SUPREME COURT OF ARIZONA 

En Banc 

AMERICAN PEPPER SUPPLY COMPANY, ) Arizona Supreme Court 

 ) No. CV-03-0290-PR 

 Plaintiff-Appellant, ) 

 Cross-Appellee, ) Court of Appeals 

 ) Division One 

 v. ) No. 1 CA-CV 00-0549 

 ) 

FEDERAL INSURANCE COMPANY, ) Maricopa County 

 ) Superior Court 

 Defendant-Appellee, ) No. CV 98-004028 

 Cross-Appellant. ) 

_________________________________ ) O P I N I O N

Appeal from the Superior Court in Maricopa County 

The Honorable Barry C. Schneider, Judge 

REVERSED AND REMANDED

Court of Appeals, Division One 

Memorandum Decision (filed Jul. 24, 2003) 

REVIEW DISMISSED 

Opinion of the Court of Appeals, Division One 

205 Ariz. 465, 72 P.3d 1284 (App. 2003) 

VACATED IN PART 

HERMAN, GOLDSTEIN & FORSYTH, P.C. Phoenix 

by Keith B. Forsyth 

and Evan S. Goldstein 

Attorneys for Plaintiff-Appellant, Cross-Appellee 

SANDERS & PARKS, P.C. Phoenix 

by Robert J. Bruno 

and Mark R. Gilling 

Attorneys for Defendant-Appellee, Cross-Appellant 

HUMPHREY & PETERSEN, P.C. Phoenix 

by Andrew J. Petersen 

Attorneys for Amicus Curiae 

The Arizona Association of Defense Counsel 
B E R C H, Justice 

¶1 We granted review to determine the appropriate burden 

for proving an insurer’s policy defense of concealment or 

misrepresentation. We have jurisdiction pursuant to Article 6, 

Section 5(3) of the Arizona Constitution, and Arizona Revised 

Statutes (“A.R.S.”) section 12-120.24 (2003). 

BACKGROUND 

¶2 On Tuesday, August 27, 1996, American Pepper Supply 

Company reported to its insurer, Federal Insurance Company, a 

theft of equipment left outside its building during the 

preceding weekend. Within three weeks of American Pepper’s 

initial report of the loss, Federal’s investigation revealed 

facts and inconsistencies that rendered American Pepper’s claim 

“suspicious”: (1) the equipment, which American Pepper claimed 

had a replacement value of more than $87,000, was left in an 

unfenced and unguarded area; (2) the equipment stolen was no 

longer used in American Pepper’s business; (3) there were 

inconsistencies between American Pepper’s initial reports and 

later reports to both the insurance company and the police as to 

the equipment reportedly stolen;1 (4) American Pepper wanted to 

settle the claim quickly for two-thirds of the value of the 

equipment; and (5) American Pepper was not forthcoming regarding 

 

1 For example, American Pepper initially reported that 600 

galvanized steel meat hooks were stolen, but revised the number 

and quality to 3000 stainless steal meat hooks. 

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details of the acquisition of the equipment. Federal therefore 

turned the claim over to its special investigation unit. 

¶3 The investigation revealed that, contrary to American 

Pepper’s initial reports that the equipment had been left on the 

ground outside its building, employees had actually left the 

equipment in a scrap metal salvage bin, which was discovered 

empty on Monday, August 26. When confronted with the 

discrepancy, American Pepper’s general manager claimed that the 

equipment had been stolen out of the bin, and that the bin was 

empty when National Metals, a metal recycler, picked up the bin 

on Tuesday, the day American Pepper reported the claim to 

Federal. But further investigation revealed that when National 

Metals picked up the bin on Tuesday, it contained more than four 

tons of material. 

¶4 On November 19, 1997, Federal sent a letter formally 

denying American Pepper’s claim on the grounds that the 

investigation revealed “that [the equipment reported stolen] was 

sold for scrap metal” and that American Pepper “concealed or 

misrepresented material facts in the claim presentment process.” 

Federal concluded that the claim was “not covered due to the 

misrepresentation/concealment provisions of the policy and under 

the law.”2

 Despite the denial of coverage, Federal invited 

 

2 The concealment or misrepresentation provision states that 

“[t]his insurance is void if you or any other insured 

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American Pepper to submit for review and consideration any 

information “that has not been made available to us that would 

have a bearing on [Federal’s coverage] decision.” 

¶5 Rather than submitting further information, American 

Pepper sued Federal, alleging breach of contract and bad faith. 

American Pepper asserted that the equipment had been stolen and 

that its employees had refilled the bin on Monday, after 

American Pepper discovered the theft. Federal defended by 

asserting that American Pepper had not suffered a compensable 

loss and that American Pepper’s representatives had concealed or 

misrepresented material facts concerning the theft of the 

equipment, thereby precluding coverage pursuant to the 

concealment or misrepresentation policy exclusion. 

