the mistake by the other, should justify relief as fully as a mutual mistake. Williston on Contracts, 3rd Ed. § 1577; Restatement of Contracts § 505; Corbin on Contracts, 1960 Ed. § 610. In effect, the party with knowledge of the mistake is estopped from relying on the mistake.

Our courts have indicated approval of that doctrine as early as Cook v. Liston, 192 Pa. 19, 43 A. 389 (1899). ^[6] See also, Peoples Natural Gas Co. Appeal, 399 Pa. 226, 160 A.2d 391 (1960). In Kaufman v. New York Life Insurance Co., 315 Pa. 34, 172 A.2d 306 (1934), we stated that if the party against whom reformation is sought has such knowledge of a mistake as to justify an inference of fraud or bad faith, relief would be justified. ^[7] In Overholt v. Reliance Insurance Co., 319 Pa. 340, 179 A. 554 (1935), after noting that there was evidence to support a finding of mutual mistake, the court stated that the insurance company was not aided by its cotention that it had made no mistake in drafting the policy because reformation will be granted where 'one party at the time of the execution of a written instrument knows not only that the writing does not accurately express the intention of the other party as to the terms to be embodied therein, but knows what that intention is.' 319 Pa. at 345, 179 A. at 557, quoting from the Restatement of Contracts § 505. The estoppel doctrine was specifically enunciated in General Electric Credit Corp. v. Aetna Casualty and Surety Co., 437 Pa. 463, 474, 263 A.2d 448, 455 (1970). There we held that, 'where one with an insurable interest . . ., at the time of applying for a policy, advises the agent of the insurance company . . . of the desired coverage and truthfully states to such agent the facts involved in the risk, and the agent, acting within his real or apparent authority and without the actual or constructive knowledge of the applicant, fails to insert a requested provision, the insurer cannot set up such mistake in avoidance of the policy.' We, therefore, find ample authority from commentators and from the pronouncements of this court to support the principle that a party who knowingly causes a written instrument to fail to embody the intent of the other party is estopped from relying on such defect in the instrument. Moreover, where the first party knows what the other party actually intended, the instrument will be reformed to conform to that intention.

It remains to determine whether this doctrine would justify relief under the facts alleged in the appellant's complaint. We are satisfied that the complaint contains the elements of estoppel set forth in GECC v. Aetna, Supra. First, appellant alleged that it was the owner of the building. That allegation establishes that it has an insurable interest. Second, appellant alleged that the applicant, Publishing, disclosed to Marsh that appellant was the owner and Publishing was the lessee of the building. Marsh was thereby in possession of all of the facts relevant to the risk involved in insuring the building. Third, appellant alleged that Marsh knew that appellant was intended to be designated as the insured party, yet Marsh caused Publishing to be named as the insured party. Marsh therefore was advised of the desired coverage and failed to provide that coverage. ^[8] Fourth, appellant alleged that Marsh was acting as broker and agent for Insurers in obtaining these policies. As we explain below, this allegation is sufficient to establish the liability of the Insurers on a theory of agency.

The lower court, relying on Spires v. Hanover Fire Insurance Co., 364 Pa. 52, 70 A.2d 828 (1950), refused to grant relief to a 'total stranger' to an insurance policy. Spires does not demand such a result in the instant case. In Spires, the plaintiffs leased an airplane hangar to tenants who, under the terms of the lease, were obligated to maintain fire insurance thereon. A fire destroyed the hangar, and when the tenants refused to make a claim, the plaintiffs sued the insurance company directly. We refused to grant relief because the plaintiffs were not referred to in the policy and the tenant and insurance company did not intend them to be third party beneficiaries. That is clearly different from the facts alleged here: Marsh knew that appellant was intended to be designated as the insured party and, but for the alleged mistake appellant would in fact have been a named party in the policy. The contracting parties in Spires never intended to create an obligation between the insurers and the plaintiffs. Here the converse is alleged and reformation is sought to effectuate that intent.

The lower court also relied upon Van Cor, Inc. v. American Casualty Co. of Reading, 417 Pa. 408, 208 A.2d 267 (1965). This case merely affirms the rule that, in order for one to be a third party beneficiary, to a contract, the contracting parties must have so intended.

The court below contended that our appellate courts have never granted relief to a 'total stranger' to a written contract. Bugen v. New York Life Insurance Co., 408 Pa. 472 184 A.2d 499 (19...