- Emergency Consultation Services
- FMG BlogLine
By: Kristian Smith
Insurers may need to pay closer attention to insurance applications. A Pennsylvania jury recently ruled that an insurer knew (or should have known) about omissions on an insurance application, preventing the insurer from rescinding the policy.
In May 2015, H. J. Heinz Co. filed suit against Starr Surplus Lines Insurance Co. for breach of contract, declaratory judgment and bad faith, arising from Heinz’s claim for coverage under a Starr product contamination policy for losses Heinz incurred when its baby cereal product was recalled for lead-contamination. Heinz made claims for $25 million involving baby cereal that Heinz sold in China. Starr denied coverage for the claim, and Heinz filed suit.
Starr responded with a counterclaim seeking rescission of the policy. Starr claimed that Heinz’s applications for the product contamination policy, submitted in May and June 2014, failed to disclose four accidental contamination losses Heinz suffered in early 2014, misstated the value of a loss for a 2008 contamination incident and failed to disclose a 2013 fine by the Chinese food safety agency. One of the 2014 incidents that Starr contends Heinz failed to disclose was a $12 million loss related to production and sale of baby cereal in China that was contaminated with high levels of nitrite. Starr claimed that if Heinz had accurately disclosed these losses and recalls in its policy application, Starr would not have issued the policy or would have issued it with substantially different terms. In response, Heinz claimed that Starr should have done more due diligence regarding Heinz’s application. Heinz also claimed that these omissions were not “material” to constitute rescission.
In regards to Starr’s counterclaim, a jury ruled on December 16, 2015 that although Heinz made misrepresentations in its application, Starr knew about the misrepresentations and sold the policy anyway.
There was also a noteworthy discovery ruling in this case – the judge ruled that Starr must produce to Heinz information from its underwriting files for similar product contamination policies that Starr issued to other insureds, in order for Heinz to test Starr’s claim of materiality.