Innocent or Intentional Misrepresentation Requires Rescission

The Equitable Remedy of Rescission

Sometimes courts think insurance is a government entitlement rather than a contract between two parties. In H.J. Heinz Company v. Starr Surplus Lines Insurance Company, Slip Copy, United States District Court, W.D. Pennsylvania 2016 WL 374307 (02/01/2016)
the US District Court for the Western District of Pennsylvania, remembered the reality and that “An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.” [Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.App.2d 581]

THE ISSUES

This case involves an insurance coverage dispute between Plaintiff/Counterclaim-Defendant H.J. Heinz Company (“Heinz”) and Defendant/Counterclaim-Plaintiff Starr Surplus Lines Insurance Company (“Starr”).

The Counterclaim seeks the equitable relief of rescission of the insurance policy, and thus the final determination of that claim is one for the Court, even though the Court decided to employ an advisory jury after consultation with counsel.

DISCUSSION

New York applies the Marine Rule with regard to rescission of insurance contracts and Section 3105 of New York’s Insurance Law sets forth the basic framework for rescission. [N.Y. Ins. Law § 3105] It states in relevant part that: “No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material.”

New York case law instructs that both intentional and unintentional misrepresentations will void a contract of insurance if the misrepresentation is material because it is unfair to deceive an insurer into issuing an insurance policy it would not have issued had it known the truth.

Starr Underwriters Credibly Explained Why the Misrepresentations Were Material

Starr underwriter Jill Peev had 8 years of experience in underwriting in contamination insurance policies, and Christian Waeldner, to whom she reported, had 15 years of experience doing the same. The judge concluded that they both credibly testified to support a finding that misrepresentations by Heinz were material, meaning that had the underwriters known of these misrepresentations, they would have declined to issue the same or substantially the same policy on the same terms.

The judge also concluded that Heinz concealed from Starr:

  • The January 2014 China Nitrite Loss, wherein Chinese Government food safety agents detected that Heinz baby cereal products were contaminated with levels of Nitrite that exceeded the limit imposed by Chinese law, which prompted Heinz to conduct a “silent recall.” Heinz eventually destroyed 245,000 pounds of product, and the loss was $11-12 million. This loss was intentionally not disclosed to Starr or other prospective insurers on the purported basis (according to Mr. Ascher) that the loss would not have been covered by a Contaminated Products Insurance (CPI) policy. The Court notes, however, that Application Question 11a sought the disclosure of all withdrawals, recall and stock recoveries “whether or not insured or insurable under” a CPI policy. Regardless of Question 11a, these events should have triggered a “yes” to Question 6e — which broadly asked about government regulatory issues.
  • The 2013 China Mercury Loss, wherein Heinz’s tuna-based baby food was contaminated with Mercury, the product was recalled, and Heinz was fined in July of 2013 by the Chinese Government. In Heinz’s response to Question 6e, Heinz represented that it had not been fined by a governmental agency in the last three years, which was false.
  • The 2008 Listeria Loss, wherein Heinz’s San Diego facility was found by the United States Department of Agriculture to be contaminated with Listeria, resulting in a loss of at least $12.7 million. Although the Listeria event was provided to Starr, the associated loss amount was listed as a dash (“-”), which the testimony established denoted as a “$0 loss.” Regardless, prior versions of the loss history by Aon to Heinz correctly disclosed a $12.7 million loss, but those versions were never provided to Starr. Mr. Ascher the Heinz representative testified that he purposefully removed this information from the “updated” loss history that Heinz submitted to insurers.  In fact Mr. Ascher’s predecessor at Heinz had previously determined that the non-disclosed Listeria loss was a covered loss, and the loss would have been covered by an ACI Policy.
  • Other smaller losses in 2014, including one in Canada and two in New Zealand, were not disclosed. Heinz contended those losses were disclosed but offered no credible evidence of disclosure.

Alex Pittignano, Senior Vice-President at Starr, testified credibly that these misrepresentations were material.

Mr. Ascher, a sophisticated business person in an executive position at Heinz, was responsible for completing and signing/certifying the Insurance Application pursuant to his newly acquired role as Global Insurance Director. The undisputed evidence revealed that Heinz had a form of Product Contamination Insurance prior to 2013, subject to a $20 million self-insured retention (SIR) but Mr. Ascher knew that the new Heinz senior management did not continue coverage as part of a cost-reduction measure.

After Mr. Ascher was hired, he recommended to Heinz senior management that Heinz obtain this coverage again — but he needed a lower SIR and/or a lower premium in order to gain the support of Heinz senior management. Thus, on behalf of Heinz, Mr. Ascher, who considered himself to be an “expert” on matters relating to insurance, sought proposals to achieve his goal of a lower SIR ($5 million or less) and a lower premium.

The trial evidence established that his goal would not have been achieved if he had provided to Starr the same information he provided to Heinz senior management — namely the misrepresentations described above.

The Court found that Mr. Ascher’s testimony was not credible. The Court instead found that Mr. Ascher, a sophisticated business person and insurance “expert,” misrepresented information on the Application to obtain a lower Self Insured Retention (SIR) ($5 million instead of $10 or $20 million) and/or to secure a lower insurance premium. Additionally, he signed a Certification, on behalf of Heinz, that the statements in its Application were “true” and that “no material information has been withheld,” knowing that his Certification was intentionally false.

NO POST-CLAIM UNDERWRITING

There was no credible evidence to support Heinz’s theory of “post-claim underwriting.” Heinz’s expert, D. Bendure, an expert in the field of insurance, could not apply his broad opinions about insurance underwriting and claims processing to the facts of this case. Instead, he spoke in generalities regarding undisclosed losses above an SIR and its effect on underwriting.

Additionally, the credible testimony of Louise Ann Kelleher, of Starr Adjustment Services, Inc., who was involved in this case pursuant to her employment as a supervisor of all Starr claims managers during the period at issue, established that Starr acted promptly and reasonably.

The evidence reveals that at the time that Heinz brought suit against Starr, Starr was properly and deliberately engaged in the process of evaluating Heinz’s claim for coverage under the policy. Heinz failed to meet its burden to show that Starr did not act promptly to rescind the policy under these circumstances.

The Court employed the use of an advisory jury with the purpose of providing insight into the facts underlying the Counterclaim for Rescission. The advisory jury has provided this insight in a thorough and thoughtful manner. The Court, however, was keenly aware that pursuant to its equitable powers, it maintains the ultimate responsibility to resolve claims and counterclaims of an equitable nature. The Court also recognized that the decision to void an insurance contract ab initio is not to be taken lightly

Based upon the facts that were fully developed at trial, the evidence warrants application of the extraordinary equitable remedy of rescission. As the advisory jury found, Starr has adequately demonstrated that Heinz made material misrepresentations, misrepresentations that the Court found were intentional, and that Heinz has fallen short on carrying its burden of proof on the affirmative defense of waiver.

ZALMA OPINION

Rescission is an equitable remedy that when one party to a contract of insurance is deceived by the other into entering into the contract by misrepresentation or concealment of material fact, the parties must be returned to the status quo that existed before the contract was made. Heinz intentionally deceived Starr to obtain a reduced premium and a smaller SIR. Since equity requires that Heinz should not be allowed to profit from its deception rescission was the only proper remedy because it would not be fair to compel Starr to insure a risk it would not have taken but for the deception.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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