IN THE COURT OF APPEALS STATE OF ARIZONA DIVISION TWO

VALLEY FARMS, LTD., a n Illinois corporation, Plaintiff/Appellant,

v. TRANSCONTINENTAL INSURANCE COMPANY; CNA CASUA LTY OF CALIFORNIA, dba CNA INSURANCE COMPANIES, Defendants/Appellees

. ) ) ) ) ) ) ) ) ) ) ) ) ) ) 2 CA-CV 2003-0040

DEPARTMENT A O P I N I O N

APPEAL FROM THE SUPER IOR COURT OF GRAHAM COUNTY Cause No. CV99-0085 Honorable C. Robert Pu

rsley, Judge REVERSED AND REMANDED Lieberman, Dodge, Ge

rding, Kothe & Anderson, Ltd. By David R. Dodge and Marc R. Lieberman

Richards & Smock By Charles F. Richards and Carolyn R. Tatkin Phoenix Attorneys for Plaintiff/

Appellant

Phoenix Attorneys for Defendants/Appellees B R A M M E R, Presiding Judge.2

¶1 Ap pellant

Valley Farms, Ltd. appe als from the trial court’s grant of summary judgment in favor of appellees Tra nscontinental Insurance

Company and CNA Casua lty of California

(collectively, Transcontinental ) on the issue of misrepresentations in Valley Farms’s application

for insurance. We con clude that Valle

y Farms had a continuing duty to update Transcontinental on claims it had made be tween the time it gave

Transcontinental’s agent claims information

and the time Transcontine ntal issued the

policy of hazard insurance. But, because we conclude a genuine issue

of material fact

exists as to whether Transcontinental would have issued the policy, would have issued it in a s large an am ount, or would have provided coverage for lightning damage if it had known additional facts, we reverse sum mary judgment

and remand the case for further proceedings. Facts and Procedural Ba ckground ¶2 In

reviewing a summary jud gment, we view the

facts and the reasonable inferences therefrom in the light most favorable to the party opposing the

summary judgment motion. Link

v. Pima County , 193 Ariz. 336, 972 P.2d 669 (App. 1998). Valley Farms owns and operates appleorchards; it

also owns a

refrigerated warehou

se in which it stores harveste d apples. In 1996, Valley Farms applied for commerc ial insurance coverage from Transcontinental be cause its coverage with its then insurer, Golden Ea gle, was scheduled to expire on November 1, 19 96. Early that summer, Transcontinental requested information about Valley Farms’s claims history. Valley Farms reported that it had made one claim with Golden Ea gle for damage cause d by a lightning strike. Transcontinental’ s agent, Jay Walter, subm itted Valley Farms’s app lication to Transcontinental on October 8, 1996. Although Valley Farms apparen

tly was unaware

of when Walter would submit the application to Transcontinental, it knew the Golden Eagle polic y would3

expireon November 1, and that it would need replacement coverage by that date. Between June 1 andOctober 8, Valley Farms made three additional claims with Golden Eagle for damage caused by lightning strikes. Valley Farms did not disclose these c laims to Transcontinental, and Transcontinental did not request that Valley Farms update its historical claims record after Walter obtained the application inf ormation, but before Tra nsamerica issued the insu rance policy. ¶3 On

September 30, 1997, Valley Farms reported to Transcontinental that lightning had damaged a pump used t o operate Valley Farms’ s apple storage refriger ation unit. After it discovered the damage, Valley Farms moved the apples to an alternate re frigerated storage unit in

an effort to prevent them f rom spoiling. When Valley F arms shipped th

ose stored ap ples to a buyer in December 1997, the buyer reported they had been da maged and were

not salable. Valley Farms reported the damage to the apples to Transcontinental on December 17. When Transcontinental investigated the claim in 19 98, it discovered the three additional claims Valley Farms had made with Golden Eagle . Transcontinental paid the claim Valley Farms had made for the repair and replacement of the damaged pump equipment but denied Valle y Farms’s claim for the lost apple inventory. ¶4 Valley Farms sued Transcontinental for breach of contract an

d bad faith for making unreasonable

document requests and refusing to pay Valley Farms’s claim fordamages caused by

alightning strike. The trial court gran ted one of Transcontinenta l’s motions for summary judgment, concluding that Valley Farms was precluded from recovering dam ages because

it had not cooperated with Transc ontinental in its investigation of the claim and that Valley Farms had failed to show Transcontinental had acted in bad faith. Valley Farms appeale d that judgment and

we reversed, concluding that the trial court had erredin granting summary judgm ent in favor of4

