Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_09-cv-01118/USCOURTS-azd-2_09-cv-01118-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Breach of Contract

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 Plaintiff’s request for oral argument is denied. The parties have fully briefed the issues and

oral argument will not aid the Court’s decision. See Lake at Las Vegas Investors Group, Inc.

v. Pac. Malibu Dev. Corp., 933 F.2d 724, 729 (9th Cir. 1991).

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Michael Loza, a single man, 

Plaintiff, 

vs.

American Heritage Life Insurance

Company, a Florida corporation,

Defendant.

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No. CV09-1118 PHX DGC

ORDER

Plaintiff Michael Loza has filed a motion for partial summary judgment (Dkt. #48)

and Defendant American Heritage Life Insurance Company has filed a motion for summary

judgment (Dkt. #46). Both motions are fully briefed. Dkt. ##56, 58, 67, 70. For reasons that

follow, the Court will grant American Heritage’s motion for summary judgment and deny

Loza’s motion for partial summary judgment.1

I. Background.

On January 3, 2007, Loza became eligible for health insurance through his employer.

On January 10, 2007, Loza visited Dr. Jay Raymock, a family practitioner, for a physical

examination. Dkt. #67 at 3. According to Loza, he told Dr. Raymock that “he had difficulty

getting his stream going and some urgency” (Dkt. #47, ¶ 8; Dkt. #63, ¶ 8) and that “he had

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 In his statement of facts in support of his response to American Heritage’s motion for

summary judgment, Loza disputes American Heritage’s factual assertion that “his father had

died from prostate cancer.” Dkt. #63 at 2. Loza does not dispute, however, that his father

was diagnosed with prostate cancer or that Dr. Raymock ordered the PSA test based, in part,

upon Loza’s family history. Dkt. #63, ¶ 21.

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a past history of an enlarged prostate” (Dkt. #47, ¶ 10; Dkt. #63, ¶ 10). Loza also told Dr.

Raymock that his father had been diagnosed with prostate cancer.2

 Dkt. #47-2 at 25-26. Dr.

Raymock performed a rectal examination which revealed that Loza had an enlarged prostate

(Dkt. #47, ¶ 16; Dkt. #63, ¶ 16) and ordered a prostate specific antigen test (“PSA test”)

“because of [Loza’s] family history, certain symptoms, and because it is a routine screening

at Mr. Loza’s age” (Dkt. #63, ¶ 21). A PSA test is often used as a routine screening test in

men, but it also is used to “indicate multiple medical conditions; including benign prostate

enlargement, benign prostatic hyperplasia (BPH), inflammation, urinary tract infection,

increased sexual activity, age, and cancer.” Dkt. #63, ¶ 21. On January 18, 2007, Loza

received the results of his PSA test and was referred to a urologist because the test showed

an elevated level of prostate specific antigens in his blood. Dkt. #67 at 3.

On January 24, 2007, Loza decided to apply for a cancer insurance policy with

American Heritage. Id. at 3-4. Jody McCandless, Loza’s girlfriend, completed the

application for Loza by phone with Judith Biggs, an insurance agent. Id. at 4. During the

application process, Biggs asked the following question:

Is any person to be insured currently undergoing any diagnostic test for, now

being treated for, or ever been treated for, cancer of any malignancy which

includes: carcinoma; sarcoma; Hodgkin’s Disease; leukemia; lymphoma; or

any malignant tumor?

Dkt. #47-5 at 48. McCandless answered “no” to the question. Dkt. #67 at 4. Biggs

subsequently forwarded the application to Loza, who signed it with the representation that

all answers were “true, complete, and correctly recorded.” Dkt. #47-5 at 48. Based on the

application answers, Loza was approved for the policy.

On June 4, 2007, Loza was diagnosed with prostate cancer. Id. On June 15, 2007,

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Loza filed a claim for benefits under the cancer policy. Id. at 5. Upon receiving Loza’s

claim, American Heritage initiated a claim investigation, during which it learned about the

PSA test, which it considered to be a “diagnostic test for . . . cancer” as contemplated by the

question asked during Loza’s application process. Id. On August 28, 2007, American

Heritage denied Loza’s claims and cancelled his policy on the ground that he had made a

misrepresentation in his application by stating that he had not had any diagnostic test for

cancer. Id. After cancelling the policy, American Heritage refunded all of Loza’s premiums,

but due to a clerical error his policy was left active on American Heritage’s computers and

premiums continued to be deducted from his paycheck. Dkt. #70 at 7. Upon learning of the

mistake several months later, American Heritage refunded the money with interest. Id. at 8.

