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IN THE SUPREME COURT OF THE STATE OF KANSAS No. 95,548 NATIONAL BANK OF ANDOVER, Appellee/Cross-appellant, v. KANSAS BANKERS SURETY COMPANY, Appellant/Cross-appellee.

KANSAS BANKERS SURETY COMPANY, Appellant/Cross-appellee, v. NATIONAL BANK OF ANDOVER, Appellee/Cross-appellant.

SYLLABUS BY THE COURT

1. The trial court is required to properly instruct the jury on a party's theory of the case. However, there must be evidence which, viewed in the light most favorable to that party, is sufficient to justify a rational factfinder finding in accordance with that theory. Errors regarding jury instructions will not demand reversal unless they result in prejudice to the appealing party. Instructions in any particular action are to be considered together and read as a whole, and where they fairly instruct the jury on the law governing the case, error in an isolated instruction may be disregarded as harmless.

2. Competent parties may make contracts on their own terms, provided such contracts are neither illegal nor contrary to public policy, and in the absence of fraud, mistake, or duress a party who has entered into such a contract is bound thereby.

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3. It is the duty of courts to sustain the legality of contracts where possible. Contracts are presumed legal and the burden rests on the party challenging the contract to prove it is illegal.

4. 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. Such a contract between two sophisticated commercial entities does not contravene public policy, is not illegal, and should be enforced as written.

5. The interpretation and legal effect of contracts and insurance policies are matters of law over which an appellate court exercises unlimited review. Regardless of the construction given them by the trial court, an appellate court may construe them and determine their legal effect.

6. If contracts and insurance policies have clear language and can be carried out as written, rules of construction are not necessary. If they are clear and unambiguous, they must be construed in their plain, ordinary, and popular sense and according to the sense and meaning of the terms used.

7. The question of whether a written instrument is ambiguous is a question of law subject to de novo review.

8. Relevant evidence means evidence having any tendency in reason to prove any material fact. Relevance only requires a logical connection between the asserted facts and the inferences they are intended to establish.

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9. When ruling on a motion for judgment as a matter of law under K.S.A. 60-250, the trial court is required to resolve all facts and inferences reasonably to be drawn from the evidence in favor of the party against whom the ruling is sought. Where reasonable minds could reach different conclusions based on the evidence, the motion must be denied. Stated another way, the inquiry is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. A similar analysis must be applied by an appellate court when reviewing the grant or denial of such a motion.

10. The determination of what constitutes agency and whether there is competent evidence to prove its existence is a question of law.

11. An apparent agent is one who, with or without authority, reasonably appears to third persons to be authorized to act as the agent of another. An ostensible or apparent authority may exist if a principal has intentionally or even by want of ordinary care induced and permitted third persons to believe a person is his or her agent, even though no authority, either express or implied, has been actually conferred.

12. Errors that do not affirmatively cause prejudice to the substantial rights of a complaining party do not require reversal when substantial justice has been done.

13. One purpose of a proffer of evidence is to make an adequate record of the evidence to be introduced. This record allows the trial court to make decisions based on the substance of the proposed evidence. It also preserves the issue for appeal and provides the appellate court an adequate record to review when determining whether the trial court erred in excluding the evidence.

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14. The proponent of excluded evidence has the duty of making known the substance of the expected evidence in a proffer. A formal offer of proof in question and answer form is not required if an adequate record is made in a manner that discloses the evidence sought to be introduced. Failure to make a proffer of excluded evidence precludes appellate review because there is no basis to consider whether the trial court erred.

15. When errors in rulings or orders are of such a nature as to affect the outcome of the trial and deny substantial justice, reversal is required.

16. In the absence of any trial court error, none can accumulate.

17. The decision to grant or deny a motion for a new trial rests in the sound discretion of the district court.

18. An issue not briefed on appeal is deemed waived or abandoned. Moreover, a point raised only incidentally in a brief but not argued there is deemed abandoned.

19. Under Supreme Court Rule 6.02(d) (2009 Kan. Ct. R. Annot. 38), any material factual statement made in an appellate brief without being keyed to the record on appeal by volume and page number may be presumed to be without support in the record.

20. It is well settled that the burden is on a party to designate a record sufficient to present its points to the appellate court and to establish its claims.

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Review of the judgment of the Court of Appeals in an unpublished opinion filed April 4, 2008. Appeal from Butler district court; MICHAEL E. WARD, judge. Judgment of the Court of Appeals reversing the district court is affirmed in part and reversed in part. Judgment of the district court is reversed and remanded. Opinion filed March 5, 2010.

Ann L. Hoover, of Topeka, argued the cause and was on the briefs for appellant/cross-appellee.

Richard C. Hite, of Hite, Fanning & Honeyman L.L.P., of Wichita, argued the cause and was on the briefs for appellee/cross-appellant.

Stanley R. Parker and Deanne Watts Hay, of Parker & Hay, LLP, of Topeka, were on the brief for amicus curiae The Surety & Fidelity Association of America.