Transcontinental. We ruled that Transcontinental was required to show it had been prejudiced by Valley Farms’s failure to cooperate and that issues of fact existed as to whether Transcontinental had acted in bad faith. Valley Farms, Ltd. v. Transcontinental Ins. Co

. , No. 2 CA-CV 01-0115 (memorandum decision filed January 17, 2002). ¶5 Valley Farms now appeals from th e trial court’s g rant of summary judgme nt in favor of Transcontinental on

Transcontinental’s subseq uent motion for summary judgment in

which it argu edthat Valley Farms had fr audulently misrepresente d material facts in its app lication fo r insurance and that, had Transcontine ntal known

the true facts, it “probably would not have issued the insurance policy . . . at issue in this case.” Discussion Motion to amend answer ¶6 We first address Valley Farm s’s argument that the trial court erred by gra nting Transcontinental’s motion to amend its answer to include the defense of misrepresentation, an d that “Transcontinental is estopped from raising the defense of misrepres

entation in the application for insurance” because it did not timely raise the defense . We will not disturb a trial cou rt’s ruling on

amotion to amend a pleading absent an abuse of discretion. Czarnecki v. Volks wag en of America , 172 Ariz. 408, 837 P .2d 1 143 (App. 1991). “Leave to amend shall be freely given when justice requires.” Ar iz. R. Civ. P. 15(a) (1), 16 A.R.S., P t. 1. ¶7 Va lley Farms fi led its first amended com plaint in November 1999. I n January 2000, Transcontinental fil ed its ans wer, which contained no a llegations that Valley Farm s had made misrepresentations

in its application. In September 2000, Transcontinental filed two m otions for summary judgment. One motion was based on Valley Farms’s allege

d failure to

cooperate in the5

claims investigation, and the second was based on misrepresentations Valley Farms allegedly had madeduring the

application process. In October, Valley Far ms moved to strike the sec ond motion

on the ground that the first time Transcontinental had raised the misrepresent ation issue was in its response to Valley Farms’s reque st for discovery. Valley F arms argued that Transc ontinental should have raised the misrepr

esentation defense in

an amended answer. In responding to Valley Farms’s motion to strike, Transcontin ent a l alternatively moved to amend its answer to allege a fraudulent misrepresentation defense. ¶8 Without

ruling on Transcontinental’s mot ion for summary judgment b ased on misrepresentation, its motion to amen d its answer, or Valley Farms’s motion to strike, the trial court granted Transcontinental’s motion forsummary judgment base d on Valley Farms’s fail

ure to cooperate in the claims investigation. As noted above , we re versed that ruling in the first appeal. Immediately upon remand, Transcontinental renewed its motion to amend its answer to includethe application misrepresen tation defense. The trial court granted the motion before Valley Farms filed its untimely op position. ¶9 Valley Farms argues Transcon tinental’s motion to amend its answer was untimely because it was filed in February 2002, mo re than two years after Valley Fa rms had filed its complaint in 1999. Valley Farms’s a rgument is misplaced. One of Tra nscontinental’s motions for summary judgment filed in September 2000 was based on Valley Farms’ s failure to disclose the additional lightning damage claims. The trial court did not rule

on that motion, however, g ranting instead Transcontinental’s other m otion for summary judgme nt based on Valley Farms’s failure

to cooperate. The motion to amend, therefore, was still pending when the ca se was remanded to the trial court after Valley Farm s’s first appeal. Based on this

record, we cannot say th

at the trial court6

abused its discretion when it granted T ranscontin ental’s motion to amend its answer. See Czarnecki

. Misrepresentation in insura nce application ¶10 Valley Farms further argues thatthe trial court erred in granting summary judgme nt in favor of Transcontinenta l on the application misrepre

sentation issue. On

appeal from summar

y judgment, we determine de novo whe ther any genuine issues of material fact exist

and whether the trial court erred in applying the law. Bothell v. Two Point Acres, I nc ., 192 Ariz. 313, 965 P. 2d 47 (App. 1998). A motion fo r summary judgment “shoul d be granted if the facts

p ro duced in support of the claim or defense haveso little probative value, given the quantum of evidence required, that reasonable people c ouldnot agree with the conclusio ns advanced by the proponen t of the claim or defe ns e.” Orme Sch. v. Reeves , 166 Ariz. 301, 309, 802 P .2d 1000, 1008 (1990). To withstand a motion for summa r y judgment, the opposing par ty must show that a genuineissue of

material fact exists tha

t precludes summary judg ment in favor of the moving party

. Ariz. R. Civ. P. 56(

c), 16 A.R.S., P

t. 2. ¶11 In

its motion for summary judg ment, Transcontinental relied on A.R.S. § 20- 1109 to argue that Valley Farms had “made frau dulent misr epresentations of mate rial facts in its insurance application [and that, h]ad the true fac