On July 21, 2008, Loza filed this lawsuit in Arizona state court alleging breach of

contract, bad faith, and negligent and intentional infliction of emotional distress because of

American Heritage’s decision to cancel Loza’s policy. Dkt. #1-2 at 3-11. American Heritage

removed the case to this Court. Dkt. #1.

II. Legal standard.

A court must grant summary judgment if the pleadings and supporting documents,

viewed in the light most favorable to the nonmoving party, “show that there is no genuine

issue as to any material fact and that the moving party is entitled to judgment as a matter of

law.” Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Jesinger v. Nev. Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law

determines which facts are material, and “[o]nly disputes over facts that might affect the

outcome of the suit under the governing law will properly preclude the entry of summary

judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see Jesinger, 24 F.3d

at 1130. In addition, the dispute must be genuine, that is, the evidence must be “such that a

reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248.

III. American Heritage’s motion.

American Heritage has moved for summary judgment on all of Loza’s claims and his

request for punitive damages. The Court will consider each claim in turn.

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A. Breach of contract.

Loza alleges that American Heritage breached the insurance contract by failing to pay

benefits and by cancelling the policy. Dkt. #1-2 at 8. American Heritage contends that the

policy is void under Arizona law based on misrepresentations made in Loza’s insurance

application.

The parties agree that A.R.S. § 20-1109 governs the denial of claims and the

cancellation of an insurance policy. The statute provides: 

All statements and descriptions in any application for an insurance policy or

in negotiations therefor, by or in behalf of the insured, shall be deemed to be

representations and not warranties. 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.

All three parts of the statute must be met for an insurance company to deny recovery. Valley

Farms, Ltd. v. Transcontinental Ins. Co., 78 P.3d 1070, 1074 (Ariz. App. 2003). American

Heritage contends that there is no genuine dispute of material fact as to whether all three

parts are satisfied and, as a result, it is entitled to summary judgment on the breach of

contract claim. The Court agrees.

1. Part One: Fraud.

For purposes of proving fraud under A.R.S. § 20-1109, an insurer generally need only

prove legal fraud (which does not require an intent to deceive), not actual fraud (which does

require an intent to deceive). Mann v. New York Life Ins. & Annuity Corp., 222 F. Supp. 2d

1151, 1154 (D. Ariz. 2002). American Heritage argues that the PSA test performed on Loza

only a few weeks before he applied for cancer insurance was a diagnostic test for cancer, and

that Loza committed legal fraud by answering “no” when asked whether he had undergone

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such a test. Loza makes three primary arguments in response: (1) the term “diagnostic test”

is ambiguous, this ambiguity must be construed in his favor, and, when so construed, his

answer was not fraudulent; (2) a PSA test is not a diagnostic test for cancer; and (3) the

question called for an opinion, meaning that American Heritage must prove that Loza

committed actual fraud. The Court finds none of these arguments persuasive.

When interpreting an insurance contract, Arizona courts look to the plain and ordinary

meaning of the words used. Sparks v. Republic Nat. Life Ins. Co., 647 P.2d 1127, 1132

(1982). Ambiguity exists only if “‘the court is unable to determine how the language of the

policy applies to the specific facts of the case.’” Employers Mut. Cas. Co. v. DGG & CAR,

Inc., 183 P.3d 513, 515 (2008) (quoting Preferred Risk Mut. Ins. Co. v. Lewallen, 703 P.2d

1232, 1234 (Ariz. App.1985)). “Accordingly, the core question is whether the policy

language is, in fact, ambiguous under the facts of this case.” Id. “Interpretation of a contract

is a question of law for the court when its terms are unambiguous on its face.” Ash v. Egar,

541 P.2d 398, 401 (Ariz. App. 1975). 

The Oxford English dictionary defines “diagnostic” as “[o]f value for purposes of

diagnosis, discrimination, or identification.” Oxford English Dictionary, 2d Ed. 1989. The

Merriam-Webster dictionary defines it as “serving to distinguish or identify.” MerriamWebster Online Dictionary, 2010. Thus, the plain and ordinary meaning of “diagnostic test”

is a test used to discriminate, distinguish, or identify. American Heritage’s application thus

asked whether Loza was currently undergoing a test to discriminate, distinguish, or identify

cancer as the cause of his condition. 

