ASSOCIATED INTERNATIONAL INSURANCE COMPANY, Individually and as subrogee of Alpha Barnes Real Estate Services, L.L.C., Plaintiff - Appellant
SCOTTSDALE INSURANCE COMPANY, Defendant-Appellee
from the United States District Court for the Southern
District of Texas
REAVLEY, HAYNES, and COSTA, Circuit Judges.
COSTA, Circuit Judge
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.
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.
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.
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
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.
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")).
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
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.).
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