1.18 Rescission Based on Misrepresentation

• Jurisdiction: Arizona

Under Arizona law, misrepresentation, omissions, concealment of facts, and incorrect statements contained within an application for insurance will not prevent recovery under the issued policy unless the criteria set forth in A.R.S. Sec. 20-1109 can be established. The statute provides, in part:

Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under the policy unless:

1. Fraudulent.

2. Material either to the acceptance of the risk, or to the hazard assumed by the insurer.

3. The insurer in good faith would either not have issued the policy, or would not have issued a policy in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or otherwise.

Each of the statute's subparagraphs must be read in the conjunctive;^[230] the burden is upon the insurance company to establish that all three subparagraphs are applicable before rescission will be permitted.^[231]

The first two subparagraphs of A.R.S. Sec. 20-1109 are a codification of prior Arizona decisions requiring legal or actual fraud to be present and that the fraud was material to the acceptance of the risk or hazard insured against.^[232] The third subparagraph of the statute was a statutory overruling of First National Benefit Society v. Fiske,^[233] where the facts had been revealed in the application.^[234]

The demarcation between legal fraud and actual fraud is determined by intent.^[235] Actual fraud requires an intent to deceive while legal fraud does not.^[236] The court in Illinois Bankers' Life Ass'n v. Theodore,^[237] discussed the concept of legal fraud:

[I]f the question [asked in an insurance application] is one where the facts are presumably within the personal knowledge of the insured, and are such that the insurer would naturally have contemplated that his answers represented the actual facts, if the representation be false, the insured is guilty of legal fraud, although as a matter of fact he may not have intended to deceive the insurer, but that where the question is of such a nature that a reasonable man would know that it represented merely the opinion of the insured, there must be an actual intent to deceive and bad faith on the part of the insured.^[238]

Whether a question set forth in an insurance application elicits a factual answer or an opinion may depend on the evidence in the particular case.^[239]

The test of materiality under A.R.S. Sec. 20-1109(2) is whether the facts, if truly stated, might have influenced a reasonable insurer in deciding whether to accept the risk.^[240]

The general rule is that the insured is bound by misstatements appearing in an application.^[241] However, where the insurance agent, in filling out the application, fraudulently enters incorrect answers without the fault, knowledge, or collusion of the applicant, the insurance company cannot deny recovery under the policy.^[242] Where the insured gives truthful answers that are incorrectly recorded on the application by the agent, the insurance company cannot deny recovery.^[243] "[K]nowledge of the agent is in law the knowledge of the . . . insurance company, whether or not [properly] communicated to it by its agent."^[244] Thus, the insurer cannot rely on incorrectly recorded answers where the incorrect answers are entered pursuant to the agent's advice, suggestion, or interpretation. In connection with a discussion of misrepresentation as the basis for voiding a policy, one commentator has stated:

The intent of the law is to permit one who, in good faith has done honestly all he is led by the insurer's agent to believe he is required to do. . . . And in order for a company to defeat a claim for loss, it must show that representations in the application were those of the insured, and not mistakes of its own.^[245]

If a question in an insurance application is vague and ambiguous, "a reasonable interpretation of that question by the applicant may be of controlling effect, and legal fraud may not be predicated upon an honest response based upon such reasonable interpretation."^[246]

Although subparagraphs (1) and (2) of A.R.S. Sec. 20-1109 are conjunctive, subparagraph three is internally disjunctive.^[247] The insurance company can satisfy the requirement of subparagraph (3) in any of the following ways where there has been a misrepresentation:

(1) The insurer in good faith would not have issued the policy; or

(2) The insurer would not have issued a policy in as large an amount; or

(3) The insurer would not have provided coverage with respect to the hazard resulting in the loss.

In those situations where the insurance company claims that it would not have provided coverage with respect to a certain hazard, that particular hazard must be the one that actually caused the loss.^[248] Whether an insurance company would have refused to issue a policy or would have issued one that excluded a particular hazard is a question of fact.^[249]

A.R.S. Sec. 20-1109(3) does not permit rescission if the insurer merely would have charged a higher premium for the coverage applied for.^[250]

When an insurance company engages in untrue, deceptive or...