Viewing the facts in the light most favorable to Loza, “[a] PSA test measures the

amount of prostate-specific antigen in the blood,” “can only monitor a naturally occurring

biological compound in the body,” and “cannot directly diagnose cancer.” Dkt. #63 at 18.

The test often is used as a routine screening test in men of Loza’s age, but can also be used

to “indicate multiple medical conditions; including benign prostate enlargement, benign

prostatic hyperplasia (BPH), inflammation, urinary tract infection, increased sexual activity,

age, and cancer.” Id; Dkt. #63, ¶ 21 (emphasis added). The relevant question under Arizona

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law is not whether PSA tests generally can be described as diagnostic tests, but “how the

language of the policy applies to the specific facts of the case.” Employers Mut., 183 P.3d

at 515. 

The undisputed facts of this case show that the PSA test was a diagnostic test for

cancer. When Loza visited Dr. Raymock for a physical, he told the doctor that “he had

difficulty getting his stream going and some urgency” (Dkt. #47, ¶ 8; Dkt. #63, ¶ 8) and that

“he had a past history of an enlarged prostate” (Dkt. #47, ¶ 10; Dkt. #63, ¶ 10). Loza also

informed Dr. Raymock that his father had prostate cancer. Dkt. #47-2 at 25-26. Dr.

Raymock performed a rectal examination which revealed that Loza had an enlarged prostate

(Dkt. #47, ¶ 16; Dkt. #63, ¶ 16) and ordered a PSA test “because of family history, certain

symptoms, and because it is a routine screening at Mr. Loza’s age” (Dkt. #63, ¶ 21).

Although routine screening is mentioned, these undisputed facts show that Dr. Raymock

ordered the PSA test because Loza complained of specific symptoms, Dr. Raymock’s exam

disclosed additional symptoms, and Loza had a family history of prostate cancer. Clearly,

the doctor ordered the PSA test for the purpose of detecting medical conditions that might

be causing Loza’s symptoms, including cancer. 

“A contract is not ambiguous just because the parties . . . disagree about its meaning.

Language in a contract is ambiguous only when it can reasonably be construed to have more

than one meaning.” In re Estate of Lamparella, 109 P.3d 959, 963 (Ariz. App. 2005)

(internal citations omitted). Loza proposes no alternative meanings for the phrase

“diagnostic test,” and the Court concludes that when such a test is performed for the specific

purpose of investigating the cause of particular symptoms, the test clearly is diagnostic – it

is given for the purposes of diagnosing, discriminating, or identifying the existence of

medical conditions. And when one of the possible causes being investigated is prostate

cancer, the test clearly is a diagnostic test for cancer. See Eley v. Boeing Co., 945 F.2d 276,

279 (9th Cir. 1991) (stating that a test is diagnostic when it is used to recognize the presence

or possible presence of disease). Thus, as applied to the facts of this case, “diagnostic test”

is not ambiguous. 

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Under A.R.S. § 20-1109, an insurer must prove actual fraud if the question called for

an opinion rather than a factual response. Russell v. Royal Maccabees Life Ins. Co., 974 P.2d

443, 450 (Ariz. App. 1998). Loza argues that the question asked of him was an opinion

question and that, as a result, American Heritage must prove actual fraud, which it cannot do.

The standard for distinguishing between opinion and fact questions has been explained by

the Arizona Supreme Court:

[I]f a 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.

Equitable Life Assur. Soc’y v. Anderson, 727 P.2d 1066, 1068 (Ariz. App. 1986) (quoting

Illinois Bankers’ Life Assn. v. Theodore, 34 P.2d 423 (Ariz. 1934)). “Whether a question

elicits a factual response or an opinion is a matter for the trier of fact to decide based on the

particular facts of each case, unless reasonable persons could not differ as to whether the

answer was a statement of opinion or a statement of fact.” Anderson, 727 P.2d at 1070.

In Anderson, the court considered whether asking if an individual was a habitual drug

user elicited an opinion or a fact. The insurance applicant contended that it was an opinion

because reasonable people could differ as to the meaning of the word “habitual.” The court,

however, based its decision on the specific facts of the case – that the applicant had regularly

used heroin – and determined that although the word “habitual” might be open to opinion in

certain cases, in this applicant’s case the question did not call for an opinion because the

applicant clearly and unambiguously was a habitual user. 

