Reformation of an insurance policy is an equitable remedy that is rarely employed by the courts. Yet, in the rare circumstances when it may be applied, the remedy can throw a wrench into even the most well-developed coverage defenses. If successful, a reformation posture can take policy language that clearly precludes coverage, and reform the policy such that it ultimately provides coverage. In 2021, New Jersey’s courts issued two decisions which illustrate the circumstances when reformation may be ordered.

Initially, in Huggins v. Aquilar, 246 N.J. 75 (2021), the New Jersey Supreme Court held that a garage policy issued to an auto dealership was subject to reformation so that it would meet New Jersey’s statutory minimum requirements for automobile dealer liability insurance. As such, the Supreme Court held that the subject policy’s definition of who qualified as an “insured” eliminated coverage for a class of customers and, therefore, constituted “an impermissible escape clause.” In response, the Court reformed the policy so that it would provide the minimum liability insurance coverage required by statute. Huggins, 246 N.J. at 88, 93.

However, in Cadre v. Proassurance Cas. Co., 468 N.J. Super. 246 (App. Div. 2021), the Appellate Division distinguished Huggins, and held that a professional liability policy issued to a law firm was not subject to reformation, even though it did not meet the minimum liability insurance requirements of New Jersey’s Court Rules. In this case, the Appellate Division held that even though the relevant policy did not provide coverage for the misappropriation of client funds, and, thus, did not provide the coverage required by Rule 1:21-1B, the policy’s language “was not ambiguous,” and was enforceable as written. Cadre, 468 N.J. Super. at 268-69.

A comparison of the two cases can instruct on the circumstances when reformation of a policy may be ordered under New Jersey law:

• Is the relevant authority directed at insurers? Reformation is traditionally applied when an authority requires that insurers, or insurance policies, provide a minimum level of coverage. One of the main bases for the Appellate Division’s decision in Cadre was the fact that the Court Rules are not directed at insurers or insurance policies, but instead are directed at attorneys. See Cadre, 468 N.J. Super. at 266 (“Simply put, the Rule regulates the conduct of attorneys, not insurers.”) This is a meaningful distinguishing feature from statutes and regulations governing auto insurance, which set forth minimum liability limits through reference to insurers or insurance policies. g. N.J.S.A. 39:6B-1; N.J.A.C. 13:21-15.2. Thus, it appears that reformation is more likely to be ordered by a court when the relevant authority setting forth insurance requirements is actually directed at insurers or insurance policies.
• Is this an auto liability claim? In general, reformation is more commonly ordered as a matter of equity when a court is confronted with an automobile liability coverage dispute, particularly because of the breadth of statutory regulation in this arena.
• Who is the policyholder? In Cadre, the policyholder was not the everyday consumer; the policyholder was an attorney, and the authority at issue was a Rule of Court. Attorneys, by the nature of their profession, are required to be knowledgeable of the Rules of Court. The Cadre court noted this fact when holding that it was incumbent on the attorney to ensure the coverage purchased complied with the Rules of Court. See Cadre, 468 N.J. Super. at 272 (“Who is charged with a greater knowledge of our Rules of Court, particularly those governing the practice of law contained in Rule 1:21-1 to -12, than a licensed attorney?”) Consequently, a court may consider the sophistication of the policyholder when deciding whether reformation is appropriate. See also Nunn v. Franklin Mut. Ins. Co., 274 N.J. Super. 543, 550 (App. Div. 1994) (distinguishing reformation of a commercial policy from reformation of a homeowner policy because, “a homeowner is a less sophisticated consumer than a commercial insured.”)
• What is the source of the relevant authority? The authority at issue in Cadre was a Rule of Court, which in New Jersey, is enacted by the Supreme Court. The fact that the authority at issue was not endorsed by the legislature was cited by the court when finding reformation inappropriate. “Plaintiff cites no authority for the proposition that the Court, acting within its constitutional spheres of attorney discipline and administration of the courts, has the power to enact a rule that regulates the conduct of insurers doing business in the state, a function the Legislature delegated to [the Department of Banking and Insurance].” Cadre, 468 N.J. Super. at 266. Therefore, Cadre suggests that reformation may only be ordered if the terms of a policy conflict with a statute or a regulation from the Department of Banking and Insurance.

A court’s determination on whether to reform a policy may come down to factors not contemplated at the time the policy was issued.  Therefore, when considering the possibility of reformation, careful attention should be given to the relevant legal requirement for insurance coverage, the nature of the subject claim, and the sophistication of the policyholder.