PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

_________________________________ 

EVANSTON INSURANCE 

COMPANY, 

 Plaintiff - Appellant, 

v. 

DESERT STATE LIFE MANAGEMENT; CHRISTOPHER MOYA, in his 

capacity as Receiver for the receivership estate of Desert State Life Management; PAUL A. DONISTHORPE; 

L. HELEN BENNETT; LIANE KERR; 

AYUDANDO GUARDIANS, INC., a 

New Mexico nonprofit corporation, on 

behalf of seven protected persons; JOSEPH PEREZ; CHRISTINE 

GALLEGOS, individually and as 

Guardian of Victor Baldizan, an incapacitated adult; SCOTT K. ATKINSON, as Guardian ad Litem for Vincent Esquibel, Jr., an incapacitated 

person; CHARLES REYNOLDS, as 

Conservator for J.W., an incapacitated 

person; CAMERON GRAHAM, as 

Trustee for Andrew Graham; ASCENDING HOPE, LLC; CNRAG, 

INC.; DECADES, LLC, 

 Defendants - Appellees. 

No. 21-2145 

_________________________________ 

Appeal from the United States District Court 

for the District of New Mexico 

(D.C. No. 1:18-CV-00654-JB-KK)

_________________________________ 

FILED 

United States Court of Appeals 

Tenth Circuit 

December 30, 2022

Christopher M. Wolpert 

Clerk of Court

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Thomas C. Bird of Jennings Haug Keleher McLeod, Albuquerque, New Mexico 

(Ann Maloney Conway and Julianna T. Hopper of Jennings Haug Keleher 

McLeod, Albuquerque, New Mexico; Joseph J. Borders of McJessy, Ching & 

Thompson, Chicago, Illinois, with him on the brief) for Plaintiff-Appellant. 

Maureen A. Sanders of Sanders & Westbrook, Albuquerque, New Mexico, for 

Defendant-Appellee L. Helen Bennett; Frank T. Davis of Harrison Hart & 

Davis, Albuquerque, New Mexico, for Defendants-Appellees Joseph Perez, 

Christine Gallegos, Scott K. Atkinson, Charles Reynolds, and Cameron 

Graham. 

_________________________________ 

Before TYMKOVICH, BRISCOE, and PHILLIPS, Circuit Judges. 

_________________________________ 

PHILLIPS, Circuit Judge. 

_________________________________ 

Evanston Insurance Company appeals from a bench trial on an 

insurance-coverage dispute. After determining that Evanston failed to timely 

rescind the policy and that a policy exclusion did not apply, the district court 

required Evanston to continue defending Desert State Life Management against 

a class action arising from its former CEO’s embezzlement scheme. Though we 

agree with the district court that rescission was untimely, we disagree about the 

likely application of New Mexico law on applying policy exclusions. For the 

following reasons, we affirm in part, reverse in part, and remand for the court 

to enter judgment for Evanston. 

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BACKGROUND

I. Factual Background1

Four things underlie this appeal: Paul Donisthorpe’s application for the 

Evanston insurance policy, his embezzlement scheme, the former clients’ class 

action, and Evanston’s response to Donisthorpe’s misconduct. 

Desert State Life Management was a New Mexico trust corporation that 

acted as a trustee for disabled individuals. From 2008 to March 2017, 

Donisthorpe served as its CEO. In October 2016, Donisthorpe applied for an 

Evanston professional-liability insurance policy on Desert State’s behalf.

Donisthorpe answered “no” to the following application question: 

Is the applicant [Desert State] or any principal, partner, owner, officer, director, employee, manager or managing member of the Applicant or any person(s) or organization(s) proposed for this insurance aware of any fact, circumstance, situation, incident or allegation of negligence or wrongdoing, which might afford grounds for 

any claim such as would fall under th[e] proposed insurance? 

Evanston, 484 F. Supp. 3d at 1001. The application also contained the 

following notice: 

NOTICE TO THE APPLICANT – PLEASE READ CAREFULLY 

No fact, circumstance or situation indicating the probability of a 

claim or action for which coverage may be afforded by the proposed 

insurance is now known by any person(s) or entity(ies) proposed for 

1

 These facts come mostly from the district court’s order denying 

Evanston’s motion for summary judgment and its findings of fact and 

conclusions of law after the bench trial. Evanston Ins. Co. v. Desert State Life 

Mgmt., 434 F. Supp. 3d 1051 (D.N.M. 2020) (summary judgment); Evanston 

Ins. Co. v. Desert State Life Mgmt., 484 F. Supp. 3d 987 (D.N.M. 2020) (bench 

trial). 

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this insurance other than that which is disclosed in this application. 

It is agreed by all concerned that if there be knowledge of any such 

fact, circumstance or situation, any claim subsequently emanating 

therefrom shall be excluded from coverage under the proposed [insurance]. 

⁎ ⁎ ⁎

This application, information submitted with this application and all 

previous applications and material changes thereto of which the underwriting manager, Company [Evanston] and/or affiliates thereof 

receives notice is on file with the underwriting manager, Company 

and/or affiliates thereof and is considered physically attached to and 

part of the policy if [issued]. The underwriting manager, Company 

and/or affiliates thereof will have relied upon this application and 

all such attachments in issuing the policy. 