ts been known, [Transcon tinental] probably

would not have issued the insuranc e policy.” Section 20-11 09 provides: All statements and des crip tions in any application for an insurance policy or in negotiations there for, by or in behalf of the insured, shall be deemed to be representations and n ot warranties. Misrepresentations, omissions, conc ealme nt of facts and incorrect statements shall not preve nt a recovery under the po licy unless:7 1. Fraudulent. 2. Material either to the acceptance of r isk, or to the hazard assumed by the insurer. 3. The insurer in good

faith would either not have i ssued the policy, or would not

have issued a policy in

as large an amount, or would not hav e provided coverage with re spect to the hazard resulting in the loss, if the tr ue fa cts had been made known to the insu rer as required either by the app lication for the policy or otherwise. ¶12 An

insurer may not deny coverage under a policy unless the insurer can prove that all three conditions

of § 20-1109 have been satisfied. State Comp. Fund v. Mar Pac Helicopter Corp. , 156 Ariz. 348, 752 P.2d 1 ( App. 1987). To avoid cove rage of an insured risk

in a n insurance policy based on an insured’s misrepresenta

tion in the application, an insu rer must prove the insured committed actual or legal fraud that was material to the insurer’s accepting that risk. Equitable Life Assurance Soc’y

of the United States v. An derson , 151 Ariz. 355, 727 P.2d 1066 (App. 1986). “Actual fraud re quires an intent to

deceive while

legal fraud does not.” Id . at 357, 727 P.2d at 1068. Legal fr aud exists if the question [asked in an insurance application] is one where the facts are presumably within the personal knowledge of the insured, andare such that the

insurer would naturally

have contemplated that his answers represented the actual facts, if the re

presentation be false, the insured is guilty of legal fra ud, although

as a matter of fact he may not have intended to decei ve theinsurer; but that where the question is of such a nature that a re asonable man would

know that it represented merely the

opinion of the insured, the re must be an actual intent to deceive a nd bad faith on the part of th e insured. Ill. Bankers’ Life Ass’n v. Theodore , 44 Ariz. 160, 170-71, 34 P.2d 423, 427 (1934). “The test of materiality is whether the facts, if truly stated, might

have influenced a rea

sonable insurer in8

decidingwhether to accept or rej ect the risk. ” Cent. Nat’l L ife Ins. Co. v. Peter son , 23 Ariz. App. 4, 7, 529 P.2d 1213, 1216 (1975). ¶13 When

Walter requested a claims history from Valley Farm s’s representative, Lor

i Hassel br ing, she reported one claim for lightning damage on June 1, 1996. Between the time Walter made the request and when he submitted the application several months later, Valley Farms filed claims with Golden Eagle for lightning damage

that had occurred on July 23 , August 10, and September14, 1996. In her deposition,Hasselbringstated that it “[d]idn’t even cross [he r] mind” to update Valley Farms’s claims history after she had reported the June lightning claim to Walter in response to his inquiry earlier that summer. And Walter did not request an updated historical record before he submitted the a pplication to

Transcontinental. Transcontinental’s under writer, Nancy Rummel, stated in an affidavit that, “in all probability, . . . Transcontinental . . . would [not] have issued the policy of insuran ce ultimately issued . . . had the true history of claimed lightning losses been disclosed . . . . The prior claim history was both

material to the acceptance of the risk and to the hazard assumed by the insurer.” ¶14 The trial court originally denied T ranscontinental’s motion f or summary judgment as to the misrepresentation issue, finding “reasonable people can differ as to the meaning

of the facts.” The court subsequently reve rsed that decision, howeve r, and granted summar

y judgment in favor of Transcontinenta l after it filed a motion fo r reconsideration. In doi

ng so, the trial court relied on Stipcich v. Metropolitan

Life Insurance Co. , 277 U.S. 311, 48 S. C t. 512, 72 L. Ed. 895 (1928), concluding that, as the insur ance applicant, Valle

y Farms had had a duty t o u pdate its claims history to report the three additional lightning claims the company had made after Walter inquired about its past claim s history.9

¶15 We agree. Reversing the judgment in favor of the insurer and r emanding the case fora new tr i al on other grounds, the Cou rt in Stipcichstated the general rule is that changes materially

affecting the risk

to an insurer and about which the insurer has previously inqui red that become known to the prospective insur ed between the time an a pplication for insurance is completed and submitted and an insurance policy is issued must be disclosed to the insurer. See also 6 Lee R. Russ &

