United States: Third Circuit Affirms Rescission Of $25 Million Contaminated Products Policy

Last Updated: February 23 2017
Article by Gabriella S. Paglieri

In H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., No. 16-1447 (3d Cir. Jan. 11, 2017), the Third Circuit affirmed a District Court's order allowing insurer Starr Surplus Lines Insurance Company ("Starr") to rescind a $25 million Contaminated Products Insurance (CPI) policy that it sold to food manufacturer H.J. Heinz Company ("Heinz"), on the basis that Heinz failed to disclose material information in its insurance application.

After Starr declined coverage, Heinz brought suit against Starr, alleging breach of contract and bad faith for Starr's denial of coverage for losses Heinz suffered as a result of a recall of lead-tainted baby cereal. Starr asserted a counter-claim for rescission. Starr alleged that in June 2014 Heinz failed to make certain material disclosures in its application for the CPI policy. The application asked the following questions:

Has the Applicant, its premises, products or processes been the subject of recommendations or complaints made by any regulatory body, internal or third party audit over the past 12 months or have any fines or penalties been assessed against the Applicant by any food or similar regulatory body over the last 3 years?

In the last 10 years has the Applicant experienced a withdrawal, recall, or stock recovery of any products or has the Applicant been responsible for the costs incurred by a third party in recalling or withdrawing any products, whether insured or insurable under an accidental and malicious contamination policy?

Heinz responded "NO" to the first question and attached a spreadsheet detailing its loss history from 1998 to 2013 in response to the second question. The spreadsheet disclosed only one loss over ten years that was greater than the $5 million self-insured retention that Heinz requested. The spreadsheet, however, failed to disclose a $12 million loss suffered in early 2014 after Chinese officials discovered high levels of nitrite in baby cereal, as well as other smaller losses.

The parties agreed to try the rescission claim first before an advisory jury. The jury found that Heinz made material misrepresentations of fact in its application, but that Starr waived its right to rescind. On February 1, 2016, the District Court issued an order agreeing with the jury on misrepresentation, but disagreeing on waiver, and thus, declared the policy void ab initio in favor of Starr.

Heinz appealed claiming that the District Court erred because (i) Pennsylvania, not New York law applies to Starr's counterclaim, (ii) it applied the incorrect burden of proof, and (iii) Starr waived its right to rescind.

Choice of Law

Initially, Heinz argued that Pennsylvania law applied to the rescission claim under the service-of-suit endorsement in the CPI policy, which provided that the law of the jurisdiction where suit is brought will govern. The Third Circuit dismissed Heinz's argument holding that where, as in this case, there is an unambiguous choice-of-law provision providing that New York law applies that is separate and apart from the service-of-suit endorsement, then the choice-of-law provision controls and is not superseded by the service-of-suit endorsement.

Moreover, Heinz argued that Starr could not argue that the CPI policy be wholly rescinded, while at the same time seeking to enforce its choice-of-law provision. The Court of Appeals disagreed:

We think the plain text of the policy's choice-of-law provision — which states that the 'validity ... of this policy will be governed' by New York law (emphasis added) — refutes this argument. We accordingly decline Heinz's invitation to render the policy's choice-of-law provision a nullity.

Burden of Proof

Heinz argued that the District Court held Starr to the incorrect burden of proof and did not require Starr to prove every element of its prima facie case for rescission. In order to void an insurance contract, the insurer has the burden of proving that the insured made a material misrepresentation and that it relied on such misrepresentation when issuing the policy. The Third Circuit agreed with the District Court's findings that Starr presented sufficient evidence showing Heinz made material misrepresentations on its application. The Third Circuit went even further and stated:

[T]he materiality of Heinz's misrepresentation is self-evident. For the 10-year period identified in the application, Heinz disclosed only one loss in excess of a $5 million [self-insured retention]. In reality, however, Heinz experienced three losses exceeding a $5 million [self-insured retention], totaling more than $20 million ... Heinz's misrepresentations were of such magnitude that they deprived Starr of 'its freedom of choice in determining whether to accept or reject the risk.'

But the Third Circuit held that the District Court erred by relieving Starr of its burden of proving reliance on Heinz's material misrepresentations. The Court, however, concluded that the error was harmless and did not warrant reversal because there was "overwhelming" proof that Starr relied on Heinz's misrepresentations in issuing the policy.

Waiver

The Third Circuit affirmed the District Court's decision declining to adopt the advisory jury's verdict on waiver. Specifically, the Third Circuit agreed that the mere fact that one of Starr's underwriters read an internet article discussing one of Heinz's undisclosed losses and that Heinz disclosed certain information on a prior application would not trigger a reasonably prudent insurer to follow-up.

Finally, the Third Circuit rejected Heinz's argument that Starr had failed to seek rescission promptly after learning about the misrepresentations because a five month delay is reasonable under New York law. Therefore, the Third Circuit held that Starr did not waive its right to rescind and affirmed the District Court's ruling voiding the CPI policy ab initio.

Rescission is a powerful equitable remedy that can be used by either insureds or insurers to wholly cancel insurance contracts entered into by misrepresentations or omissions of material facts. This decision from the Third Circuit, and the high stakes involved, stand as a stark reminder that full disclosure by insureds and thorough investigations by insurers can avoid unexpected defenses to coverage claims and protracted litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.