⁎ ⁎ ⁎

WARRANTY 

I/We warrant to the Company, that I/We understand and accept the 

notice stated above and that the information contained herein is true 

and that it shall be the basis of the policy []and deemed incorporated 

therein, should the Company evidence its acceptance of this application by issuance of a policy. I/We authorize the release of claim 

information from any prior insurer to the underwriting manager, 

Company and/or affiliates thereof. 

Id. at 1001–02. 

Based on Donisthorpe’s application responses, Evanston issued Desert 

State a professional-liability insurance policy. Under the policy, “Insureds” 

included (1) Desert State (as the Named Insured); (2) past and present Desert 

State officers and directors, plus their spouses; and (3) past and present Desert 

State employees. 

The policy’s insuring agreement, “Coverage A,” outlined Desert State’s 

coverage: 

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The Company shall pay on behalf of the Insured all sums in excess 

of the Deductible amount stated in Item 5.A. of the Declarations, 

which the Insured shall become legally obligated to pay as Damages 

as a result of a Claim[2] first made against the Insured during the 

Policy Period or during the Extended Reporting Period, if exercised, 

and reported to the Company pursuant to the Section Claims A., 

Claims Reporting Provision, 

By reason of: 

1. A Wrongful Act;[3] or 

2. A Personal Injury; 

In the Performance of Specified Professional Services rendered or 

that should have been rendered by the Insured or by any person for 

whose Wrongful Act or Personal Injury the Insured is legally responsible, 

Provided: 

a. The entirety of such Wrongful Act(s) or Personal Injury(ies) 

happens during the Policy Period or on or after the applicable 

Retroactive Date stated in Item 5.A. of the Declarations and 

before the end of the Policy Period; and 

b. Prior to the effective date of this Coverage Part the Insured 

had no knowledge of such Wrongful Act(s) or Personal Injury(ies) or any fact, circumstance, situation or incident, 

which may have led a reasonable person in the Insured’s position to conclude that a Claim was likely. 

Id. at 1004–05. 

The policy also contained several coverage exclusions. Among them was 

Exclusion P, which excluded coverage for claims “[b]ased upon or arising out 

2

 The policy defined “Claim” to include “[a] written demand for money 

damages” and “service of suit.” Id. at 1004. 

3

 The policy defined “Wrongful Act” as “a negligent act, error or 

omission in Specified Professional Services.” Id. “Specified Professional 

Services” included “Financial Case Management Services to Trust Accounts 

and Conservatorships.” Id. 

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of any conversion, misappropriation, commingling [of] or defalcation of funds 

or property.” Evanston, 434 F. Supp. 3d at 1066 (first alteration in original).

Despite the notices, coverages, and exclusions, Donisthorpe completed 

Evanston’s application while running an embezzlement scheme that exposed 

Desert State to liability. Donisthorpe intentionally misappropriated and 

commingled over $4.9 million of Desert State’s client funds for his own use.

Donisthorpe hid his scheme by presenting fraudulent reports to Desert State’s 

board of directors and to New Mexico regulators.

After a March 2017 investigation, regulators declared Desert State 

financially unsound. Also in March, L. Helen Bennett, a Desert State director, 

told Evanston about Donisthorpe’s misconduct. Evanston also began receiving 

claims from Desert State clients that confirmed Bennett’s report. Evanston 

ultimately opted not to rescind the policy; instead, it notified Desert State that 

it wouldn’t be renewing the policy. In August, Christopher Moya was appointed 

Desert State’s receiver.

In November 2017, Donisthorpe pleaded guilty to a two-count federal 

felony information charging him with wire fraud and money laundering. He was 

sentenced to 144 months in prison and was ordered to pay $6.8 million in 

restitution and a $4.8 million money judgment.

Donisthorpe’s criminal case triggered demands for restitution among 

former Desert State clients. These former clients sued Desert State, 

Donisthorpe, Liane Kerr (Donisthorpe’s ex-wife), Bennett, and others; the 

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clients’ cases were consolidated into a class action. Their class-action 

complaint incorporated admissions from Donisthorpe’s guilty plea and 

contained ten claims, including 

 Claim 1: Negligence and Gross Negligence (against Desert State, 

Donisthorpe, and Bennett); 

 Claim 2: Breach of Fiduciary Duty (against Desert State, 

Donisthorpe, and Bennett); 

 Claim 3: Conversion (against Desert State and Donisthorpe); 

 Claim 4: Violations of New Mexico Uniform Trust Code (against 

Desert State, Donisthorpe, and Bennett); 

 Claim 5: Violations of New Mexico Unfair Practices Act (against 

Desert State, Donisthorpe, and others); and 

 Claim 6: Violations of New Mexico Uniform Voidable Transactions Act (against Desert State, Donisthorpe, Kerr, and others).4

Moya asked Evanston to defend and indemnify Desert State, including against 

the class-action claims. As discussed below, Evanston did not respond until 

January 2018.

