Why it matters: A federal jury concluded that Starr Surplus Lines Insurance Company did not have a valid basis to rescind the product contamination policy it issued to H.J. Heinz Company, notwithstanding misrepresentations the insured made during the application process. Moreover, Starr waived its right to rescind the product contamination policy issued to Heinz. When tests by the Chinese government revealed high levels of lead in Heinz baby cereal, the company recalled the cereal and submitted a claim to its insurer Starr. The insurer refused to pay, however, arguing that Heinz made multiple material misrepresentations on its insurance policy application such that rescission was appropriate. The question of rescission went to a federal jury in Pennsylvania and the jurors agreed with Starr that Heinz made misrepresentations of fact in its insurance application. But the jury found that the insurer could not rescind the policy because it failed to demonstrate Heinz deliberately omittedinformation that it knew would be material to Starr. Moreover, the jury determined that the policyholder proved by a preponderance of the evidence that the insurer waived the right to assert a rescission claim in any event.
Detailed discussion: In 2014, H.J. Heinz Company was forced to recall baby cereal it sold when tests conducted by the Chinese government revealed that the baby cereal contained levels of lead in excess of the allowable amount. To cover the costs of the recall and subsequent destruction of the products, the company filed a claim with Starr Surplus Lines Insurance Company pursuant to its product contamination policy.
Starr, however, refused to pay and Heinz filed suit in Pennsylvania federal court seeking coverage for damages estimated in excess of $30 million. Starr sought to rescind the policy, arguing that Heinz omitted material information from its policy application. After the court denied Starr's motion for summary judgment, trial began on the issue of rescission.
The insurer argued to the jury that Heinz omitted multiple material pieces of information, including a prior loss of baby cereal in China that was contaminated by nitrate; a recall of baby food in Canada; multiple product recalls in New Zealand involving pesto dip and canned spaghetti; and a fine imposed by a Chinese food safety agency.
Although the jurors determined that Starr proved by a preponderance of the evidence "that Heinz made a misrepresentation of fact(s) in its insurance application that was material," the jury answered "no" on the verdict form to the question of whether Starr proved by clear and convincing evidence that, during the insurance application process, Heinz deliberately omitted information and/or deliberately remained silent on information that Heinz knew would be material to Starr, so as to justify rescission of the policy.
Further, the jurors accepted Heinz's affirmative defense of waiver. The jurors answered in the affirmative the question, "Did Heinz prove by a preponderance of the evidence that Starr waived the right to assert a rescission claim by (1) agreeing to sell the Policy despite sufficient knowledge of the misrepresentation/omitted information/silence; or (2) failing to promptly assert rescission of the Policy after gaining sufficient knowledge of the grounds for rescission, and after a reasonable period of time in which to investigate all of the facts surrounding the potential basis for rescission and to deliberately decide whether it should rescind the Policy?"
With the issue of rescission now off the table, the case will turn to whether the insurer breached its duty to defend Heinz.
To read the verdict form in H.J. Heinz Company v. Starr Surplus Lines Insurance Company, click here.