As in Anderson, the facts in this case dictate that American Heritage’s question called

for a fact, not an opinion. Loza’s doctor ordered the PSA test for the specific purpose of

investigating Loza’s prostate symptoms, one possible cause of which was prostate cancer.

An insurer reasonably would expect that Loza knew he had received the test and that it was

given after he complained of specific symptoms to Dr. Raymock and was determined to have

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an enlarged prostate. The Court accordingly concludes that the question in this case called

for a factual response. As a result, American Heritage need only prove legal fraud. Mann,

222 F. Supp. 2d at 1154. 

In reaching this conclusion, the Court notes that legal fraud does not require intent to

deceive. A.R.S. § 20-1109 allows insurance companies to rescind policies on the basis of

legal fraud not because the applicant has acted wrongly, but because the insurance company

has issued a policy on the basis of incorrect facts – facts which, if correctly disclosed, would

have led the company to deny coverage. See Mann, 222 F. Supp. 2d at 1154. The idea is to

prevent the injustice of imposing insurance obligations in circumstances where such

obligation never would have been created had accurate information been disclosed. In this

case, the undisputed facts show that the PSA test was ordered because Loza had urinary

difficulties, an enlarged prostate, and a family history of prostate cancer. Dkt. #63, ¶ 21. Dr.

Raymock was seeking to determine the cause of Loza’s symptoms, and one possible cause

was prostate cancer. Such a test clearly fell within the plain meaning of a “diagnostic test

for cancer,” and the failure to disclose the test, even if innocent, rightly invokes the legal

fraud doctrine. 

2. Part Two: Materiality.

American Heritage must also prove that there is no genuine issue of material fact as

to whether Loza’s legal fraud was material to its acceptance of the risk of issuing Loza’s

cancer policy. The test of materiality is whether the facts, if truly stated, might have

influenced a reasonable insurer in deciding whether to accept the risk. Valley Farms, Ltd.,

78 P.3d at 1074. American Heritage’s underwriting department has declared that it would

not have issued the policy to Loza had he answered “yes” to question 6. Dkt. #47, ¶ 131.

Loza does not dispute the truth of this declaration, but continues to argue that it was

unreasonable for American Heritage to believe that the PSA test was diagnostic. Dkt. #63,

¶ 131. As discussed above, the Court does not agree with this argument. 

Loza also argues that the test was not material because, if it was, American Heritage

would specifically have asked if Loza had undergone a PSA test. Dkt. #67 at 14. The Court

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3

 Because the Court is granting summary judgment on the ground that American Heritage

was entitled to rescind the policy, the Court will not consider American Heritage’s argument

that Loza’s condition was pre-existing.

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does not agree that the materiality of a fact is determined by how the insurer phrases a

question. Question 6 was not ambiguous given the facts of this case and American Heritage

has established without contradiction that it would not have issued the policy had Loza

answered the question “yes.” This is sufficient to satisfy the Arizona test for materiality –

that the facts, if truly stated, might have influenced a reasonable insurer in deciding whether

to accept the risk. Valley Farms, Ltd., 78 P.3d at 1074.

3. Part Three: Non-issuance.

American Heritage must prove that it would not have issued the policy had Loza been

truthful. American Heritage has presented uncontroverted evidence that it would not have

issued the policy had Loza answered “yes” to question 6.

4. Conclusion.

On the basis of undisputed facts, the Court concludes that American Heritage was

entitled to rescind the policy under A.R.S. § 20-1109. The Court therefore will enter

summary judgment on Loza’s breach of contract claim.3

B. Bad faith.

In Arizona, a plaintiff attempting to prove insurance bad faith must show “the absence

of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or

reckless disregard of the lack of a reasonable basis for denying the claim.” Noble v. Nat’l

Am. Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981). Loza cannot show the absence of a

reasonable basis for denying benefits of the policy because American Heritage gave a basis

that is reasonable as a matter of law – that Loza made a legal misrepresentation in his

application. Loza therefore cannot prove bad faith and American Heritage is entitled to

summary judgment on this claim.

C. Negligent and intentional infliction of emotional distress.

To establish a claim for negligent infliction of emotional distress, Loza must prove

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physical injury. Rayes v. United States, 967 F. Supp. 1162, 1165 (D. Ariz. 1997). It is

undisputed that Loza received no physical injury from the actions of American Heritage.

