American Electrical Power Co., Inc. v. Affiliated FM Insurance Co., 556 F.3d 282 (5th Cir. 2009), assigns a rather literal definition to the term “corporation” in a prior-loss clause. In 2000, Affiliated issued a policy to AEP and its subsidiaries, insuring against employee theft or misconduct. Later that year, AEP acquired another corporation, CSW. The Affiliated policy was amended to include CSW and its subsidiaries as covered subsidiaries of AEP.
Following the acquisition of CSW, AEP discovered that losses occurred in 1999 due to employee theft in two of CSW’s subsidiary limited liability companies (“LLCs”). AEP submitted a claim under the Affiliated policy’s “prior loss” clause, which provides coverage for earlier losses if those losses would have been covered under an insurance policy in existence at the time. At the time of the theft, CSW was covered by an insurance policy with Chubb Insurance Group (the “Chubb policy”). Affiliated denied the claim on its determination that the 1999 theft would not have been covered under the Chubb policy.
The Chubb policy extended coverage to CSW “and any subsidiary corporation now existing or hereafter created or acquired.” Affiliated contended that this language limited coverage to corporations and excluded other subsidiary entities like the two LLCs.
Applying Louisiana law, the court affirmed the district court’s conclusion that the Chubb policy was unambiguous and that the generally prevailing meaning of the term “corporation” does not include an LLC. Id. at 286. The court observed that “the relevant Louisiana statute tellingly provides that “‘no limited liability companies organized under this Chapter shall be deemed, described as, or referred to as an incorporated entity [or] corporation. . . .” Id.
The court further rejected AEP’s action for reformation of the Chubb policy to include an LLC. The court noted that, under Louisiana law, reformation is “an equitable remedy used to correct errors or mistakes in contracts.” Id. at 287. “An insurance policy may be reformed if, through mutual error or fraud, the policy as issued does not express the agreement of the parties.” Louisiana law provides that “parol evidence is admissible to establish such a mutual error, but not to create ambiguity in the meaning of an intended term.” Id.
The court affirmed the district court’s refusal to reform the Chubb policy. “There is no indication that Affiliated knew or should have known of an informal understanding between Chubb and CSW regarding the meaning of ‘corporation.’” Id. at 288. What is more, “the use of the term ‘corporation’ is not the type of ‘error’ that reformation is intended to remedy.” Id. The court determined that AEP’s argument that the original parties had intended to assign the term a broader meaning was “an end-run around the parol-evidence rule by framing its argument as a request for reformation.” Id. “There is a significant difference between an obvious clerical error and the alleged ‘hidden meaning’ in a contract assumed by an unwitting party.” Id.