¶6 After being instructed by the trial court that Federal 

had to prove the policy defense of concealment or 

misrepresentation by “clear and convincing” evidence, the jury 

found in favor of American Pepper and awarded $15,000. The 

court of appeals affirmed, concluding that Federal’s defense was 

comparable to a claim of fraud and thus should be proved by 

clear and convincing evidence. Am. Pepper Supply Co. v. Fed. 

Ins. Co., 205 Ariz. 465, 469-70, ¶ 18, 72 P.3d 1284, 1288-89 

(App. 2003). We granted review to determine the appropriate 

 

intentionally conceals or misrepresents any material fact or 

circumstance relating to this insurance at any time.” 

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burden by which an insurer must prove its policy defense of 

concealment or misrepresentation. 

DISCUSSION 

¶7 Federal argues that the trial court erred by 

instructing the jury that Federal had to prove its policy 

defense of concealment or misrepresentation by clear and 

convincing evidence rather than merely by a preponderance of the 

evidence. To warrant reversal, the jury instruction must have 

been not only erroneous, but “prejudicial to the substantial 

rights of the appealing party.” Gemstar Ltd. v. Ernst & Young, 

185 Ariz. 493, 504, 917 P.2d 222, 233 (1996) (quoting Walters v. 

First Fed. Sav. & Loan Ass’n of Phoenix, 131 Ariz. 321, 326, 641 

P.2d 235, 240 (1982)). 

¶8 The appropriate burden of proof is a question of law, 

which this court reviews de novo. See Nielson v. Patterson, 204 

Ariz. 530, 531, ¶ 5, 65 P.3d 911, 912 (2003) (approving de novo 

review of legal issues). Although a few jurisdictions require 

that exclusions from coverage be proved by clear and convincing 

evidence, the burden of proving insurance policy exclusionary 

provisions is usually a “preponderance of the evidence.” Lee R. 

Russ & Thomas F. Segalla, 17 Couch on Insurance § 254:14 (3d ed. 

2003) [hereinafter “Couch”]; compare Rego v. Conn. Ins. 

Placement Facility, 593 A.2d 491, 494-95 (Conn. 1991) (following 

the majority of courts and commentators suggesting that insurers 

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must prove policy defenses by a preponderance of the evidence), 

with Am. Family Mut. Ins. Co. v. Schley, 978 F. Supp. 870, 874-

75 (E.D. Wis. 1997) (applying Wisconsin law, which requires that 

an insurer prove the policy defense of misrepresentation “by 

clear, satisfactory and convincing evidence”). 

¶9 By requiring clear and convincing proof in this case, 

the trial court and court of appeals adopted the minority 

approach. In doing so, the court of appeals analogized 

Federal’s defense to a charge of common-law fraud. Am. Pepper 

Supply Co., 205 Ariz. at 469, ¶¶ 14, 16, 72 P.3d at 1288. 

Observing that allegations of concealment or misrepresentation 

implicitly charge the maker with “deceitful” conduct, the court 

reasoned that such allegations may harm an individual’s 

reputation in the same way that allegations of fraudulent 

conduct do. Id. ¶ 15. The court of appeals therefore concluded 

that it should require the defendant to meet the heavier burden 

of proving clear and convincing evidence to help prevent 

unwarranted harms to insureds’ reputations caused by insurance 

policy defenses sounding in fraud. Id. ¶ 14 (citing Wells Fargo 

Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 

Pension Trust Fund, 201 Ariz. 474, 498 n.24, ¶ 98, 38 P.3d 12, 

36 n.24 (2002)). 

¶10 Such reasoning comports with the notion that “[t]he 

degree of proof should generally correspond to the elements 

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required to be proved before the insurer escapes liability. The 

closer the elements come to intentional wrongdoing, the stricter 

the degree of proof is likely to be.” 17 Couch, supra ¶ 8, § 

254:94 (second “Observation”). 

¶11 Arizona has adopted this approach. As explained in 

State v. Renforth, 155 Ariz. 385, 387, 746 P.2d 1315, 1317 (App. 

1987), burdens of proof correlate positively with the 

significance of the interests at stake. In a criminal case, for 

example, the state must prove guilt beyond a reasonable doubt, a 

heavy burden rooted in the belief that “it is far worse to 

convict an innocent [person] than to let a guilty [person] go 

free.” Id. (quoting In re Winship, 397 U.S. 358, 373 (1970)). 

The clear and convincing burden imposed on fraud claims 

similarly stems from the societal importance of an untarnished 

reputation. Id. (citing Addington v. Texas, 441 U.S. 418, 424 

(1979)). In a non-fraud civil case, however, an erroneous 

verdict for either party is no less unjust for one party than it 

would be if it were rendered for the opposing party. Id.

