Publications

(Article from Insurance Law Alert, February 2017)

For more information, please visit the Insurance Law Alert Resource Center.

The Third Circuit ruled that an insurer did not waive its right to rescind a policy based on the policyholder’s material misrepresentations in the application.  H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., 2017 WL 108006 (3d Cir. Jan. 11, 2017).

Starr issued a product contamination policy to Heinz.  The policy application posed two questions pertaining to complaints or recalls of Heinz products.  Heinz responded “no” to one of the questions, and left the other blank, but attached a loss history spreadsheet.  After the policy incepted, Heinz notified Starr of a contamination claim.  During its investigation of the claim, Starr discovered that Heinz had incurred a loss in excess of $10 million in connection with baby food contamination and reserved its right to limit or deny coverage.  Heinz sued, alleging breach of contract and bad faith.  Starr counterclaimed for rescission.  A jury found that Heinz made material misrepresentations in its application, but that Starr waived its right to assert rescission.  A Pennsylvania federal district court agreed with the jury on the misrepresentation issue, but disagreed with the waiver finding.  The district court declared the policy void.  The Third Circuit affirmed, rejecting three arguments asserted by Heinz on appeal.

First, the court rejected the notion that by invoking the policy’s choice-of-law clause, Starr had essentially ratified the policy.  Heinz argued that Starr was not entitled to assert that the policy should be rescinded as if it never existed while seeking to enforce its choice-of-law provision.  The court explained that the choice-of-law provision itself refutes that argument because it explicitly states that the “validity . . . of this Policy will be governed” by New York law, indicating that the choice-of-law provision can be invoked to determine the  validity of the policy in the first place.  Second, the Third Circuit rejected Heinz’s contention that the district court improperly applied a preponderance of the evidence burden of proof on Starr’s rescission claim.  According to Heinz, New York law requires the elements of rescission to be established by clear and convincing evidence.  Without deciding the issue, the Third Circuit ruled that the factual evidence satisfied both standards.  Finally, the court rejected the assertion that Starr waived its right to assert rescission based on its knowledge of Heinz’s misrepresentations.  Heinz argued that email communications suggested that Starr knew of Heinz’s prior losses.  The Third Circuit affirmed the district court’s finding that “[t]hese items, without more, would not trigger a reasonably prudent insurer to follow-up further.”  The court also rejected the contention that Starr failed to assert rescission promptly after learning of the misrepresentations, reasoning that a five-month period of investigation preceding the rescission claim was reasonable.