Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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MILWAUKEE METROPOLITAN SEWERAGE DISTRICT v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO. (March 10, 2010)

The Milwaukee Metropolitan Sewerage District ("District") provides wastewater treatment services and performs flood control work in the Milwaukee area. As part of its flood control responsibilities, the District developed a plan to control flooding on the Lincoln Creek. Execution of the plan required the District to purchase a nineteen-acre parcel of land along the Creek. The District decided to procure environmental liability insurance before purchasing the property. The District met in late 1998 with its insurance broker, Sedgwick of Illinois. The District discussed obtaining insurance for property it referred to as "Lincoln Creek" but provided very little information about the actual parcel. Sedgwick contacted Crump Insurance Services of Illinois, a wholesale broker, and inquired about coverage. In February of 1999, the District authorized Sedgwick to obtain insurance for five separate properties, including Lincoln Creek. Each of the properties other than Lincoln Creek was identified with a specific address. Lincoln Creek was not. Crump forwarded the order of insurance to AISLIC. Although AISLIC confirmed that it had bound coverage, it listed only the four properties that had specific addresses. When Crump noticed the absence of Lincoln Creek, it added the parcel to the binder and forwarded it to both Sedgwick and AISLIC. AISLIC objected to the inclusion and stated that it was not including Lincoln Creek as an insured property. After its receipt of the formal application, which included Lincoln Creek, AISLIC again stated that it was not willing to include Lincoln Creek. Crump informed Sedgwick that AISLIC was not including Lincoln Creek both because of the absence of an actual address and because the property was not then owned by the District. AISLIC eventually issued a policy for the four identified properties and a fifth added property. Although the District noticed the absence of Lincoln Creek, Sedgwick told the District that the fifth property was actually a reference to Lincoln Creek. The District proceeded with its purchase and discovered significant environmental contamination. It submitted a claim to AISLIC for over $700,000 for its cleanup of the contamination. AISLIC denied the claim. The District sued AISLIC for reformation of the contract. AISLIC brought a third-party indemnification action against Crump. After a bench trial, the district court granted reformation of the contract, concluding that Crump was AISLIC’s agent and that it was Crump’s failure to obtain necessary that led to the parcel being excluded from coverage. The court entered judgment for the District against AISLIC and for AISLIC against Crump. AISLIC and Crump appeal.

In their opinion, Judges Flaum, Manion, and Wood reversed and remanded the judgment against AISLIC and vacated the judgment against Crump. Applying Wisconsin law, the Court stated that an insurance policy can be reformed to reflect a prior agreement if: a) there is clear and convincing proof of a prior meeting of the minds, and b) the failure of the agreement to reflect the prior agreement results from either a mutual mistake or a mistake by the party seeking reformation combined with some inequitable conduct by the other. Here, the Court found both elements absent. The clearest description of the parcel ever given to AISLIC was its name and that it was located somewhere along several miles of the Creek. The Court found that evidence insufficient to identify the property for which the District sought coverage and that the evidence as a whole failed to amount to clear and convincing evidence of a prior agreement. In addition, the Court found that the evidence supported the proposition that the District knew the parcel was never covered. The District’s agent was well aware that AISLIC required an address before including the parcel and, in fact, refused to include the parcel because it was not owned by the District. Therefore, the District could not satisfy that it was operating under a mistake.