H.J. Heinz Co. v. Starr Surplus Lines Ins. Co. – 2:15-cv-00631
On the first of February, 2016, federal Judge Arthur J. Schwab of the Western District of Pennsylvania overruled a jury verdict and held that Starr Surplus Lines Insurance (“Starr”) can rescind a $25 million policy the insurer had issued to H.J. Heinz Co. (“Heinz”). The policy would have provided coverage damages resulting from lead-contaminated baby food sold by Heinz, a Pittsburgh food company. The Pennsylvania decision emphasizes the importance of the disclosures made during the insurance policy application process. Further, the ruling may reinforce insurer arguments that insurance carriers are not required to investigate information outside of that provided by a potential insured in the policy application.
HISTORY OF THE CASE:
On May 15, 2015, Heinz sued Starr in Pennsylvania federal court, alleging that Starr failed to make payments for an accidental contamination claim. In its complaint, Heinz claimed it incurred significant damages as a result of a 2014 recall of dry baby cereal in China. The recall was prompted by the discovery of lead-contaminated soy bean powder used in the product. Heinz claimed that its losses, including business interruption losses, were covered under a Policy issued by Starr for up to $25 million. The complaint asserted the following causes of action: (1) breach of contract, (2) declaratory judgment, and (3) bad faith.
On June 16, 2015, Starr filed two counterclaims against Heinz for (1) a declaratory judgment and (2) rescission, based upon material misrepresentations allegedly made by Heinz in applying for the policy at issue. According to Starr, such misrepresentations included Heinz’ failure to disclose “other highly material recalls” including an earlier February 2014 China recall and 2014 recalls in Canada and New Zealand.
The Court decided to hear Starr’s claims first, ruling in early November 2015 that Starr could void the subject policy if the insurer could prove by a preponderance of the evidence that Heinz made a material misrepresentation, whether intentional or unintentional, when applying for the policy. However, as instructed by Judge Schwab, Starr would have to meet the higher standard of proof, clear and convincing evidence, if the insurer intended to prove Heinz made a misrepresentation by fraudulently omitting information material to the application. Ultimately, on December 16, 2015, a Pennsylvania federal jury found that Heinz made misrepresentations on its insurance policy applications; however, the jury found that Starr could not rescind the policy because the insurer knew of the misrepresentations and chose to issue to policy nonetheless.
In the February 1, 2016, decision, Judge Schwab agreed with the jury’s conclusion that Heinz made material misrepresentations in its initial insurance application to Starr, as to support recession. In support of the misrepresentation ruling, Judge Schwab pointed to several omissions made by Heinz, including a failure to disclose the earlier China recall for baby cereal products contaminated with nitrate and a 2013 recall for mercury-contaminated baby food, also in China.
However, the Court found that Heinz failed to prove its affirmative defense of waiver, despite the jury’s advisory verdict to the contrary, which found that Starr had waived its right to void the policy. Although Heinz argued that Starr had knowledge of any undisclosed recall incidents from materials outside the application, and still chose to issue the policy, Judge Schwab held that such materials, "without more, would not trigger a reasonably prudent insurer to follow up further." Judge Schwab further wrote:
“[Insurer Starr] should not have been expected to look at an application for a different type of insurance submitted at some other time, or to independently verify the entries on Heinz's loss history, or to determine whether, at some point in history, Heinz disclosed something about one of the listed losses that might have prompted further inquiry, in order to properly assess the risk.”
SIGNIFICANCE & THE IMPACT ON INSURERS:
This decision highlights the significance of disclosures made at the outset of the policy application and issuance process. For future recession cases and disputes, insurers may rely on the decision to argue that there is no independent duty to investigate information outside a policy application, as Judge Schwab rejected Heinz’s contention that Starr had sufficient knowledge of misrepresentations based on outside materials.
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Attorney Emily G. Cottingham specializes in insurance coverage and works for Parker, PLLC Attorneys at Law in the Fort Worth, Texas main office.