Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_06-cv-02435/USCOURTS-azd-2_06-cv-02435-0/pdf.json

Parties Involved:
Monte Cristia
Counter Defendant
Illinois Mutual Life Insurance Company
Counter Claimant

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Monte Cristia, 

Plaintiff, 

vs.

Illinois Mutual Life Insurance Company, 

Defendant. 

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No. CV 06-2435-PHX-JAT

ORDER

Plaintiff Monte Cristia filed this lawsuit alleging that Defendant Illinois Mutual

Life Insurance Company ("Illinois Mutual") breached a disability-income insurance

contract. Illinois Mutual filed a counterclaim contending that it lawfully rescinded the

contract on the basis of certain misrepresentations in Cristia's insurance application. 

Illinois Mutual now moves for summary judgment on the counterclaim (Doc. # 17). For

the following reasons, the Court denies the motion.

I. Background

On June 11, 2003, Plaintiff Monte Cristia applied for a disability-income insurance

policy with Defendant Illinois Mutual. Among other things, the application required

Cristia to disclose any medical advice he had received within the past five years as well as

any medical advice he was currently receiving. Although less than three months earlier a

doctor had recommended that Cristia undergo arthroscopic surgery on his right shoulder,

Cristia did not include this information on the application. Cristia claims, however, that

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he fully disclosed the recommended surgery to an agent of Illinois Mutual who helped

him complete the application, and that the agent advised him that it was not necessary to

include this information on the application. The Court must address whether, under these

circumstances, Cristia's failure to disclose the recommended surgery on the application

gave Illinois Mutual a lawful ground to rescind the policy.

II. Legal Standard

The standard for summary judgment is set forth in Rule 56(c) of the Federal Rules

of Civil Procedure. Under this rule, summary judgment is appropriate when no "genuine

issue" of "material fact" remains and "the moving party is entitled to summary judgment

as a matter of law." Fed. R. Civ. P. 56(c). A dispute about a fact is genuine if the

evidence is such that a reasonable jury could return a verdict for the nonmoving party. 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The court must resolve all

ambiguities and draw all reasonable inferences in favor of the nonmoving party. Provenz

v. Miller, 102 F.3d 1478, 1483 (9th Cir. 1996).

III. Discussion

Both parties agree that the determination of whether Illinois Mutual lawfully

rescinded the insurance policy is governed by section 20-1109 of the Arizona Revised

Statutes. This statute provides, in relevant part, that a misrepresentation in an insurance

application shall not prevent recovery under the policy unless: (1) the misrepresentation is

"fraudulent"; (2) the misrepresentation is "material . . . to the acceptance of the risk"; and

(3) the insurance company would not have issued the policy had it known the actual facts. 

Ariz. Rev. Stat. Ann. § 20-1109 (2002). All three elements must be satisfied in order to

deny coverage. Valley Farms, Ltd. v. Transcontinental Ins. Co., 78 P.3d 1070, 1074

(Ariz. Ct. App. 2004). Illinois Mutual's failure to demonstrate the absence of a genuine

issue of material fact regarding the fraud element is dispositive of this motion.

The fraud element of the rescission claim can be satisfied by proof of actual or

legal fraud. Id. In this case, Illinois Mutual alleges only legal fraud. As a general rule,

legal fraud exists if: (1) the insurance application contains an incorrect answer to a

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question that asks for facts within the personal knowledge of the insured; and (2) the

requested facts are such that the insurance company would have naturally contemplated

that the answer given represented the actual facts. Id.

However, incorrect answers contained in an insurance application cannot be

fraudulent if the insurance company either knows or should know the true facts. Centrust

Mortgage Corp. v. PMI Mortgage Ins. Co., 800 P.2d 37, 43 (Ariz. Ct. App. 1990). 

Knowledge of the true facts can be imputed to the insurance company from its agents. 

E.g., Smith v. Republic Nat'l Life Ins. Co., 483 P.2d 527, 532 (Ariz. 1971); Stewart v.

Mutual of Omaha Ins. Co., 817 P.2d 44, 53 (Ariz. Ct. App. 1991). An insurance

company has constructive knowledge of the true facts by virtue of its agent's knowledge

when: (1) the applicant fully discloses the true facts to the agent; (2) the failure to include

these facts in the application is the fault of the agent; and (3) the applicant has in good

faith done all he was led by the agent to believe he was required to do. Stewart, 817 P.2d

at 53.

Although Illinois Mutual acknowledges the constructive-knowledge exception to

legal fraud, it contends that the exception does not apply in this case. Illinois Mutual first

argues, curiously, that Cristia has failed to present evidence sufficient to establish the

existence of an agency relationship between itself and the alleged agent, Christina

Magazzu. The insurance application at issue in this case, which is attached to Illinois

Mutual's Statement of Facts as Exhibit B, specifically identifies Magazzu as Illinois

Mutual's "agent" in at least four different places. Such undisputed evidence is certainly

sufficient to establish an apparent agency relationship. See Gulf Ins. Co. v. Grisham, 613

P.2d 283, 286 (1980) (noting that apparent agency exists when the principal "intentionally

or inadvertently induced" a third party to believe that a person was its agent).

Illinois Mutual next argues that the undisputed evidence shows that Cristia did not

fully disclose the true facts to Magazzu. According to Illinois Mutual, instead of

disclosing that he had already decided to undergo surgery, Cristia only revealed that his

doctor had recommended surgery — a difference, in the Court's view, that makes no

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difference. The relevant inquiry for assessing insurance risk is whether a person is or is

likely to be injured, not whether a person plans to receive medical treatment for an

existing injury. Moreover, Illinois Mutual admits that it is the doctor's recommendation

of surgery rather than the patient's decision to have it that would have prevented approval

of Cristia's application [Defendant's Statement of Facts ¶ 11]. Cristia has, therefore,

presented evidence from which a jury could reasonably conclude that he fully disclosed

all of the relevant information to Illinois Mutual's agent.

Finally, Illinois Mutual argues that Cristia's responses in the application would

appear false to a reasonable applicant, and that, as a result, Cristia could not have acted in

good faith when he failed to disclose the impending surgery on the application. In

response, Cristia claims that Magazzu advised him that the impending surgery did not

need to be included on the application because he had already included an earlier surgery

on the same shoulder, and that "if the insurance company wanted more information

regarding [his] shoulder injury they [sic] would contact [Cristia] or [his] doctors" [PSOF

App. 2 ¶ 6]. This testimony, coupled with the fact that Illinois Mutual excluded the

injured shoulder from coverage, would support a jury finding of good faith. See Stewart,

817 P.2d at 53 ("[An] insurer cannot rely on incorrectly recorded answers known to the

insured where the incorrect answers are entered pursuant to the agent's advice, suggestion

or interpretation.").

IV. Conclusion

The principle underlying the constructive-knowledge exception to legal fraud is

that innocent insurance applicants should not be punished for the fraudulent conduct of

insurance agents. As the Arizona Supreme Court stated in Smith:

Protection of the insurer from its agent's acts at the price of disaster to an

applicant sanctifies and fosters over-reaching and is fundamentally unfair. 

The methods employed in processing applications lie substantially within

the control of the insurer, and the insurer should not be shielded from its

own wrong.

483 P.2d at 532. As the above discussion illustrates, Cristia has presented sufficient

evidence from which a jury could reasonably conclude that he is being punished for the

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fraud of Illinois Mutual's agent. The Court having found a disputed issue of material fact

as to the fraud element of Illinois Mutual's rescission claim,

IT IS ORDERED that Defendant's Motion for Summary Judgment (Doc. # 17) is

denied.

DATED this 20th day of September, 2007.

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