The opinion of the court was delivered by

NUSS, J.: This appeal arises out of an employee's unauthorized honoring of insufficient funds checks, which resulted in a loss to her employer, National Bank of Andover (bank). The bank had obtained a Financial Institution Crime Bond, which its issuer, Kansas Bankers Surety Company (KBS), then sought to rescind via a declaratory judgment action. The bank filed a separate suit and alleged breach of contract by KBS.

The cases were consolidated and tried to a jury. KBS obtained a verdict in its favor, but the trial court granted the bank's motion for a new trial. On retrial, the bank obtained a verdict in its favor. KBS appealed, and the bank cross-appealed. The Court of Appeals panel reversed and remanded for a third trial. This court granted the petition and cross-petition for review. Our jurisdiction is under K.S.A. 20-3018(b) and K.S.A. 60-2101(b).

We have reorganized the issues on appeal, which, along with our holdings, are as follows:

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THE BANK'S ISSUES: 1. Did the Court of Appeals panel err in holding that 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? No.

2. Did the panel err in holding that the phrase "does your bank require" contained in the bond application refers not only to standards of performance but also to actual performance? No.

3. Did the panel err in reversing the trial court's grant of judgment to the bank on KBS's claim that the bank gave an untrue answer to Question 1 of the bond application? No.

4. Did the panel err in holding that employee Steward's transactions can be characterized as bank loans? No.

5. Did KBS show prejudice resulting from the trial court's order in limine and evidentiary rulings? Yes.

6. Did the panel err in reversing and remanding for a third trial? No.

KBS'S ISSUES ON CROSS-APPEAL:

7. Did the panel err in failing to reinstate KBS's favorable jury verdict in the first trial? No.

8. Did the panel err in failing to rule as a matter of law that no coverage exists under Insuring Agreement (A) of the bond? No.

9. Did the panel err in failing to reverse the trial judge's grant of judgment as a matter of law against KBS regarding Question 2 of the bond application? Yes.

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Accordingly, we affirm in part and reverse in part the Court of Appeals, reverse the district court, and remand for a third trial.

FACTS

For years National Bank of Andover had been covered by annual renewals of a Financial Institution Crime Bond through Kansas Bankers Surety Company. On January 11, 2002, the bank submitted its annual application and renewal form for the bond to KBS. The application was filled out by Jo Ann Wallace, the bank's cashier; reviewed by Lane Kvasnicka, the bank's senior vice-president; and signed by Dennis Bush, the bank's president and CEO.

The application provides that it becomes part of the bond upon issuance. The application also addresses an insured's representations to KBS and the grounds for KBS's rescission of the bond:

"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."

Among other things, the application required bank president Bush to answer the following three questions:

"Does EVERYONE employed by the bank know and understand the POLICY AND PROCEDURES as approved by the Board of Directors for their job or department? [Hereinafter referred to as Question 1.]

"Do you have a planned program requiring segregation of duties so that no single transaction can be fully controlled by one person? [Question 2.]

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"The correspondent account, suspense account, or transit account is used most often by dishonest employees. Does your bank require that all correspondent accounts, suspense accounts, and transit accounts be balanced regularly and balanced by a second person at least monthly? [Question 3.]"

Bush answered yes to each question. After KBS received the application, it issued the bond on March 15, 2002. One week later, a bank employee discovered suspicious checks in the desk of employee Paula Steward.

Steward was the head accounting clerk at the bank beginning in 1998. From 1999 through the beginning of 2002, Steward paid insufficient funds checks drawn on the accounts of three of the bank's customers: William Spillman, Dr. John Brooks, and Brooks' business, Meadowbrook Farms, Inc. Steward did not charge the paid amounts against the customers' accounts. Rather, she made false entries in the bank records to hide the payments. She paid each of the checks despite the "no pay" instructions given to her by the bank's officers and hid the checks in her desk drawer.

Steward later explained she paid these checks because she was having problems keeping up with her job, things got out of control, and she panicked. She also believed these customers when they told her they would repay the bank for the overdrafts.

On March 27, the bank notified KBS of the problem. The next day, the bank's outside accounting firm, Kennedy and Coe, LLC, began an investigation of the bank's losses. Kennedy and Coe confirmed that Steward had paid insufficient funds checks without charging the three customer accounts even though bank officers had instructed her to return such checks unpaid. The bank's net loss was calculated at nearly $900,000 after customer Spillman refunded the bank for his insufficient funds checks. Kennedy and Coe eventually wrote to inform the bank of "an absence of segregation of duties in regard to return item handling, transit functions and the reconciliations and balancing of both internal general ledger accounts and due from correspondent accounts."

