A Win for the Basic Freedom to Contract

For a waiver of UM/UIM coverage to be valid, the carrier must ensure it makes a “meaningful offer” to the insured (that sets out the details of coverages available and premiums) each time there is a material change to the policy, which is essentially any change other than an update to premium amounts.

It is a basic principle of Delaware contract law that only the contracting parties have standing to seek reformation. In Gonzalez-Rodriguez v. National Fire Insurance Company of Hartford, 2021 WL 1030179 (Del. Super. Mar. 15, 2021), the plaintiff challenged this fundamental concept in his pursuit of underinsured motorist (UIM) benefits which did not exist in his former employer’s commercial automobile insurance policy.

The plaintiff alleged he was injured in an automobile accident as a passenger in March 2017 while he was working for Tri-State The Roofers. He received workers’ compensation benefits and collected the policy limit of $25,000 from the tortfeasor’s liability carrier. He obtained personal injury protection (PIP) benefits from his then-employer’s automobile insurance carrier, National Fire. National Fire had entered into a commercial policy for automobile insurance with Tri-State on April 30, 2008. Under the policy, Tri-State was the “named insured” and had rejected all UM/UIM coverage in writing.

Though Tri-State rejected UM/UIM coverage, the plaintiff’s amended complaint named National Fire as a defendant and alleged he “was insured by a policy of insurance with the Defendant National Fire Insurance Company of Hartford for uninsured/underinsured motorist coverage.” In short, the plaintiff sought benefits that did not exist.

National Fire moved to dismiss the plaintiff’s amended complaint for failure to state a claim under Rule 12(b)(6). Anticipating the plaintiff’s opposition, National Fire argued he could not seek reformation of the policy to add UM/UIM coverage because he lacked standing to do so—the policy was in Tri-State’s name, and the insured was the corporation. The plaintiff was neither the contracting party nor the named insured.

In support of its motion, National Fire cited to numerous Delaware cases which hold that the right to reform a contract belongs to the person who contracted for the insurance. National Fire argued that the court did not need to reach the issue of whether a meaningful offer of UM/UIM coverage was made to Tri-State (and whether the rejection was valid) because the plaintiff lacked standing on the issue regardless. Under Delaware law, if a meaningful offer of UM/UIM benefits is not made each time there is a material policy change, the remedy is a continuing offer which the contracting party can accept.

National Fire continued to assert that standing was the only issue the court should consider. The policy did not have the benefits the plaintiff sought, and he lacked standing to challenge it.

The plaintiff’s opposition asserted there was no meaningful offer of UM/UIM coverage and requested discovery of the underwriting file from 2008-2017. The plaintiff focused on the fact that the named insured was a corporation which could not sustain bodily injuries. Therefore, it would be unfair to disallow an injured individual to reform the policy just because he/she was not the “named insured.” Because he was an employee at the time, the plaintiff argued that he was, in essence, Tri-State. National Fire responded that if a right to reformation existed, it belonged solely to Tri-State, acting through a duly-authorized representative to contract (just as Tri-State did when it contracted for insurance in the first place).

National Fire cautioned that to accept the plaintiff’s position would upend contract law and the manner in which businesses contract in the state of Delaware.

At the first oral argument, the court ordered discovery of the underwriting file for the automobile policy from 2008 forward. Supplemental briefing followed on the issue of whether National Fire made a “meaningful offer” to Tri-State for UM/UIM benefits such that the rejection was valid at the time of the accident. The 2008 rejection was the most recent waiver of UM/UIM benefits. In the interim, Tri-State had changed vehicles on the policy and altered the personal injury protection coverage from a $30,000 single limit to a $15,000/$30,000 split limit.

National Fire continued to assert that standing was the sole issue. Beyond that, the carrier asserted that: (1) 18 Del. C. 3902(b) and its case law require only that a meaningful offer be made to the insured (Tri-State); (2) a meaningful offer was made to Tri-State; and (3) even if a meaningful offer was not made, the policy was not voidable or void. The remedy would be an “open” offer for UM/UIM benefits, which only Tri-State could accept (through its duly-authorized representative). National Fire submitted an affidavit from the Tri-State representative who declared that Tri-State intended to waive UM/UIM benefits from 2008 forward.

In its decision issued March 15, 2021, the Superior Court granted National Fire’s motion. The court held:

Plaintiff lacked standing to reform the policy.

Under Delaware law, UM/UIM insurance is ‘personal’ to the insured and not vehicle specific.

There is no case law to support Plaintiff’s position that an employee can be considered a named insured with rights to reformation.

The right to reform lies with Tri-State. Plaintiff fails to establish a legal basis to hold otherwise. To find in his favor would upend basic principles of contract law far beyond the intended scope of 18 Del. C. § 3902(b).

Standing remains the court’s primary consideration.

*Jessica is a shareholder in our Wilmington, Delaware office. She can be reached at 302.552.4370 or jltyler@mdwcg.com.

_{Defense Digest, Vol. 27, No. 3, June 2021 is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2021 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}