Opinion ID: 2539402
Heading Depth: 1
Heading Rank: 4

Heading: Issue 1: An insurer may rescind a financial institution crime bond whose terms expressly allow rescission for an insured's conduct which is less serious than fraudulent misrepresentation.

Text: The bank argues that the Court of Appeals panel erred in holding that KBS can rescind the bond by showing that the bank made any incorrect statement in the application, e.g., through negligent misrepresentation. The bank contends that a higher standard than mere negligent misrepresentation is required by the common law. KBS responds that the application specifically provided that the Bond could be rescinded based on any negligent misrepresentation or omission. Again, the application states: THE INSURED REPRESENTS THAT THE INFORMATION FURNISHED IN THIS APPLICATION IS COMPLETE, TRUE AND CORRECT. ANY MISREPRESENTATION, OMISSION, CONCEALMENT OR ANY INCORRECT STATEMENT OF A MATERIAL FACT, IN THIS APPLICATION OR OTHERWISE, SHALL BE GROUNDS FOR THE RESCISSION OF ANY BOND ISSUED OR RENEWED IN RELIANCE UPON SUCH INFORMATION. (Emphasis added.) The trial court, however, denied KBS's request to instruct the jury on negligent misrepresentation rather than the higher standards of fraudulent misrepresentation. It instead gave Instruction No. 3, which provides in relevant part: [KBS] makes the following claims: 1. That [the bank] misrepresented, omitted or concealed material facts in its answer of yes to [Question 3] contained within the application for the Financial Institution Crime Bond.... 2. That because of these material misrepresentations or omissions, [KBS] is entitled to rescind the bond and declare it to be void ab initio (from the beginning), and thus not pay the claim of the National Bank of Andover; 3. That the actions of Paula Steward in this case are not covered by the provisions of the bond; and 4. That the bank has not sustained a loss under the terms of the bond. More important, the court also gave Jury Instruction No. 4, which identifies the standards for fraudulent misrepresentation: In order for the Kansas Bankers Surety Company to be entitled to rescind the bond in this case it must prove that the National Bank of Andover engaged in fraudulent misrepresentation with respect to its answer of yes to [Question 3] contained within the application for the Financial Institution Crime Bond.... A fraudulent misrepresentation in the law of insurance is a statement [or statements] by the insured as a fact of something which is untrue, and which the insured states with the knowledge that it is untrue and with the intent to deceive, or which it states positively as true without knowing it to be true, and which has a tendency to mislead, where such fact in either case is material to the risk. (Emphasis added.) In short, KBS argues that Instruction No. 4 erroneously imposes a higher burden than the one imposed by the bond, which provides for rescission simply for any ... incorrect statement of a material fact.