This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. ' 480A.08, subd. 3 (1994).


Norwest Bank Minnesota, N.A.,
f/k/a Northwestern National Bank of Minneapolis,
as Trustee for the Minneapolis Community Development Agency
and St. Paul Redevelopment Authority
Collateralized Mortgage Bonds, Series 1986,


Verex Assurance, Inc.,

Filed July 2, 1996

Willis, Judge

Hennepin County District Court
File No. 93-9070

Robert Gust, Gust & Zerin, PLC, 3640 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for Appellant)

Jonathan G. Steinberg, Chrastil, Steinberg, & Sarnoski, P.L.L.P., 1155 Grain Exchange- East Building, 412 South Fourth Street, P.O. Box 15085, Minneapolis, MN 55415 (for Respondent)

Considered and decided by Davies, Presiding Judge, Willis, Judge, and Stone, Judge.*



Appellant Norwest Bank appeals from a judgment of the trial court denying coverage under mortgage insurance policies issued by respondent Verex Assurance, Inc. We reverse.


Appellant Norwest Bank Minnesota, N.A. (the bank), is trustee for "The Minneapolis Community Development Agency and The St. Paul Redevelopment Authority Collateralized Mortgage Bond Program" (the program). The program, a bond offering, is designed to raise money to provide mortgage loans for low-income families. The monies raised through the program are loaned to borrowers to purchase homes, and the mortgage payments and other proceeds are used to repay the bonds. The bank is responsible for the disbursement of funds to the bondholders.

As part of the program, respondent Verex Assurance, Inc., provides two types of mortgage insurance: primary policies (similar to those used in typical residential real estate transactions) and a pool policy. The insured's interest in the only primary policy involved here was assigned to the bank. The bank is the named insured on the pool policy, which covers losses not otherwise covered by primary insurance policies. The primary policy contains the following provision:

Verex Assurance, Inc. * * * agrees to pay [the Insured] in consideration of the premiums to be paid by the Insured as specified in the Certificate, and in reliance upon the statements made in the Application submitted by the Insured, any loss sustained by reason of the default in payments by a borrower * * * .

(Emphasis added.) In contrast, the pool policy provides:

Verex Assurance, Inc., * * * AGREES TO PAY [the bank], in consideration of the premium paid or to be paid as specified herein, any loss sustained by reason of the default in payments by a borrower on any Mortgage Agreement included in the attached Schedule(s) after underwriting and approval by the Company, * * * .

The pool policy contains no language relating to the effect on coverage of misrepresentations in an application.

Under the program, a potential borrower applies for a mortgage with a loan originator, typically a bank or other financial institution. The loan originator then submits the application to Verex, which evaluates the application and other relevant documents, makes a credit review to determine underwriting risk, and decides whether to issue mortgage insurance. If Verex insures the mortgage, the program, through the bank, purchases the mortgage from the loan originator.

In 1982, Verex agreed to insure mortgages issued to three borrowers: Antoinette Sassor, Cesar Sarzoza, and Craig Branson. Verex provided the bank with coverage for the Sassor mortgage under both a primary policy and the pool policy and for the Sarzoza and Branson mortgages under the pool policy alone. All three borrowers defaulted, and the bank made claims against Verex under the policies. Verex denied coverage and rescinded the policies as they related to all three borrowers' mortgages on the ground that all three made misrepresentations in their mortgage loan applications.

Both the bank and Verex moved for summary judgment. The trial court denied both motions, reasoning there were questions of fact as to whether the alleged misrepresentations occurred, whether they were made with the intent to deceive or defraud, and whether they increased Verex's risk of loss.

Following trial, the court found the misrepresentations "were made on behalf of [the bank], were material[,] and increased [Verex]'s risk of loss." The trial court concluded that: (1) Verex had the right to rescind the primary policy on Sassor's mortgage pursuant to the contract language; and (2) Verex had the right to rescind the pool policy as it related to the Sassor, Sarzoza, and Branson mortgages, pursuant to Minn. Stat. ' 60A.08, subd. 9 (1982), and the doctrine of mutual mistake. The bank appeals only from the court's ruling relating to the pool policy. [1]


Minn. Stat. ' 60A.08

A reviewing court is not bound by and need not give deference to a trial court's decision on a purely legal issue. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn. 1984). The construction of a statute is clearly a question of law. Hibbing Educ. Ass'n v. Public Employment Relations Bd., 369 N.W.2d 527, 529 (Minn. 1985).

The trial court found that the borrowers made misrepresentations and those misrepresentations were made "on behalf of" the bank. The court concluded that coverage under the pool policy could be rescinded as to the three borrowers in question on the basis of Minn. Stat. ' 60A.08, subd. 9 (1982). We disagree.