(quoting In re Winship, 397 U.S. at 372). For that reason, 

civil claims generally need be established only by a 

preponderance of the evidence. 

¶12 American Pepper cites several cases in support of its 

argument that a higher burden is appropriate when a defense 

sounds in fraud. See Sunseri v. Katz, 53 Ariz. 234, 87 P.2d 797 

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(1939) (addressing suit to rescind a deed because of incapacity 

or fraud); Cole v. Town of Miami, 52 Ariz. 488, 83 P.2d 997 

(1938) (addressing the Industrial Commission’s alleged 

concealment of a worker’s health condition in a worker’s 

compensation case); Kingsbury v. Christy, 21 Ariz. 559, 192 P. 

1114 (1920) (addressing fraudulent transfers in a 

debtor/creditor dispute); Hall v. Warren, 5 Ariz. 127, 48 P. 214 

(1897) (same); Rhoads v. Harvey Publ’ns, Inc., 145 Ariz. 142, 

700 P.2d 840 (App. 1984) (addressing a claim sounding in tort 

resulting from an employment relationship); Pinnacle Peak 

Developers v. TRW Inv. Corp., 129 Ariz. 385, 631 P.2d 540 (App. 

1980) (addressing whether the parol evidence rule bars evidence 

of fraud in the inducement); Universal Inv. Co. v. Sahara Motor 

Inn, Inc., 127 Ariz. 213, 619 P.2d 485 (App. 1980) (addressing a 

claim to rescind a real estate contract on the basis of 

fraudulent concealment of a material defect); Douglas v. 

Vancouver Plywood Co., 16 Ariz. App. 364, 493 P.2d 531 (1972) 

(addressing formation of a real estate contract); Ulan v. 

Richtars, 8 Ariz. App. 351, 446 P.2d 255 (1968) (addressing a 

claim sounding in tort resulting from a real estate 

transaction). But none of these cases analyzes the distinction 

between the common law tort of fraud, for which a heavier burden 

of proof is usually imposed, and explicit contractual 

undertakings not to conceal or misrepresent, which are usually 

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proved by a preponderance of the evidence. None therefore 

provides a persuasive rationale for imposing the heavier burden 

in the insurance context. 

¶13 Although we agree that allegations of concealment or 

misrepresentation, like allegations of fraud, may harm an 

insured’s reputation, several countervailing concerns persuade 

us that for insurance contract defenses, the preponderance of 

the evidence standard properly balances the parties’ and 

society’s interests. First is ease of application. Applying an 

identical preponderance burden of proof for both the insured in 

establishing coverage and the insurer in establishing a contract 

defense will reduce juror confusion. This is especially true in 

a case like this one, in which the insurer’s defense is simply 

the flip-side of the plaintiff’s claim. A jury will more easily 

comprehend that the plaintiff-insured must prove “theft” and the 

defendant-insurer must prove “not theft” by the same legal 

standard. 

¶14 Applying the same burden of proof to all contract 

defenses an insurer raises also simplifies the analyses for the 

jury. An insurer will often pursue in the same case several 

related policy exclusions, such as arson, dishonesty, and 

concealment or misrepresentation. See, e.g., Rego, 593 A.2d at 

491; Am. Family Mut. Ins. Co., 978 F. Supp. at 874-75, 877. The 

distinction between “dishonesty” and “concealment or 

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misrepresentation” seems elusive at best and certainly is not 

one that supports the imposition of different burdens. Thus to 

require different burdens to establish them is unwarranted.3

 As 

another court succinctly explained, to require different burdens 

of proof for dishonesty, arson, and concealment or 

misrepresentation is “illogical and impractical.” Rego, 593 

A.2d at 494. 

¶15 Second, we rely upon the inherent difference between 

the common-law tort of fraud, which is traditionally required to 

be established by clear and convincing evidence, and the 

contract defenses of concealment and misrepresentation, which 

most states require be proved by a preponderance of the 

evidence. In the former, a plaintiff sues for his justifiable 

reliance on a material misrepresentation by a defendant. In a 

contract defense case, however, it is the plaintiff himself who 

is charged with making the false statement — after having 

contractually obligated himself not to make such statements. 

 

3 The court of appeals suggested that imposing a lower burden 

for concealment or misrepresentation would create an 

inconsistency between the standard for determining “dishonesty” 

and the standard for determining “concealment or 

misrepresentation.” Am. Pepper Supply Co., 205 Ariz. at 469, ¶ 

17, 72 P.3d at 1288. Couch suggests, however, that dishonesty 

exclusionary provisions are subject to a preponderance burden. 

10 Couch, supra ¶ 8, § 149:56 (stating that generally all 

affirmative defenses are subject to a preponderance of the 

evidence burden). Because no dishonesty provision is at issue 

in this case, we reserve for another day the determination of 

the proper burden for proving that defense. 

