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Friday, November 7, 2003
Valley Farms v. Transcontinental Insurance: Division Two Holds That Prospective Insured Must Update Insurer On Changes Materially Affecting The Risk To The Insurer That Occur After The Application For Insurance Is Submitted But Before The Policy Is Issued.
On November 6, 2003, Division Two issued a decision reviewing a trial court's entry of summary judgment for an insurance company defending an insured's claims for breach of contract and bad faith. The insured was a company that owned apple orchards and stored apples in a refrigerated warehouse. When it applied for coverage from the insurer, the insurer requested information regarding its claims history. The insured complied, reporting in its application for insurance that it had made one claim to its then-current insurer for lightning damage. After submitting the application, the insured made three additional claims for lightning damage to its then-current insurer, but did not update the prospective insurer with respect to these new claims. The insurer issued a policy to the insured. When the insured filed a claim with the insurer (for yet another lightning strike), the insurer discovered the unreported prior claims. Because of the unreported prior claims, the insurer refused to pay for all of the damage claimed by the insured. The insured then filed the underlying lawsuit, charging the insurer with breach of contract and bad faith. The insured moved for summary judgment on the ground that the insurer had fraudulently misrepresented material facts in its application for insurance. The trial court granted the motion, and the insured appealed.
The Court of Appeals noted that the insurer's motion rested on A.R.S. § 20-1109, which provides that misrepresentations and omissions in applications for insurance shall not prevent a recovery under the policy unless the misrepresentations are (1) fraudulent and (2) material to the acceptance of risk or to the hazard assumed by the insurer, and (3) the insurer would not have issued the policy, or would have issued a more limited policy, had it been aware of the fact omitted or misrepresented. (In this context, the Court noted, "fraud" does not require an intent to deceive.) Addressing an issue of first impression in Arizona, the Court adopted the rule that "changes materially affecting the risk to an insurer and about which the insurer has previously inquired that become known to the prospective insured between the time an application for insurance is completed and submitted and an insurance policy is issued must be disclosed to the insurer." The Court applied this principle to hold that the insured's failure to report the three additional claims to the insurer established the fraud element as a matter of law. The Court also found the second statutory element satisfied by the insured's failure to contest a statement in the insurer's affidavit to the effect that the prior claim history was material to the insurer's acceptance of the risk. On the third statutory element, however, the Court found that the affidavit submitted by the insurer was "equivocal." Because a material issue of fact therefore remained as to that element, the Court reversed the grant of summary judgment for the insurer.
PRACTICE NOTES:
The insurer did not initially include the defense of misrepresentation in its answer to the insured's complaint. In fact, the insurer had not amended its complaint to include this defense by the time it moved for summary judgment on the basis of misrepresentation. After the insurer moved to strike the summary judgment motion on this ground, the insurer moved to amend its complaint to include the defense. The Court of Appeals held that the trial court did not abuse its discretion in granting the motion.
Both parties in the appeal moved for attorney's fees on appeal pursuant to A.R.S. § 12-341.01(A). In its discretion, the Court of Appeals declined the requests "without prejudice to either party to renew the request in the trial court after a decision on the merits."
The opinion was authored by Judge Brammer and joined by Judges Florez and Howard.
On November 6, 2003, Division Two issued a decision reviewing a trial court's entry of summary judgment for an insurance company defending an insured's claims for breach of contract and bad faith. The insured was a company that owned apple orchards and stored apples in a refrigerated warehouse. When it applied for coverage from the insurer, the insurer requested information regarding its claims history. The insured complied, reporting in its application for insurance that it had made one claim to its then-current insurer for lightning damage. After submitting the application, the insured made three additional claims for lightning damage to its then-current insurer, but did not update the prospective insurer with respect to these new claims. The insurer issued a policy to the insured. When the insured filed a claim with the insurer (for yet another lightning strike), the insurer discovered the unreported prior claims. Because of the unreported prior claims, the insurer refused to pay for all of the damage claimed by the insured. The insured then filed the underlying lawsuit, charging the insurer with breach of contract and bad faith. The insured moved for summary judgment on the ground that the insurer had fraudulently misrepresented material facts in its application for insurance. The trial court granted the motion, and the insured appealed.
The Court of Appeals noted that the insurer's motion rested on A.R.S. § 20-1109, which provides that misrepresentations and omissions in applications for insurance shall not prevent a recovery under the policy unless the misrepresentations are (1) fraudulent and (2) material to the acceptance of risk or to the hazard assumed by the insurer, and (3) the insurer would not have issued the policy, or would have issued a more limited policy, had it been aware of the fact omitted or misrepresented. (In this context, the Court noted, "fraud" does not require an intent to deceive.) Addressing an issue of first impression in Arizona, the Court adopted the rule that "changes materially affecting the risk to an insurer and about which the insurer has previously inquired that become known to the prospective insured between the time an application for insurance is completed and submitted and an insurance policy is issued must be disclosed to the insurer." The Court applied this principle to hold that the insured's failure to report the three additional claims to the insurer established the fraud element as a matter of law. The Court also found the second statutory element satisfied by the insured's failure to contest a statement in the insurer's affidavit to the effect that the prior claim history was material to the insurer's acceptance of the risk. On the third statutory element, however, the Court found that the affidavit submitted by the insurer was "equivocal." Because a material issue of fact therefore remained as to that element, the Court reversed the grant of summary judgment for the insurer.
PRACTICE NOTES:
The insurer did not initially include the defense of misrepresentation in its answer to the insured's complaint. In fact, the insurer had not amended its complaint to include this defense by the time it moved for summary judgment on the basis of misrepresentation. After the insurer moved to strike the summary judgment motion on this ground, the insurer moved to amend its complaint to include the defense. The Court of Appeals held that the trial court did not abuse its discretion in granting the motion.
Both parties in the appeal moved for attorney's fees on appeal pursuant to A.R.S. § 12-341.01(A). In its discretion, the Court of Appeals declined the requests "without prejudice to either party to renew the request in the trial court after a decision on the merits."
The opinion was authored by Judge Brammer and joined by Judges Florez and Howard.
