Opinion ID: 169527
Heading Depth: 3
Heading Rank: 4

Heading: Reliance and the Defense of Equitable Estoppel

Text: Finally, ClearOne contends a genuine dispute exists as to whether National Union actually relied on the financial statements in issuing the policy. It argues, moreover, that National Union should be equitably estopped from rescinding the insurance policy based on its knowledge of the irregularities in the financial statements. The Utah Supreme Court has laid out the standard for analyzing reliance: An insurance company cannot escape liability on a policy if it is established that there should have been no actual reliance on the applicant's misrepresentation, concealment, or omission. Hardy v. Prudential Ins. Co., 763 P.2d 761, 770 (Utah 1988). The court set forth two corollaries to this rule which, if shown, prevent the insurer from escaping liability: (1) if the insurer has information which would have put a prudent person on notice of possible falsity and would have caused an inquiry which, if carried out with reasonable diligence, would have revealed the truth, the insurer cannot rely on the misrepresentation; and (2) if the insurer chooses to make an independent inquiry and a reasonable search would have uncovered the misrepresentation but the facts were not discovered because the investigation was cursory, the insurer cannot rely on the misrepresentation. Id. ClearOne claims that National Union underwriters are trained to spot the red flags in its financial statements and knew or should have known of ClearOne's misstatements and likely priced the risks of the irregularities into the premium charged ClearOne for coverage. ClearOne avers this knowledge of the misrepresentation precludes reliance upon the financials and should estop rescission of the policy. Nevertheless, we agree that National Union conducted a reasonable inquiry into the red flags in ClearOne's financial statements. After the insurance application was submitted, Brady Head, National Union's lead underwriter, sent follow-up questions regarding National Union's concerns to ClearOne via email. Head received a call from Susan Strohm, ClearOne's CFO, indicating that there had been no non-compliance issues with ClearOne's revenue recognition practices and that its financial statements had been certified as accurate under Sarbanes-Oxley. ClearOne does not challenge this assertion. Instead, ClearOne claims that Strohm's call actually heightened Head's concerns. This is unfounded in the record even in the light most favorable to ClearOne. To the contrary, while they discussed some problems with accounts receivable and inventory levels, Head testified that Strohm answered his questions in a satisfactory manner. Aplts. App. at 3426. Moreover, there is no indication National Union was aware of the type of questionable accounting practices later revealed by ClearOne. No disputed facts suggest National Union failed to investigate adequately the financial information it was provided. Consequently, we perceive no error in the district court's findings on reliance and equitable estoppel.