By mid-December 2017, Evanston learned that Donisthorpe had pleaded 

guilty. And based on statements during his plea hearing, Evanston determined 

that Donisthorpe had made material misrepresentations when applying for 

insurance on Desert State’s behalf. Evanston had no evidence that any Insured 

besides Donisthorpe had participated in the scheme, so Evanston assumed 

4

 Claims 7, 8, and 9 alleged professional negligence and aiding and 

abetting breach of fiduciary duty against Desert State’s certified public 

accountant and the broker–dealer that held the former clients’ managed 

investment accounts. Claim 10 alleged unjust enrichment against Kerr. These 

claims aren’t at issue in this appeal. 

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(correctly) that no Insured other than Donisthorpe had made material 

misrepresentations on the insurance application.

In January 2018, Evanston sent a reservation-of-rights letter to Moya.

Evanston agreed to defend Desert State against the class action but reserved all 

its rights, including its right to rescind the policy. The company also warned 

that it could deny coverage based on the Insured’s knowledge of “Wrongful 

Acts, facts, circumstances, or incidents that would lead a reasonable person to 

conclude that a Claim was likely.” Evanston, 484 F. Supp. 3d at 1013. And 

Evanston reserved its right to deny coverage based on policy exclusions. 

In June—six months after learning of Donisthorpe’s guilty plea—

Evanston sent Moya a letter offering to rescind the policy. The company cited 

Donisthorpe’s misrepresentations on Desert State’s application. Evanston also 

refunded Desert State for the premiums paid under the policy. But Desert State 

did not accept the offer to rescind. 

II. Procedural Background 

In July 2018, Evanston sued Desert State, Donisthorpe, Kerr, and Bennett 

in the U.S. District Court for the District of New Mexico. Evanston also sued 

victims of Donisthorpe’s scheme and former Desert State clients, given their 

interest in the dispute. In Count One, Evanston sought to rescind the policy. In 

Count Two, as an alternative to rescission, Evanston sought a declaration that 

Desert State, Donisthorpe, Kerr, and Bennett weren’t entitled to coverage under 

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the policy and that Evanston had no duty to defend against claims arising from 

Donisthorpe’s criminal conduct. 

Evanston moved for summary judgment, but the case proceeded to a 

bench trial without a ruling on the motion. After the October 2019 trial, the 

district court denied summary judgment. It concluded that (1) the defendants 

had satisfied all conditions precedent for coverage under the policy, 

(2) Exclusion P did not exclude coverage for claims alleged in the class-action 

complaint, and (3) Evanston wasn’t entitled to rescission because it failed to 

promptly rescind. Evanston, 434 F. Supp. 3d at 1120, 1124–25.5

 After the trial, 

the district court issued its findings of fact and conclusions of law. It concluded 

that (1) the policy did not insure Donisthorpe and Kerr against claims arising 

from the embezzlement scheme; but (2) the policy did insure Moya and Bennett 

for such claims, including those in the class-action complaint. Evanston, 

484 F. Supp. 3d at 1040–45. 

The district court entered final judgment by separate order, and Evanston 

timely appealed. 

5

 Moya and Desert State’s former clients also moved for summary 

judgment. Their motions were granted in part and denied in part. See Evanston 

Ins. Co. v. Desert State Life Mgmt., No. 1:18-CV-00654-JB-KK, 2020 WL 

3448253 (D.N.M. Mar. 23, 2020). In an order that overlapped with its order 

denying Evanston’s motion, the court concluded that (1) Evanston had waited 

too long to rescind the policy and (2) the policy provided coverage to “innocent 

insureds.” Id. at *3–4. 

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STANDARD OF REVIEW

In an appeal from a bench trial, we review de novo the district court’s 

legal conclusions. Sw. Stainless, LP v. Sappington, 582 F.3d 1176, 1183 

(10th Cir. 2009) (citing Weyerhaeuser Co. v. Brantley, 510 F.3d 1256, 1260 

(10th Cir. 2007)). We also review de novo the district court’s denial of 

summary judgment on a legal issue. Kelley v. City of Albuquerque, 542 F.3d 

802, 820 (10th Cir. 2008) (citations omitted). And we review de novo the 

district court’s interpretation of state law. Genzer v. James River Ins. Co., 

934 F.3d 1156, 1164 (10th Cir. 2019) (citing Wade v. EMCASCO Ins. Co., 

483 F.3d 657, 666 (10th Cir. 2007)). If the state’s highest court has not decided 

an issue, we predict how the court would rule by “consulting persuasive state 

authority, such as dictum by the state’s highest court and precedential decisions 

by a state’s intermediate appellate courts.” Jordan v. Maxim Healthcare Servs., 

Inc., 950 F.3d 724, 730–31 (10th Cir. 2020) (cleaned up). 

DISCUSSION

On appeal, Evanston argues that the district court erred by denying 

rescission and by concluding that the policy requires Evanston to defend Moya 

and Bennett against the class-action claims. It raises four issues: 

1. Did the district court err by concluding that Evanston’s attempted 

rescission was untimely? 

2. Did the district court err by refusing to impute Donisthorpe’s 

knowledge to Desert State, based on agency law’s adverse-interest exception? 

3. Did the district court err by concluding that Bennett satisfied the 

no-prior-knowledge condition in Coverage A? 

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4. Did the district court err in making its Erie prediction that the 

New Mexico Supreme Court would not enforce the unambiguous 

Exclusion P? 

Because the first and fourth issues resolve the appeal, we consider only whether 

rescission and Exclusion P apply. And exercising jurisdiction under 28 U.S.C. 

