When Heinz discovered its baby food was tainted with lead, it submitted a claim to its Product Recall insurer.  But the Western District of Pennsylvania recently ruled, in H.J. Heinz Company v. Starr Surplus Ins. Co., that Starr Surplus Lines Insurance was entitled to rescind the $25 million in recall coverage because Heinz had made material misrepresentations on its application for insurance.

According to the court, Heinz failed to disclose a significant prior loss and made other false statements in its application.  Specifically, the court found that Heinz made no mention of a recall of nitrate-tainted baby cereal in China, an $11-12 million loss; falsely reported that Heinz had not been fined by a governmental agency in the prior three years, despite the fact that the Chinese government had fined Heinz for mercury-tainted baby food; and, misrepresented a $12.7 million loss associated with its Listeria-contaminated San Diego facility as a $0 loss.

Heinz argued these misrepresentations were not material, and moreover, could have been discovered had Starr made appropriate inquiries.  The court rejected Heinz’s suggestions, finding the misrepresentations were designed: “(1) to obtain a lower Self Insured Retention (SIR) ($5 million instead of $10 or $20 million) and/or (2) to secure a lower insurance premium.”  These conclusions, coupled with Starr’s evidence that the company would not have issued the same or substantially the same insurance policy on the same terms, led the court to conclude that a material misrepresentation occurred.

Finally, the court rejected Heinz’s and the jury’s conclusion that Starr waived its right to void the policy.  Heinz argued that Starr waived its right to void the policy because it knew or ought to have known about Heinz’s misrepresentations, contending that information about earlier contamination incidents was circulated in the media and was partially disclosed in an unrelated application. The court disagreed.

Although the court acknowledged that “Starr was not perfect in its assessment and underwriting practices…,” the court reasoned that “perfection is not the standard” in assessing whether an insurer has significant knowledge of an insured’s misrepresentations.  Because Starr only learned of the prior loss in April, 2015, and promptly requested more information in May, 2015, the same month Heinz filed suit, the court held that Starr did not waive its right to rescind the policy.

H.J. Heinz is significant because it affirms the principle that an insurer is entitled to rely upon the truthfulness of information disclosed in an application for insurance.  As H.J. Heinz makes plain, an insurer is not required to conduct independent due diligence to either find facts or verify facts disclosed on an application.  An insurer is free to assume that its insured has responded truthfully to all application inquiries.

Thanks to Mike Gauvin for his contribution to this post.  If you have any questions about this post, please call or email Dennis Wade for additional information.