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Associated International Insurance Co. v. Scottsdale Insurance Co.

United States Court of Appeals, Fifth Circuit

July 7, 2017

ASSOCIATED INTERNATIONAL INSURANCE COMPANY, Individually and as subrogee of Alpha Barnes Real Estate Services, L.L.C., Plaintiff - Appellant
v.
SCOTTSDALE INSURANCE COMPANY, Defendant-Appellee

         Appeal from the United States District Court for the Southern District of Texas

          Before REAVLEY, HAYNES, and COSTA, Circuit Judges.

          GREGG COSTA, Circuit Judge

         Subrogation clauses are common in insurance policies. They transfer rights from the insured to the insurer, allowing the latter to recover funds it paid to cover the former's loss. We decide whether the rights that flow through a subrogation clause allow an insurer to seek reformation of a contract between its insured and a third party.

         I.

         This Texas insurance case arose from an assault in an apartment complex owned by VDC-Matthew Ridge, Ltd. The plaintiff in that lawsuit sought recovery from Matthew Ridge and the property manager of the complex, Alpha-Barnes Real Estate Services, LLC. The lawsuit settled.

         Matthew Ridge had an insurance policy issued by Westfield Insurance Company that extended to Alpha Barnes through its role as Matthew Ridge's property manager. Westfield exhausted that policy in defending and settling the lawsuit for both the apartment complex and property manager. Matthew Ridge's commercial umbrella insurer, Associated International Insurance Company, paid the portion of the settlement that was in excess of the Westfield policy. Associated now seeks reimbursement from Scottsdale Insurance Company, an insurer that issued a commercial umbrella policy to Alpha. It does so despite that policy not listing the complex on the schedule of covered properties.

         Associated asserts it can seek reimbursement from Scottsdale on Alpha's behalf through a subrogation clause in the policy it issued to Alpha. That clause states that "if [Alpha] has rights to recover all or part of any payment [Associated has] made under [the] policy, those rights are transferred to [Associated]." But how can Associated seek reimbursement from Scottsdale when the umbrella policy does not list the property at issue? Associated contends that it can reform the Alpha-Scottsdale agreement to include the apartment complex because it was omitted due to a mutual mistake between those contracting parties.

         The district court rejected this argument, first in an unexplained order dismissing Associated's claim at the pleading stage under Rules 12(b)(1) and 12(b)(6), and later in a brief opinion denying Associated's motion for reconsideration. The district court concluded that Associated had no standing to seek reformation because it was not in privity with the Alpha-Scottsdale "agreement." Associated appeals, arguing that it has standing as a subrogee to seek reformation on its insured's behalf.

         II.

         Despite the ubiquity of subrogation clauses, Texas law has not addressed whether a subrogation clause allows a subrogee to assert a reformation claim on a contract between its subrogor and a third party. As we answer it in the first instance, we keep in mind the longstanding principle of Texas courts to "recognize the [subrogation] doctrine . . . to its fullest extent." Frymire Eng'g Co. ex rel. Liberty Mut. Ins. v. Jomar Int'l., Ltd., 259 S.W.3d 140, 141 (Tex. 2008) (quoting Faires v. Cockrill, 31 S.W. 190, 194 (1895) (noting that "the courts of no state have gone further" than Texas "in applying the doctrine of subrogation")).

         "Subrogation is the substitution of one party for another such that the new party may assert the rights of the substituted party." Cont'l Cas. Co. v. N. Am. Capacity Ins. Co., 683 F.3d 79, 85 (5th Cir. 2012). Without subrogation, the only ways to prevent an insured from obtaining a double recovery would be to delay the insurer's payment until recovery from a third party could be had or to disallow an insured from recovering from a third party once the insurer paid out the claim. The former could cause delay in insurance companies paying claims to make injured parties whole; the latter could allow tortfeasors to escape liability. Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 222:4 (3d ed. 2005). Subrogation avoids these unfavorable outcomes by permitting an insurer to "stand in the shoes of the insured, " allowing the insurer to assert any claims or rights held by the insured against a third party. Mid-Continent Ins. v. Liberty Mut. Ins., 236 S.W.3d 765, 774 (Tex. 2007); see also Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 484 (Tex. 1992) (allowing a subrogee to assert a legal malpractice claim against the subrogor's defense attorney).

         Do those rights that pass to the subrogee include the right to reform a contract? Reformation allows parties to correct a mutual mistake made in drafting a contract, "so that the instrument truly reflects the original agreement of the parties." Simpson v. Curtis, 351 S.W.3d 374, 378 (Tex. App.- Tyler 2010, no pet.) (citing Cherokee Water Co. v. Forderhause, 741 S.W.2d 377, 379 (Tex. 1987)). Reformation may be sought by either the parties to the original contract or those standing in privity with them. Merrimack Mut. Fire Ins. Co. v. Allied Fairbanks Bank, 678 S.W.2d 574, 577 (Tex. App.-Houston [14th Dist.] 1984, writ ref'd n.r.e.).

         The district court erred in reading reformation's privity requirement to necessitate a specific connection to the Alpha-Scottsdale insurance policy. Privity in Texas instead focuses on the relationship to a party. See id. ("Reformation is an action on a written contract and may be had only by the immediate parties thereto and by those standing in privity with them."); First-Citizens Bank & Trust Co. v. Greater Austin Area Telecomm. Network, 318 S.W.3d 560, 566 (Tex. App.-Austin 2010, no pet.) ("[P]rivity is established by proving that the defendant was a party to an enforceable contract with either the plaintiff or a party who assigned its cause of action to the plaintiff."); see also Privity, Black's ...


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