§ 1291, we affirm in part and reverse in part. 

I. Rescission 

We begin by reviewing whether Evanston’s attempted rescission was 

untimely. We hold that it was and affirm the district court on this issue. 

Rescission is an equitable remedy that results in the cancellation of a 

contract. Branch v. Chamisa Dev. Corp., 223 P.3d 942, 946 (N.M. Ct. App. 

2009). It’s available “where there has been a misrepresentation of a material 

fact, the misrepresentation was made to be relied on, and has in fact been relied 

on.” Prudential Ins. Co. of Am. v. Anaya, 428 P.2d 640, 643 (N.M. 1967). But a 

party seeking to rescind “must promptly exercise it or [the] same will be 

waived.” Yucca Mining & Petrol. Co. v. Howard C. Phillips Oil Co., 365 P.2d 

925, 928 (N.M. 1961); see also Putney v. Schmidt, 120 P. 720, 723 (N.M. 1911) 

(“[I]f [a party] seeks to rescind the [contract] upon the ground of fraud, he must 

immediately, upon discovering the fraud, restore, or offer to restore, all that he 

has received under the contract, as a condition precedent to his right to rescind 

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the same.”).6

 To be prompt is to act “immediate[ly].” Prompt, Black’s Law 

Dictionary (11th ed. 2019). 

The district court concluded that “because Evanston Insurance did not act 

‘immediately’ to rescind the Insurance Policy, it was not entitled to this 

remedy.” Evanston, 484 F. Supp. 3d at 1016. The court noted that in other 

states, “insurance companies are entitled to a reasonable time to investigate 

before rescinding an insurance policy.” Evanston, 2020 WL 3448253, at *3 

(citing California cases). These states “represent the majority rule that, ‘[i]f an 

insurer decides to rescind a contract, it is required to act with reasonable 

promptness after discovery of grounds for rescission.’” Id. (quoting 2 Steven 

Plitt et al., Couch on Insurance § 31:98 (2019)). “By contrast,” the district 

court reasoned, “rather than affording insurers a reasonable amount of time, 

New Mexico requires that those seeking rescission ‘immediately, upon 

discovering the fraud, restore, or offer to restore’ all that was received under 

the contract.” Id. (quoting Putney, 120 P. at 723). The district court thus 

concluded that “the Supreme Court of New Mexico would hold that an 

insurance company in Evanston Insurance’s position delayed too long before 

seeking rescission.” Id.

6

 Evanston argues that we shouldn’t rely on this principle from Putney 

given the case’s age. But the principle that rescission must be prompt has been 

recognized in more recent New Mexico cases. In 2009, for example, the New 

Mexico Court of Appeals acknowledged this principle from Putney. See 

Branch, 223 P.3d at 947 (quoting Putney, 120 P. at 723). 

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Based on Putney’s touchstone language—which has never been 

overruled—we agree. The district court’s factual findings belie any suggestion 

that Evanston acted promptly in seeking to rescind the policy. In March 2017, 

New Mexico regulators began investigating Desert State’s finances, and by the 

end of the month, they declared the corporation to be financially unsound. That 

same month, Bennett notified Evanston about Donisthorpe’s alleged 

misconduct. Though Evanston considered whether to rescind the policy in 

March, it ultimately chose only to issue a letter of nonrenewal in July, with 

Donisthorpe’s embezzlement contributing to that decision. In August, Desert 

State was in receivership. Still, Evanston didn’t try to rescind. In November, 

Donisthorpe pleaded guilty to wire fraud and money laundering. Evanston knew 

about this guilty plea by mid-December. Still, no rescission. In January 2018, 

months after Moya timely requested that Evanston defend and indemnify Desert 

State against the class-action claims, Evanston sent the reservation-of-rights 

letter. There, Evanston reserved its right to rescind the policy. Yet not until 

June did Evanston try to rescind. And it cited Donisthorpe’s misrepresentations 

on the insurance application—which it knew or should’ve known about months 

earlier—as its reason for rescinding. 

The concurrence describes the timing of Evanston’s discovering the fraud 

as something about which “reasonable minds might differ” and ultimately fixes 

the Putney point of no return in December 2017, when Evanston learned of 

Donisthorpe’s guilty plea. Concurrence at 5. In the concurrence’s view, 

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Evanston’s January reservation-of-rights letter bought the insurer time to 

investigate “whether Donisthorpe’s plea gave sufficient grounds for rescission.” 

Id. And citing Agnew v. Landers, 278 P.2d 970 (N.M. 1954), in which the New 

Mexico Supreme Court excused a six-month rescission delay, the concurrence 

finds Evanston’s June 2018 rescission to be timely. 

As we see it, this logical chain snaps at each link. Evanston was on 

notice of its right to rescind as early as March 2017, when Bennett first relayed 

Donisthorpe’s misconduct to the insurer. Indeed, Evanston contemplated 

rescinding the policy then, though it stopped short and only issued a 

nonrenewal letter. But as the district court found, Donisthorpe’s embezzlement 

undergirded Evanston’s nonrenewal decision. Evanston, 484 F. Supp. 3d 

at 1012. It’s unclear why this actual knowledge of its insured’s fraud wouldn’t 

trigger Putney’s immediacy requirement—or at least Evanston’s need to reserve 

its rescission right (as the concurrence would allow). 