Minn. Stat. ' 60A.08, subd. 9 (1982), provides:

No oral or written misrepresentation made by the assured, or in his behalf, in the negotiation of insurance, shall be deemed material, or defeat or avoid the policy, or prevent its attaching, unless made with intent to deceive and defraud, or unless the matter misrepresented increases the risk of loss.

(Emphasis added.)

The bank concedes that the misrepresentations increased Verex's risk of loss, but denies that the misrepresentations were made in its behalf. Minnesota appellate courts have not interpreted the meaning of "in [assured's] behalf" in Minn. Stat. ' 60A.08. Words and phrases in statutes "are construed according to * * * their common and approved usage." Minn. Stat. ' 645.08 (1994). The phrase in behalf of means "in the interest or in defense of." Bryan A. Garner, A Dictionary of Modern Legal Usage 102 (2d ed. 1995). [2]

The bank argues the misrepresentations were not made in its behalf because it had no interest in whether Verex approved Sassor, Sarzoza, or Branson; if Verex refused to approve them, the bank contends it would simply find other borrowers. Moreover, the bank argues its relationship with the borrowers was indirect at best because it did not see their applications until after Verex approved them.

Verex counters with language from TCF Mortgage Corp. v. Verex Assurance, Inc., 709 F. Supp. 164, 166 (D. Minn. 1989), stating:

[B]ecause "the matter misrepresented increase[d] the risk of loss" the policy is avoidable "regardless of the intent with which it was made."

(Citations omitted.) Indeed, the TCF court found that a borrower's representations were made "in behalf of" an insured even when the insured bank was unaware of the misrepresentations. Id. at 165-66.

The policy at issue in TCF, however, explicitly provided that "representations of the borrower" were equivalent to "representations of the insured." See id. at 166. While the TCF court further stated that "[s]uch a contractual clarification is not, however, necessary" if the insured bank itself submitted to the insurer the documents containing the misrepresentations, those are not the facts here. [3] See id.

It appears the trial court in this case concluded the misrepresentations were in the bank's behalf because the borrowers and the bank were both involved in the program. However, even though each had an interest in the program, there is no evidence that either acted in the interest of the other. The insurance contract does not explicitly equate a borrower's misrepresentation with a misrepresentation by the bank, and the loan originator, rather than the bank, submitted the borrowers' applications to Verex. We conclude, therefore, that any borrower misrepresentations were not made in behalf of the bank, and the pool policy should not have been rescinded as to the Sassor, Sarzoza, and Branson mortgages on the basis of Minn. Stat. ' 60A.08, subd. 9.

Mutual Mistake

The trial court concluded, alternatively, that the pool policy could be rescinded as to the three mortgages in question because the bank and Verex were mutually mistaken regarding the financial status of the borrowers. Mutual mistake as to material facts allows for rescission of a contract as long as "the party seeking to avoid the contract did not assume the risk of the mistake." Winter v. Skoglund, 404 N.W.2d 786, 793 (Minn. 1987). A party bears the risk of mistake when

he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient.

Restatement (Second) of Contracts ' 154 (b) (1981) (emphasis added), cited in Winter, 404 N.W.2d at 793.

Verex had the manuals, procedures, and personnel necessary for conducting an extensive credit review. Not only was it in the best position to evaluate risk, it was the only entity evaluating risk. Moreover, in its brief on appeal, Verex refers to its quick turnaround on insurance applications (24 to 48 hours) and admits that it makes limited investigations to verify the information submitted by potential borrowers. Despite its limited knowledge, Verex issued insurance to the bank on Sassor's, Sarzoza's, and Branson's mortgages. Because the issuance of insurance is by its nature an assumption of risk and because Verex apparently believed its limited knowledge was sufficient for Verex's purposes, the trial court should not have rescinded coverage under the pool policy on the basis of mutual mistake.

Because of our disposition of these issues, we need not address the bank's remaining arguments.



* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, ' 10.

[1]The bank states in its appellate brief that whether the "in reliance" language found in the primary policy "allows a right to rescission is less than clear." However, the bank does not pursue the issue. Consequently, we deem it waived. See Melina v. Chaplin, 327 N.W.2d 19, 20 (Minn. 1982) (holding that issues not argued in the briefs must be deemed waived).

[2]The statute uses the phrase "in [assured's] behalf," while the trial court used "on behalf of." The terms are not synonymous. As noted above, "in behalf of" means "in the interest or in defense of." Garner, supra. "On behalf of" means "as the agent of, as representative of." Id. Because the statutory language is "in [assured's] behalf," our inquiry focuses on whether the borrowers acted in the interest or defense of the bank.

[3]In TCF, the federal district court reasoned: [B]ecause TCF submitted these documents [containing the misrepresentations] (as required by Verex) in order to receive the insurance, the misrepresentations were "made by the assured" or at least "in the assured's behalf." TCF, 709 F. Supp. at 166 (quoting Minn. Stat. ' 60A.08, subd. 9).