Opinion ID: 169527
Heading Depth: 3
Heading Rank: 1

Heading: Misstatement

Text: Preliminarily, the parties had divergent views as to the nature of the misstatement at issue. While it is uncontested that ClearOne's 2002 10-K financial statement falsely represented ClearOne's true financial condition, see Aplts. Br. at 37 (ClearOne and Bagley do not deny that the financial statements reviewed by National Union while underwriting D & O Policy were misstated.), two theories of the nature of the misstatement flow from the representations in the insurance application. On one hand, National Union claims the false financial statements themselves constitute the misstatement since they were incorporated into the application. ClearOne argues, on the other hand, that the financial statements could not serve as the basis of rescission because (1) ClearOne never gave an unqualified representation that its financials were accurate, id. at 29, and (2) incorporating the 10-K by reference into the application contravenes both Utah law and an insurance policy provision against incorporation of items not found in the policy or application. Instead, ClearOne maintains that the only possible misstatement flows from Flood's answer to two questions in the application which warranted against any knowledge or information that would give rise to a claim under the policy. See Questions 9(a) and (b), Aplts. App. at 3678. The district court agreed with National Union and held that the false financials constituted a misstatement for purposes of rescission. We concur. Question 14 of the application clearly asks applicants to provide copies of the latest 10K report filed with the Securities and Exchange Commission. In response, ClearOne directed National Union to its website to gain the requested forms. The application then states, All written statements and materials furnished to the insurer in conjunction with this application are hereby incorporated by reference into this application and made a part hereof. Aplts. App. at 3681. The incorporated financials in turn become a basis of the contract issuing a policy between National Union and ClearOne. Id. at 3680.
Taking ClearOne's second argument first, we perceive no legal infirmity in incorporating the financials into the insurance application. Under Utah law, an insurance policy may not contain any agreement or incorporate any provision not fully set forth in the policy or in an application or other document attached to and made a part of the policy at the time of its delivery, unless the policy, application, or agreement accurately reflects the terms of the incorporated agreement, provision, or attached document. Utah Code Ann. § 31A-21-106(1)(a) (1996). National Union's D & O policy also states that [t]he Application and all relevant documents will be attached to the policy at the time of delivery. Aplts. App. at 3727. ClearOne interprets these provisions as precluding the incorporation of the 10-K by reference. Neither the plain language nor the purpose behind the statute support ClearOne's conclusion. First, § 31A-21-106(1)(a) restricts only agreement[s] or provision[s] from incorporation into the insurance contract. The 10-K Form is neither. Instead, it is a part of the factual predicate of the application, serving to induce issuance of the policy. The financial form was not a part of the policy's coverage terms, and was analytically no different than other information ClearOne provided to National Union. As the Utah Supreme Court has stated, the statute's aim is to ensure that the entire insurance contract is contained in one document so that the insured can determine from the policy exactly what coverage he or she has. Cullum v. Farmers Ins. Exch., 857 P.2d 922, 925 (Utah 1993). When insureds can determine their coverage under the policy solely by relying on the [policy] document, then § 31A-21-106(1)(a) is not implicated. Id. ; see also Progressive Cas. Ins. Co. v. Dalgleish, 52 P.3d 1142, 1146 (Utah 2002). Accordingly, we find that this statute does not apply to ClearOne's financial statements incorporated into the National Union application.
ClearOne's first argument that it never gave an iron-clad warranty as to the accuracy of its financials is also unpersuasive. ClearOne bases its argument on the fact that the financials included only a tepid certification of their accuracy. [4] Nevertheless, under § 31A-21-105, a representation need not be warranted as true to constitute a misrepresentation. The provision distinguishes between a misrepresentation or a breach of an affirmative warranty [5] and either may form the basis of rescission. Utah Code Ann. § 31A-21-105(a). The statute obviously contemplates a distinction between (1) a statement that is falsely represented and (2) a statement that violates a warranty of accuracy. Reading a warranty requirement into misrepresentation fails to give full effect to both provisions of the statute, and we decline such an interpretation. Utah case law pre-dating § 31A-21-105 confirms this view. In Fidelity & Casualty Co. v. Middlemiss, 103 Utah 429, 135 P.2d 275, 279 (1943), the Utah Supreme Court held, If a representation is material to the risk and likewise knowingly false, it will be as potent for a rescission of the contract embodied in the policy as if the untrue statement was made in form [of] a warranty. Thus, ClearOne's representations in its financials were as good as a warranty. An inaccurate statement is an inaccurate statement, regardless of whether the maker of that statement made an additional promise to be truthful. National Union Fire Ins. Co. v. Sahlen, 807 F.Supp. 743, 747 (S.D.Fla.1992). Accordingly, the district court did not err in concluding that National Union met the misstatement element necessary to establish rescission.