The concurrence would hold that a “promptly issued” reservation-ofrights letter followed by a “reasonable investigation (if necessary)” is 

immediate enough under Putney. Concurrence at 2. Yet even giving effect to 

Evanston’s reservation of rights and accepting that the letter was “promptly 

issued,” the concurrence offers no limiting principle when the insurer 

completes its investigation before reserving its rights. Evanston began 

investigating Donisthorpe’s misconduct back in March 2017, not when it 

reserved its rights in January 2018. In other words, it did not need the ensuing 

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five months to continue exploring its options. The record is silent about what 

Evanston did between January and June, but to us, that five-month delay looks 

like “meander[ing],” “dragg[ing] its feet,” and “sleep[ing] on its rights.” 

Concurrence at 3–4, 6. So the attempted rescission was still inexplicably late. 

Nor does Agnew draw a bright line about how much delay is permissible. 

The Agnew plaintiffs faced significant obstacles in their quest to rescind a 

warranty deed. By the time the plaintiffs learned about the defendants’ 

misrepresentations, the plaintiffs had left New Mexico and were “concerned 

with [other] affairs.” Agnew, 278 P.2d at 67. And the plaintiffs had to wait for a 

third party to default on a promissory note before they could even take over the 

property. Id. The court thus concluded that these obstacles, along with the 

nature of the defendants’ misrepresentations, excused the six-month delay: 

[T]he [defendants’] misrepresentations of fact . . . by their very nature placed plaintiffs in a position so complex and so difficult to 

evaluate that the time required by them to return to New Mexico, 

employ counsel and explore the possibilities of salvaging this transaction cannot be deemed an inordinate delay in the exercise of their 

right to rescission. 

Id. We read Agnew to hold that circumstances outside a party’s control can 

excuse a delayed rescission. 

Here, by contrast, Evanston faced few (if any) obstacles in rescinding, 

especially once it learned in December 2017 that Donisthorpe had pleaded 

guilty. Perhaps Donisthorpe’s misconduct was also “complex” and “difficult to 

evaluate.” Id. But this doesn’t explain the delay after Evanston sent the 

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reservation-of-rights letter—by then, Evanston had all the information it needed 

to rescind. Putney’s immediacy requirement required Evanston to promptly 

exercise its rights no later than when it “discover[ed] the fraud.” Putney, 120 P. 

at 723. Still, Evanston did not try to rescind until June 2018, five months later. 

Putney and common sense tell us that this was too late. 

Because the undisputed facts establish that Evanston waited too long to 

rescind the policy, we hold that the district court did not err in concluding that 

Putney effectively barred Evanston’s rescission claim.7

 

II. Exclusion P 

We turn now to Exclusion P and whether the district court erred by not 

applying it according to its unambiguously broad terms. We hold that the 

district court so erred. 

In New Mexico, unambiguous contract provisions are applied, not 

interpreted. Richardson v. Farmers Ins. Co., 811 P.2d 571, 572 (N.M. 1991) 

(citing McKinney v. Davis, 503 P.2d 332, 333 (N.M. 1972)). Though New 

Mexico courts generally interpret exclusionary language narrowly, they do not 

apply this principle “to override the clear and unambiguous terms of an 

exclusion.” Grisham v. Allstate Ins. Co., 992 P.2d 891, 894 (N.M. Ct. App. 

1999) (citations omitted). Insurance clauses are ambiguous only if they are 

7

 At oral argument, Evanston’s counsel conceded that the adverse-interest 

exception is moot if Evanston’s rescission was untimely. Because we hold that 

rescission was untimely, we do not reach this exception. 

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“reasonably and fairly susceptible of different constructions.” Knowles v. 

United Servs. Auto. Ass’n, 832 P.2d 394, 396 (N.M. 1992) (quoting Sanchez v. 

Herrera, 783 P.2d 465, 469 (N.M. 1989)). The New Mexico Supreme Court has 

twice read “arising from” in an exclusionary clause to be unambiguous. Lopez 

v. N.M. Pub. Sch. Ins. Auth., 870 P.2d 745, 747 (N.M. 1994); Askew v. Miller 

Mut. Fire Ins. Co. of Tex., 522 P.2d 574, 575 (N.M. 1974). 

Applying these straightforward principles of New Mexico law, Exclusion 

P is unambiguous. The exclusion bars coverage for any claim “[b]ased upon or 

arising out of any conversion, misappropriation, commingling [of] or 

defalcation of funds or property.” Evanston, 434 F. Supp. 3d at 1066. The only 

phrase susceptible to potential ambiguity is “arising out of.”8

 But as stated 

above, New Mexico courts provide a clear answer about that phrase’s meaning: 

“[T]he words ‘arising out of’ are very broad, general and comprehensive terms, 

ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ 

‘growing out of’ or ‘flowing from.’” Krieger v. Wilson Corp., 131 P.3d 661, 666 

(N.M. Ct. App. 2005) (citing Baca v. N.M. State Highway Dep’t, 486 P.2d 625, 

628 (N.M. Ct. App. 1971)). This broad reading of “arising out of” applies 

equally to exclusionary clauses. See, e.g., Baca, 486 P.2d at 628; see also Am. 