Loza admits that there can be no recovery for intentional infliction of emotional

distress absent a loss of property caused by American Heritage. Dkt. #67 at 17. Because

American Heritage properly cancelled Loza’s policy and denied Loza’s claim, there is no

loss of property on which an intentional infliction claim can stand. American Heritage is

entitled to summary judgment on these claims.

D. Punitive damages.

Because all of his other claims are being dismissed, Loza can show no actual damages

on which punitive damages can stand. See Wyatt v. Wehmueller, 806 P.2d 870, 874 (Ariz.

1991) (“A plaintiff must be entitled to actual damages before being entitled to punitive

damages.”).

IV. Loza’s motion.

Loza requests summary judgment on three issues: (1) that American Heritage waived

its right to rescind Loza’s policy, (2) that Loza did not make a misrepresentation in his

application, and (3) that Loza, if he did make a misrepresentation, did not make a fraudulent

misrepresentation. Dkt. #48. The Court has granted summary judgment to American

Heritage on issues (2) and (3) and will not discuss them again. The Court will, however,

consider Loza’s argument that American Heritage waived its right to rescind his policy.

Loza argues that he told American Heritage that his primary physician was Dr.

Raymock and provided it with his contact information. Dkt. #48 at 7-8. American Heritage

did not contact Dr. Raymock to ask if Loza had received a PSA test. Loza contends that

American Heritage was obligated to perform such due diligence and, having failed to do so,

is estopped from relying on Loza’s misrepresentation to void the policy. Id. at 8. Loza

provides no authority for the proposition that an insurance company must always conduct due

diligence to determine whether an applicant is truthful in his application. An insurance

company in fact has no duty to investigate statements in an application unless “the

information disclosed to the insurer is such as to have caused a reasonably prudent insurer

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to investigate further.” CenTrust Mortg. Corp. v. PMI Mortg. Ins. Co., 800 P.2d 37, 43

(Ariz. App. 1990). 

Loza argues that because American Heritage maintains that a PSA test is a diagnostic

test for cancer, American Heritage should have known that Loza was likely to provide

inaccurate information and, as a result, was obligated to investigate. Dkt. #48 at 8. Loza

provides no reason, however, why American Heritage should have thought Loza’s answer

was inaccurate, nor does he provide any evidence that American Heritage had other reasons

to investigate answers Loza had represented to be truthful. 

Loza also argues that this Court cannot grant summary judgment to American

Heritage because of an earlier state court ruling. Dkt. #67 at 1. In state court, Loza filed a

motion for summary judgment against American Heritage, arguing that it had waived its right

to rescind the policy because it continued to take premiums from Loza after the policy was

cancelled. Id. at 1-2. In ruling on his motion, the state court stated the following:

There is no question but that Defendant received premium payments from

Plaintiff after Defendant rescinded the insurance policy. There is a material

question of fact, however, whether those payments were retained by Defendant

because it considered the policy valid for that purpose while considering the

policy void for coverage purposes. McCollum v. Continental Casualty Co., 151 Ariz. 492 (App. 1986). The issue of waiver must be considered by the

trier of fact.

Id. at 2. Loza contends that because the state court determined that there was an issue for the

jury on the waiver issue, this Court is prohibited from granting summary judgment to

American Heritage. Id. But the state court order denied Loza’s motion for summary

judgment and was issued before the parties had conducted discovery on the waiver issue.

Dkt. #70 at 9. Loza has since conducted discovery, and has pointed to no evidence showing

that American Heritage waived its right to cancel the policy, knew that it was still collecting

premiums from Loza, or actually did not cancel the policy.

 Moreover, a summary judgment ruling is interlocutory and subject to reconsideration

by the Court at any time. Preaseau v. Prudential Ins. Co., 591 F.2d 74, 79-80 (9th Cir.

1979). The decision by the state court was made on a record that was not fully developed.

On the current record, there is no evidence that American Heritage waived its right to cancel

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the policy, and Loza has not pointed to any. As a result, the Court finds an absence of

material fact on the issue of waiver and will grant American Heritage’s motion for summary

judgment.

IT IS ORDERED:

1. American Heritage’s motion for summary judgment (Dkt. #46) is granted.

2. Loza’s motion for partial summary judgment (Dkt. #48) is denied.

3. The Clerk of Court shall terminate this action.

DATED this 24th day of February, 2010.

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