Thomas F . Segalla, Couch on Insurance 3D § 82:3 (3d ed. 1997). The issue of whether a prospective insured has a continuing duty to disclose all f acts that may affect the risk an insurer assumes that a rise after an insurance application has been completed but before the insurer issues the

policy of insurance is an issue of first impression in Arizona. See McCollum v. Cont’l Cas. Co. , 151 Ariz. 492, 728 P.2d 1242 (App. 1986) (ackno wledg in g issue one of first impression

and discussing

continuing duty rule in dicta, b ut applying predated policy ru le). The rule Stipcichannounced, which is based on a “spirit of fair de aling,” is generally recognized in other jurisdictions. See Borden v. Paul Re vere Life Ins. Co. , 935 F.2d 370 (1st Cir. 199 1) (duty to disclose medical co nditions between time origina l disability insurance policy iss ued and replacement

policy issued); Carroll v. Preferred Risk Ins. Co. , 215 N.E. 2d 801 (Ill. 1966 ) (duty to disclose fatal car accident to insurer a fter application

submitted but before autom obile liability insurance policy issued); United Sav. Life Ins. C o. v. Coulson , 5 60 S.W. 2d 211 (Tex. Ap p. 1977) (duty to disclose material change in physical condition occurring between time of application and issuance of life insurance policy). We adopt it as the law in Arizona. ¶16 We conclude that Valley Farms had a c ontinuing duty

to update Transcontinental about any additional claims it

made, including

the lightning strike claims, before Transcontinental issued the insurance policy. Because Valley Farms failed to report

the three claims it had m ade1 In its minute entry granting Tra nscontinental’s summar

y judgment motion, the trial court noted that Transcontinental’s ag ent had stated he had neve r asked for updated claim s information “because he felt it was unnecessar y due to the ‘soft market’ among insurance companies and that the insurance would have been written regardless of the historical losses.” Contrasted with Rummel’s affidavit, this stateme nt appears to

raise a question of

fact, at the very least, on this issue. 10 before the policy was issued, no gen uine issue

of material fact exists as to whether legal fraud exists, even though there is no evide nce Valley Farms intend ed to dece ive Transcontinental. Because Valley Farms failed to di sclose the additional claim s, the application was false as to its claims history, see Stipcich , and satisfies the requirement of § 20-1109(1). See Ill. Bankers’

. ¶17 In

her affidavit, Rumm

el stated, “The prior claim history was . . . material to the acceptance of the risk.” Because Va lley Farms does not

dispute this statement, we also conc lude that no genuine

issue of material fact

exists as towhether the additional cla ims were material to Transcontinental’s acceptance of the risk, as required by § 20-1109(2). ¶18 The final issue, therefore , is whether any genuine issue of materia

l fact exists as to the last requirement of § 20-1109(3). In this regard, Rummel also stated in her affidavit that,

in all probability, neither Tra nscontinental nor any other C NA commercial in suran ce company would have i ssued the policy of insurance ultimately issued by T ranscontinental in t

his matter had the true history of claimed lightning losses been disclosed . . . . In the unlikelyevent a policy had even be en issued, the

policy would not havebeen issued with

the same terms and

conditions as contained in the Transcontinental policy whic h was issued in

the absence of the . . . claim history. . . . The prior claim history was both material to the acceptance of the risk and to the hazard assume d by the insurer. As a result, had the high incidence of prior lightning claims been know[n], at the very least additional exclusionsor limitations would have been written into t he policy to protect the insure r. We conclude

that Rummel’s affid

avit is equivocal as to what Tr anscontinental’s response would havebeen if Valley Farms ha d disclosed the additional cla ims. 1 Specifically, Tra

nscon tinental11

failed to demonstrate that no genu ine issue of material fa

ct exists as t

o whether, knowing the information

Valley Farms had withheld , it would have issued an insur ance policy, whether it w

ould haveissued a policy with coverage amounts sma

ller than those contained in th e issued policy, or whether it would have provided any coverage for lightning strike damages. S ee § 20-1109(3). Therefore, we conclude that the trial c ourt erred in granting summ ary judgment in favo

r of Transcontinental. Attorney fees ¶19 Valley Farms and Transcontinen tal have both requested attorney fee s on appeal pursuant to A.R.S § 12-341.01(A). In ourdiscretion, we decline the requests without prejudice to either party to renew the request in the trial court af ter a decision on the meri ts.

____________________________ ____________ J. WILLIAM BRAMMER , JR., Presiding Judge CONCURRING:

____________________________ __________ M. JAN FLÓREZ, Judge

____________________________ __________ JOSEPH W. HOWARD, Jud ge