Nat’l Prop. & Cas. Co. v. United Specialty Ins. Co., 592 F. App’x 730, 742 

8

 The parties do not discuss whether Exclusion P’s other phrasal verb, 

“based upon,” applies here. Because we need not define “based upon” to reach 

our conclusion, we express no opinion on its plain meaning. 

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(10th Cir. 2014) (unpublished) (“[W]e have every reason to suppose that New 

Mexico law applies the same broad definition of ‘arising out of’ in the 

exclusion context as in the coverage context.”).

True, the New Mexico Supreme Court has not weighed in on that phrase’s 

precise meaning. But we expect that the New Mexico Supreme Court would 

adopt the meaning uniformly used by the New Mexico Court of Appeals. E.g., 

Krieger, 131 P.3d at 666; City of Albuquerque v. BPLW Architects & Eng’rs, 

Inc., 213 P.3d 1146, 1153 (N.M. Ct. App. 2009). Indeed, we have noted the 

same when sitting in diversity and applying New Mexico law. See Am. Nat’l 

Prop. & Cas. Co., 592 F. App’x at 741 (remarking that under New Mexico law, 

“‘arising out of’ is not facially ambiguous just because it appears in an 

exclusion”). We conclude that Exclusion P is unambiguous. 

Because the unambiguous plain language controls, we apply Exclusion P 

as written. Richardson, 811 P.2d at 572. Here, the class-action negligence 

claims arose out of Donisthorpe’s commingling. “In determining the 

applicability of [an] exclusion, [the] focus must be on the origin of the 

damages, not the legal theory asserted for recovery.” Lopez, 870 P.2d at 747 

(citations omitted). Within their negligence claims, the class-action plaintiffs 

incorporate allegations that track the admissions from Donisthorpe’s guilty 

plea. They allege that Desert State and Bennett mismanaged client accounts and 

failed to monitor the company’s financial health, in turn causing the former 

clients to suffer financial damage. And they accuse Bennett of “exercis[ing] 

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19 

little to no oversight of” Donisthorpe. App. vol. 1, at 76. The legal theory 

undergirding the class-action claims is Bennett’s alleged negligence, but the 

origin of the damages arises out of Donisthorpe’s commingling. In other words, 

the claims “originate from, have their origin in, grow out of, [or else] flow 

from” Donisthorpe’s misconduct. Krieger, 131 P.3d at 666 (cleaned up). 

Exclusion P must apply, excluding coverage for the class-action negligence 

claims against Moya and Bennett. 

In concluding otherwise, the district court exceeded its authority by 

looking beyond Exclusion P’s text. It began by correctly finding Exclusion P 

unambiguous. This conclusion should have ended the court’s analysis, and it 

should have applied the exclusion as written. Yet it pressed on, noting that New 

Mexico courts hadn’t specifically addressed whether exclusions like 

Exclusion P “reach[] the type of negligence which [Desert State’s former] 

clients have alleged” in the class-action complaint. Evanston, 434 F. Supp. 3d 

at 1105. It proceeded to survey how courts in other jurisdictions had 

approached the question. A clear majority view emerged: Similarly drafted 

provisions exclude coverage for negligence claims arising out of intentional 

misconduct, even if the negligent individuals did not commit that misconduct.

The minority approach, adopted by only New York and Pennsylvania, provides 

that “negligence claims against insureds do not necessarily ‘arise out of’ other 

insureds’ related and excluded acts.” Id. at 1112 (citation omitted).

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In predicting that the New Mexico Supreme Court would join the 

minority, the district court cited the principle that policy exclusions are 

generally read narrowly. It relied on four cases—each involving ambiguities—

to conclude that New Mexico wouldn’t read Exclusion P “broadly to cover 

claims that Evanston Insurance could have foreseen and could have expressly 

disclaimed.” Id. (citing Rummel v. Lexington Ins. Co., 945 P.2d 970 (N.M. 

1997); United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644 (N.M. 2012); 

King v. Travelers Ins. Co., 505 P.2d 1226 (N.M. 1973); and Knowles, 832 P.2d 

394). And the court faulted Evanston for writing “stronger exclusionary clauses 

in other insurance contracts,” which proved that Evanston could “clarify the 

issue, if [it] wanted, with the stroke of a pen.” Id. at 1112 & n.42 (citing 

Thames v. Evanston Ins. Co., No. 13-CV-425-PJC, 2015 WL 7272214 (N.D. 

Okla. Nov. 17, 2015)).9

9

 That Evanston has drafted a different exclusionary clause does not show 

that the Desert State clause is somehow deficient. See O’Brien v. Progressive N. 

Ins. Co., 785 A.2d 281, 290 (Del. 2001) (“The fact that Progressive chose to 

make a clear policy provision [clearer] as a remedial measure to this litigation 

may not be used as evidence of an admission of either ambiguity or acceptance 

of Appellants’ interpretation of the policy.”); Tzung v. State Farm Fire & Cas. 

