Court Opinion

ID: 9351505
Source: CourtListenerOpinion
Date Created: 2022-12-30 18:01:22.692024+00
Date Added: 2024-06-11T17:00:18.867694
License: Public Domain

Appellate Case: 21-2145    Document: 010110791268   Date Filed: 12/30/2022   Page: 1
                                                                            FILED
                                                                United States Court of Appeals
                                     PUBLISH                            Tenth Circuit

                    UNITED STATES COURT OF APPEALS                   December 30, 2022

                                                                    Christopher M. Wolpert
                             FOR THE TENTH CIRCUIT                      Clerk of Court
                          _________________________________

  EVANSTON INSURANCE
  COMPANY,

         Plaintiff - Appellant,

  v.                                                    No. 21-2145

  DESERT STATE LIFE MANAGE-
  MENT; CHRISTOPHER MOYA, in his
  capacity as Receiver for the receiver-
  ship estate of Desert State Life Man-
  agement; PAUL A. DONISTHORPE;
  L. HELEN BENNETT; LIANE KERR;
  AYUDANDO GUARDIANS, INC., a
  New Mexico nonprofit corporation, on
  behalf of seven protected persons; JO-
  SEPH PEREZ; CHRISTINE
  GALLEGOS, individually and as
  Guardian of Victor Baldizan, an inca-
  pacitated adult; SCOTT K. ATKIN-
  SON, as Guardian ad Litem for Vin-
  cent Esquibel, Jr., an incapacitated
  person; CHARLES REYNOLDS, as
  Conservator for J.W., an incapacitated
  person; CAMERON GRAHAM, as
  Trustee for Andrew Graham; AS-
  CENDING HOPE, LLC; CNRAG,
  INC.; DECADES, LLC,

         Defendants - Appellees.
                      _________________________________

                  Appeal from the United States District Court
                         for the District of New Mexico
                       (D.C. No. 1:18-CV-00654-JB-KK)
                      _________________________________
Appellate Case: 21-2145   Document: 010110791268      Date Filed: 12/30/2022   Page: 2

 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 Background 1

       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, of-
       ficer, director, employee, manager or managing member of the Ap-
       plicant or any person(s) or organization(s) proposed for this insur-
       ance aware of any fact, circumstance, situation, incident or allega-
       tion 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 [in-
       surance].
                                       ⁎⁎⁎
       This application, information submitted with this application and all
       previous applications and material changes thereto of which the un-
       derwriting 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 appli-
       cation 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 respon-
       sible,

       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 In-
             jury(ies) or any fact, circumstance, situation or incident,
             which may have led a reasonable person in the Insured’s posi-
             tion 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 Transac-
         tions 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-inter-
           est 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-of-

  rights 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 na-
        ture 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 trans-
        action 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.

                                          17
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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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  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)).

                                           20
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        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.

                                         22
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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
Appellate Case: 21-2145        Document: 010110791268         Date Filed: 12/30/2022       Page: 24

                  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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         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 six-

  month 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 &

                                                 3
Appellate Case: 21-2145       Document: 010110791268          Date Filed: 12/30/2022      Page: 26

  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

                                                 4
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  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.

                                               6