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Indeed most insurance contracts affirmatively require insureds 

to deal fairly and in good faith with the insurer. In short, 

the societal concerns that support the imposition of the clear 

and convincing burden in common-law fraud cases do not support 

the imposition of the same burden with respect to contract 

defenses. 

¶16 Third, applying the preponderance of the evidence 

burden to a concealment or misrepresentation defense comports 

with sound reason and is supported by major commentators in the 

field. See, e.g., 22A Appleman, Insurance Law and Practice § 

14062 (J. Appleman ed. 1979) (proposing a jury instruction for 

fraud in the context of insurance litigation using a 

preponderance of the evidence burden of proof); 10 Couch, supra

¶ 8, § 149:56 (stating that generally all affirmative defenses 

are subject to a preponderance of the evidence burden). Indeed, 

our own court of appeals has held that the defense of arson, 

which by its nature may impute fraudulent representations to the 

insured, must be proved only by a preponderance of the evidence. 

Godwin v. Farmers Ins. Co. of Am., 129 Ariz. 416, 418-20, 631 

P.2d 571, 573-75 (App. 1981). 

¶17 Finally, although it is a minor consideration, we note 

that adopting the preponderance burden puts Arizona in the solid 

mainstream of jurisdictions that have decided this issue. See

Rego, 593 A.2d at 494-95 (following the majority of courts and 

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commentators suggesting that insurers must prove policy defenses 

by a preponderance of the evidence); accord 17 Couch, supra ¶ 8,

§ 254:14. Although joining the majority is not, by itself, 

reason for adopting a preponderance burden of proof, there is 

value in applying a uniform and consistent standard to 

commercial transactions. 

¶18 We recognize that important interests motivate both 

insureds and insurers: insureds wish to recover for legitimate 

claims and insurers wish to avoid paying invalid ones. While we 

do not want to encourage insureds to submit fraudulent claims, 

we also do not want to make it easier for insurers to reject 

valid claims. The tort of bad faith, however, protects the 

insured’s interests against abuse in the latter case. Given 

these legitimate interests and the remedy in place for abuse by 

insurers, we conclude that an equally applied preponderance 

burden is appropriate to properly balance the competing 

concerns. 

¶19 Although plaintiffs worry that insurers will escape 

payment too easily, we do not see that application of the 

preponderance burden of proof has resulted in harmful 

consequences when applied to related contract defenses. In 

Godwin, 129 Ariz. at 418-20, 631 P.2d at 573-75, for example, 

the court of appeals applied the preponderance burden to the 

contract defense of arson, which, like the defense of 

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concealment or misrepresentation, often involves the insured’s 

concealment or misrepresentation of the true cause of the fire. 

In the nearly quarter century since that decision, we have seen 

no evidence that the application of the preponderance standard 

has led to a flood of denied claims or an onslaught of 

litigation. 

¶20 Therefore, because we find that the integrity of jury 

deliberations outweighs the negligible potential for 

reputational harms and the equities are appropriately balanced 

by an equal burden, we conclude that the trial court erred by 

instructing the jury that Federal had to prove the contract 

defense of concealment or misrepresentation by clear and 

convincing evidence. The burden of proving a concealment or 

misrepresentation exclusion is met by convincing a jury, by a 

preponderance of the evidence, that the insured has materially 

misrepresented its claim or concealed evidence that would permit 

a fair resolution of its claim. 

¶21 Having concluded that the jury instruction requiring 

proof of the contract defense by clear and convincing evidence 

was erroneous, we must now determine whether that error 

prejudiced Federal’s substantial interests. See Gemstar Ltd., 

185 Ariz. at 504, 917 P.2d at 231. In this case, the jury found 

that American Pepper established its breach of contract claim by 

a preponderance of the evidence, but did not find that Federal 

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proved concealment or misrepresentation by clear and convincing 

evidence. We cannot say that the jury might not have found 

concealment or misrepresentation by a preponderance of the 

evidence had it been properly instructed. For that reason we 

conclude that the erroneous jury instruction did prejudice 

Federal and a new trial is therefore required. 

CONCLUSION 

¶22 The proper burden of proof applicable to a policy 

defense of concealment or misrepresentation is proof by a 

preponderance of the evidence. We therefore reverse the 

judgment on the breach of contract claim and vacate that portion 

of the court of appeals opinion addressing the burden of proof. 

We further remand American Pepper’s breach of contract claim to 

the trial court for a new trial.4

__________________________________ 

Rebecca White Berch, Justice 

CONCURRING: 

_________________________________________ 

Charles E. Jones, Chief Justice 

_________________________________________ 

Ruth V. McGregor, Vice Chief Justice 

_________________________________________ 

Michael D. Ryan, Justice 

_________________________________________ 

Andrew D. Hurwitz, Justice 

 

4 The court of appeals opinion addressed another issue that 

was not the subject of this petition for review. 

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