Co., 873 F.2d 1338, 1341 (9th Cir. 1989) (“We reject the Tzungs’ reliance on 

the revised policy for its negative inferences. Not only do we believe that 

accepting such an argument would discourage remedial action and thereby 

violate public policy, but we also believe that even though the revised policy 

excludes all forms of third-party negligence[,] it does not mean that the former 

policy does not exclude some forms of third-party negligence . . . .” (citation 

and footnote omitted)). 

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21 

The district court made four mistakes by choosing this course. First, the 

four cases on which the court relied involved ambiguous contract terms. Unlike 

for unambiguous terms (like in Exclusion P), which courts apply without 

interpreting, Richardson, 811 P.2d at 572, courts “construe ambiguous language 

and . . . give it sensible construction.” State v. Johnson, 954 P.2d 79, 85 (N.M. 

Ct. App. 1997) (citations omitted). Because those four cases applied the distinct 

analytical framework for ambiguous terms, the district court erred in basing its 

Erie prediction on them. Second, the court applied the narrow-construction 

principle “to override the clear and unambiguous terms of an exclusion”—

exactly what Grisham instructs New Mexico courts not to do. 992 P.2d at 894 

(citations omitted). Third, the court also cited Baca and American National 

Property & Casualty Co., yet seemingly neglected both when predicting that 

the New Mexico Supreme Court would narrowly read Exclusion P. Finally, 

though the court recognized that Exclusion P was unambiguous and “arising out 

of” was broad, it abandoned Exclusion P’s plain language by refusing to apply 

it as written. 

We predict that, consistent with the majority view, the New Mexico 

Supreme Court would construe Exclusion P as applying to the class-action 

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negligence claims. Thus, Evanston does not have a duty to defend Moya and 

Bennett under the policy.10 

CONCLUSION 

On rescission, we affirm the district court. But we reverse the district 

court’s ruling on Exclusion P and remand the case with instructions to enter 

judgment for Evanston and against Moya and Bennett. 

10 Because we conclude that Exclusion P applies, we do not address 

whether the no-prior-knowledge condition also precludes coverage for Moya 

and Bennett. 

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21-2145, Evanston Insurance Company v. Desert State Life Management, et al.

TYMKOVICH, Circuit Judge, concurring. 

I am pleased to join the bulk of the majority opinion. But I would conclude that 

Evanston properly rescinded the insurance contract after timely notice and investigation 

of the underlying facts and circumstances. 

The district court held that Evanston waited too long to rescind its insurance 

policy. The court relied on Putney v. Schmidt, where the New Mexico Supreme Court 

held that a party seeking contract rescission must “immediately, upon discovering the 

fraud,” return whatever it received under the contract. 120 P. 720, 723 (N.M. 1911). If a 

party fails to act immediately, it affirms the contract despite the fraud. Id. Since 

Evanston waited six months after learning of Donisthorpe’s fraud to return Desert State’s 

insurance premium and rescind the insurance policy, the district court found it flunked 

the immediacy requirement. 

But importantly, Evanston also sent Desert State a “reservation of rights” letter 

shortly after discovering evidence of the fraud in late 2017. In a letter dated January 5, 

2018, Evanston stated, 

After careful consideration, Evanston has agreed to provide 

you a defense for claims asserted against you in the lawsuits 

filed by DSLM’s clients, under a full and complete 

reservation of rights . . . It appears from the Plea Agreement 

that Mr. Donisthorpe knew of facts, situations or incidents 

that might afford grounds for a claim against DSLM at the 

time he applied for the insurance on behalf of DSLM. Based 

on these admissions, his responses on the application 

constitute material misrepresentations that could provide 

grounds to rescind the Policy entirely. Evanston will 

continue to investigate this matter, as indicated above, under 

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2 

a full and complete reservation of rights. Evanston reserves 

all rights, terms and conditions of the Policy referred to above 

including, but not limited to, the right to deny coverage based 

upon the Policy provisions quoted above or seek rescission of 

the Policy based on fraud or material misrepresentation. 

Evanston’s Reservation of Rights, Evanston Ins. Co. v. Desert State Life Mgmt., No. 

1:18-cv-00654-JB-KK (D.N.M.), ECF # 106-1 at 1–12 (filed Aug. 9, 2019) (emphasis 

supplied). Evanston maintains this was enough to satisfy the immediacy requirement, but 

the district court did not address the argument. New Mexico courts have not addressed it 

either. 

In my view, a reservation of rights letter promptly issued and followed by a 

reasonable investigation (if necessary) satisfies the immediacy requirement. The 

investigation must last no longer than necessary to establish a firm basis for rescission. If 

the investigating party needlessly stretches its investigation, it would fail the immediacy 

requirement. 

In New Mexico, a “[m]isrepresentation of a material fact, even if innocently made, 

will entitle the party who has justifiably relied thereon to rescind the contract.” Ledbetter 

v. Webb, 711 P.2d 874, 877 (N.M. 1985). But when a party discovers the fraud, it must 

“immediately” restore the value received (here, the insurance premium) to preserve the 

right to rescind. Putney, 120 P. at 720. If it does not act immediately and “play[s] fast 

and loose,” New Mexico law treats its behavior as affirming the contract instead. Reed v. 

Rogers, 141 P. 611, 613 (N.M. 1914) (quoting Grymes v. Sanders, 93 U.S. 55, 62 

(1876)). 