The bank ultimately submitted its sworn proof of loss statement to KBS seeking coverage for the losses on the three accounts. Within a week, KBS vice president Paul Bures began his 8

investigation. He interviewed bank employees and reviewed documents, including the bank's Compliance Policies and Procedures Manual. The Internal Control Policy contained there stated that, among other things, its cashier "shall perform or supervise in the performance of the following" functions:

"5. Reconcile and prove to the general ledger daily: a. All deposit accounts . . . . .... "7. Reconcile and prove to the general ledger monthly: a. All correspondent bank accounts."

The job description for Steward's position, head accounting clerk, provides that she reports to the cashier; her purpose is to "assist the Cashier with daily operations and to supervise the bookkeeping department to insure completion of daily operations." Her "duties and responsibilities" include "balancing of General Ledger Accounts" and "Balancing of Correspondent Accounts." Steward confirmed through her testimony that her job included the balancing of the correspondent and general ledger accounts.

Through Bures' investigation, he discovered that Steward was the only bank employee who had been taught to balance the correspondent accounts. He also discovered that before discovery of the losses, correspondent accounts had not been balanced regularly or by a second person on a monthly basis.

KBS president Donald Towle eventually wrote a letter to the bank declaring the bond rescinded ab initio because of the bank's false answer to Question 3 on the renewal application. Consequently, Towle returned to the bank its bond premium. Towle later officially amended the basis for KBS's rescission to include the bank's false answers to Questions 1, 2, and 3 on the renewal application.

That same day, KBS filed a declaratory judgment action in Shawnee County District Court. It claimed, among other things, that because the bond was issued in reliance upon the bank's misstatements in its renewal application, KBS "has no contractual obligation to [the bank] 9

under the bond, and the bond is void ab initio." The following day, the bank filed a breach of contract action against KBS in Butler County District Court. Consistent with KBS's declaratory judgment action, its defenses included a contention that the contract was void ab initio because it was obtained by fraud. The Shawnee County case was transferred to Butler County, and these cases were consolidated.

Both parties moved for summary judgment and for orders in limine. After argument, the trial court denied both summary judgment motions but sustained the bank's motion in limine. It excluded from the trial, among other things, evidence of the failure of the bank's employees to follow the bank's policies relating to their job descriptions and duties. The court found this evidence irrelevant in the declaratory judgment action and reasoned that this evidence would improperly interject issues of comparative fault into a contract action.

The consolidated cases were tried to a jury, which returned a verdict in favor of KBS. The bank filed motions for a new trial and for judgment notwithstanding the verdict. The trial court sustained the motion for a new trial for three reasons. First, the court found that KBS had violated the orders in limine. Second, the court found it had failed to instruct the jury to disregard evidence that employees failed to comply with the bank's policies. Third, the court found there was juror misconduct based upon the affidavits of two jurors, who related that in rendering their verdict they did consider evidence of the bank's poor banking practices and its failure to follow its own procedures.

KBS filed a motion requesting that the trial court reconsider its order in limine and sought additional orders in limine. The bank also filed a motion for additional orders in limine. After hearing arguments, the court denied KBS's motion for reconsideration and granted in part the bank's motion for orders in limine.

A second jury trial was held with quite different results. At the close of the evidence, the trial court granted the bank's motion for judgment as a matter of law on KBS's rescission claims that alleged the bank gave false answers to Questions 1 and 2 on the bond application. The jury then returned a verdict in favor of the bank in the amount of $896,755.35. The trial court denied 10

KBS's motions for new trial and for judgment notwithstanding the verdict. It also later awarded the bank $187,894 in attorney fees, as well as $210,173 in prejudgment interest.

KBS appealed, and the bank cross-appealed. In an unpublished opinion, the Court of Appeals reversed and remanded for a third trial. National Bank of Andover v. Kansas Bankers Surety Co., No. 95,548, unpublished opinion filed April 4, 2008. Among the numerous errors, the panel found that the trial court erred in instructing the jury, in granting some of the bank's motions in limine, and in granting partial judgment as a matter of law.

We granted the bank's petition for review and KBS's cross-petition.

More facts will be added as necessary to the analysis. ANALYSIS THE BANK'S ISSUES:

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. 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

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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.)

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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."

STANDARD OF REVIEW This issue arose as a jury instruction question, so the appellate courts must determine whether the trial court erred in failing to give the instructions. "The trial court is required to properly instruct the jury on a party's theory of the case." Wood v. Groh, 269 Kan. 420, 423, 7 P.3d 1163 (2000). However, there must be evidence which, viewed in the light most favorable to that party, is sufficient to justify a rational factfinder finding in accordance with that theory. See State v. Anderson, 287 Kan. 325, 334, 197 P.3d 409 (2008); Pizel v. Whalen, 252 Kan. 384, 388, 845 P.2d 37 (1993) (where reasonable minds might reach different conclusions). Errors do not require reversal unless they prejudice the appealing party. Instructions should be read as a whole, and where they fairly instruct the jury, an error in a single instruction is harmless. 269 Kan. at 423.

This determination requires interpretation of an insurance contract, which is a question of law over which appellate courts have unlimited review. Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 281 Kan. 844, Syl.

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