“For never was there a story of more woe…” than that of the policyholder that fails to disclose information in its insurance application. The importance of a policyholder’s candor in the insurance application process was recently illustrated in H.J. Heinz Company v. Starr Surplus Lines Insurance Company, No. 15-cv-0631, 2016 U.S. Dist. LEXIS 11737 (W.D. Pa February 1, 2016), where a Court ruled that Starr can rescind the $25 million product contamination policy it issued to Heinz.

Heinz initiated a lawsuit against its insurer Starr in 2015, claiming that Starr had to cover business interruption costs estimated to reach $30 million, stemming from a Chinese food control agency’s discovery of lead in Heinz’s dry baby cereal. According to Heinz, the accidental contamination of its product traced back to a soy powder supplied by Qingdao Longhi Food Co., Ltd. Heinz sought a declaratory judgment that Starr breached the insurance contract, which provided for $25 million in coverage per occurrence, by refusing to pay for damages. In response, Starr brought a counterclaim for rescission, informing the Court that Heinz had failed to disclose previous contamination incidents on its insurance application, thereby rendering the policy void.   

The Pennsylvania Court, which applied New York law, agreed with an advisory jury’s determination that Heinz had made material misrepresentations on its application for its policy, but departed from the jury’s conclusion that Starr lost its ability to rescind the policy because it knew about the misrepresentations before selling the policy. At the outset, the Court acknowledged that determining whether to void an insurance contract is not to be taken lightly, and that rescission is an extraordinary remedy, which is generally disfavored. Nonetheless, the Court found that Heinz made material misrepresentations on its policy application. The Court found that Heinz failed to mention numerous prior incidents in response to questions inquiring whether it had been the subject of a government agency complaint within the preceding 3 years, or had experienced any product recalls or withdrawals in the past 10 years.

First, the Court found that Heinz failed to disclose a 2014 Chinese food safety agent’s determination that its baby cereal products were contaminated with nitrite, which led to Heinz destroying 245,000 pounds of product. Second, the Court found that Heinz failed to disclose that in 2013, it was fined by the Chinese government for its mercury-tainted baby food. Third, the Court determined that while Heinz did disclose a 2008 Listeria loss at its San Diego facility, it listed the corresponding loss amount as “--,” or zero, when in fact it had been a $12.7 million loss. Fourth, and finally, the Court held that Heinz failed to list smaller losses in 2014, including one in Canada and two in New Zealand.  

The Court found that Heinz intentionally failed to disclose this information for the purpose of either obtaining a lower policy premium, or securing a more advantageous self-insured retention. The Court also found that Heinz’s testimony that it didn’t think these omissions would be “material” was implausible. The Court noted that the company was a sophisticated business entity. Indeed, the Court found that these were material omissions based on Starr’s testimony that had their underwriters known of these misrepresentations, they would have declined to issue the same or substantially the same policy on the same terms.  

Heinz retorted that Starr had sufficient knowledge of these incidents based on information contained in Heinz’s prior insurance applications for a different type of insurance policy and a newspaper article discussing these incidents that was contained in the underwriting file. The Court, however, found that Starr’s underwriters had acted “professionally and prudently,” and that even though they may not have proceeded perfectly, they proceeded “reasonably.” The Court explained that Starr should not have been expected to look over Heinz’s applications for different types of insurance or to independently verify the entries on Heinz’s application.

This decision adds to a long line of policyholder losses on rescission claims under New York law. It stands for the proposition that insurance companies need not turn over every stone in order to investigate what isn’t on an application. It also supports an argument that an insurance company need only prove that a policyholder made a deceptive misrepresentation or omission on a policy application in order to rescind a policy—regardless of whether it was intentional or accidental.

This decision serves as a cautionary tale for policyholders as they embark upon the insurance application process. It is crucial that policyholders take the application process seriously and are careful to disclose any and all relevant information in their policy applications. Policyholders should make certain that they are candid in completing the application, ensuring that they reveal their full claims histories and loss histories so that insurers can more accurately assess the risk and an appropriate premium. This requires diligence. Policyholders should also verify that their brokers and/or agents are proceeding with equal attentiveness. As Heinz illustrates, the risk is simply too great not to act both carefully and cautiously.
Anthony A. Froio, Esq., and Melissa M. D’Alelio, Esq., are attorneys with Robins Kaplan LLP who provide counsel on insurance issues, including in the food and beverage industries.