Affirming once more the importance of due diligence and accuracy in insurance policy applications, in H.J. Heinz Company v. Starr Surplus Lines Ins. Co., No. 16-1447, 2017 U.S. App. LEXIS 510 (3rd Cir. Jan. 11, 2017) the Third Circuit affirmed a trial court ruling rescinding a policy of insurance based on the insured’s failure to fully disclose prior losses in the policy application. Heinz involved a claim for coverage under a contaminated product policy arising from losses related to baby food manufactured in China that was found to be contaminated by lead. The policy was subject to a $5,000,000 self-insured retention.
During the application process, Heinz provided a loss history which disclosed the existence of only one loss in excess of the requested $5,000,000 SIR. Based on this information, the insurer’s underwriters concluded that the requested SIR was appropriate and agreed with Heinz’s projection of one expected loss in excess of the SIR during the policy period.
Shortly after issuance of the policy, Heinz reported a claim related to lead-contaminated baby food manufactured in China. The insurer’s investigation of the claim resulted in the discovery of an additional prior loss of $10,000,000 that was not disclosed on the policy application. When the insurer notified Heinz of its intent to reserve its rights and/or withhold coverage, Heinz filed a complaint in the U.S. District Court for the Western District of Pennsylvania, seeking damages and a declaration of coverage. The insurer filed a counterclaim for rescission of the policy based on the failure to disclose the prior loss.
As a threshold matter, the Third Circuit concluded that the District Court properly applied New York law to the dispute in light of the policy’s choice-of-law clause. That choice-of-law clause provided that “validity … of this policy” would be governed by New York law. Heinz argued that Pennsylvania law governed the rescission counterclaim, because the service-of-suit clause in the policy provided that the law of the forum would apply to disputes, and the action had been filed in the federal court in Pennsylvania. The Third Circuit rejected Heinz’s argument that the separate service-of-suit provision superseded the choice-of-law clause. Similarly significant, the Court rejected Heinz’s argument that the insurer’s invocation of the choice-of-law provision waived any right to rescind the policy insofar as the choice-of-law provision was expressly applicable to disputes regarding the “validity” of the policy.
Most importantly, the Court affirmed the District Court’s conclusion that the failure to disclose the prior loss was a material misrepresentation upon which the insurer relied in issuing the policy. While Heinz disputed the evidence supporting reliance, the Court found the evidence of reliance overwhelming. The insurer was able to point to specific examples of how Heinz’s loss history affected the underwriting and issuance of the policy.
Moreover, the Court also rejected Heinz’s waiver argument, that the insurer waived its right to rescission because evidence that underwriters had read internet news articles about prior losses indicated that information regarding the undisclosed loss was available to them. Indeed, the District Court had rejected the finding of an advisory jury on that waiver issue. The Third Circuit noted that waiver under New York law is a “voluntary and intentional relinquishment of a known right” and requires evidence of “clear manifestation of intent” based on the facts. The Third Circuit agreed that the facts here did not support Heinz’s waiver argument.
Although unreported and listed as “Not Precedential,” the Heinz decision nevertheless stands as a reminder to both policyholders and insurers of the importance of complete and accurate disclosure in policy applications. Prospective policyholders must ensure accuracy in the application process or face the risk of a loss of coverage. Insurers are also reminded of the detailed proofs necessary to sustain a claim of rescission by establishing materiality of the misrepresentation and the actual effect the misrepresentation had on the decision to issue the policy.