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3 

The term “immediately,” however, does not accurately describe what the 

requirement demands. The New Mexico Supreme Court applies Putney’s “immediacy” 

requirement in a fact-sensitive manner. For example, the Supreme Court found a sixmonth delay between a party’s discovery of fraud and its rescission attempt sufficiently 

immediate. The court recognized that the party needed to “employ counsel and explore 

the possibilities of salvaging this transaction,” and noted the party was “in a position . . .

complex and difficult to evaluate.” Agnew v. Landers, 278 P.2d 970, 978 (N.M. 1954). 

I see one primary justification for the immediacy requirement: the doctrine 

encourages prompt investigation and resolution of conflicts arising from contract fraud. 

Put differently, it vindicates the principle that “[t]he law will not permit a party to sit idly 

by and await the results which, if favorable, he will receive the benefit of, but if 

unfavorable, ask rescission.” Yucca Min. & Petroleum Co. v. Howard C. Phillips Oil 

Co., 365 P.2d 925, 928 (N.M. 1961). When a party sleeps on its rights, the immediacy 

requirement takes them away. 

The common law of various other states also establishes an immediacy 

requirement, or something close to it. Courts in these states also treat the requirement as 

fact sensitive. See, e.g., Danto v. Charles C. Robbins, Inc., 230 N.W. 188, 190 (Mich. 

1930) (“[A] person claiming to be defrauded must elect to rescind, or not, immediately 

after he discovers the fraud. By waiting more than a reasonable length of time after he 

discovers the fraud, he condones it.”); Long v. Int’l Vending Mach. Co., 139 S.W. 819, 

820 (Mo. Ct. App. 1911) (the immediacy requirement allows for “a reasonable time . . . 

to do the things necessary in order to rescind”); Cont’l Cas. Co. v. Marshall Granger & 

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4 

Co., 6 F. Supp. 3d 380, 394 (S.D.N.Y. 2014) (“An insurer need not, however, make a 

rushed and uninformed decision; it is entitled to a reasonable period of time in which to 

investigate the potential basis for rescission.”). 

In my view, a timely reservation of rights letter paired with a prompt investigation 

satisfies the immediacy requirement under New Mexico law. It encourages prompt 

investigation and resolution of contract fraud, and it punishes those who sleep on their 

rights. It follows that the requirement should reward a reservation of rights: such notice 

invites the scrutinized party into the process of resolving a simmering dispute and brings 

the conflict—and perhaps other relevant facts—to the surface. 

The immediacy requirement also necessarily mitigates potential prejudice to the 

party suspected of fraud. By requiring a prompt investigation, the requirement makes it 

more likely that exonerating facts will be brought to the surface, either by the 

investigating party or the suspected party. And it prevents the suspected party from 

falling into a false sense of security. See, e.g., Illinois State Bar Ass’n Mut. Ins. Co. v. 

Corgeis Ins. Co., 821 N.E.2d 706, 717–18 (Ill. App. Ct. 2004) (“As stated above, the 

right of rescission must be exercised promptly . . . This reservation-of-rights letter made 

[the insured] aware . . . that [the insurer] was not waiving anything.”) (internal citations 

and quotations omitted). 

Of course, a reservation of rights is not a blank check for the investigating party to 

meander. Nor will a late-arriving reservation of rights letter do the trick. Finding 

otherwise would cut against the goal of swiftly resolving fraud disputes and preventing 

the suspected party from falling into a false sense of security. That is why the reservation 

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5 

must be issued quickly and the subsequent investigation must last no longer than 

necessary. And in keeping with common law developments, “quickly” and “no longer 

than necessary” must be interpreted with an eye to the relevant facts of each case. These 

facts include, but are not limited to, the complexity of the underlying fraud, external 

circumstances bearing on the investigation’s timeliness, and a showing of prejudice due 

to the delay by the party suspected of fraud. 

Based on the record in this case, I have little trouble concluding Evanston satisfied 

the immediacy requirement. 

According to the district court, the Desert State clients offered as an undisputed 

material fact (and Evanston did not object) that Evanston concluded Donisthorpe made 

material misrepresentations on the applications when it discovered Donisthorpe’s guilty 

plea. Summary Judgment Order, Evanston Insurance Co. v. Desert State Life Mgmt., 

No. 1:18-cv-00654-JB-KK (D.N.M.), ECF # 180 at 5 (filed Mar. 23, 2020). While I 

recognize that reasonable minds might differ on when Evanston “discovered the fraud,” I 

read the district court’s order to find that Evanston “discovered the fraud” in early 

December and accept that finding. 

From there, I have little trouble concluding that Evanston satisfied the 

requirement. The immediacy requirement was triggered in early December. Evanston 

issued its reservation of rights about one month later and began to investigate whether 

Donisthorpe’s plea gave sufficient grounds for rescission. And about five months after 

tolling the requirement, it rescinded. Like the New Mexico Supreme Court, I find that 

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length of time unremarkable. See Agnew, 278 P.2d at 978 (finding that a six-month delay 

between a party’s discovery of fraud and its rescission passed the immediacy 

requirement). 

Here, the facts do not suggest that Evanston dragged its feet and there is no 

showing of prejudice from the investigation. I therefore would have accepted Evanston’s 

rescission of the insurance contract. 

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