Last February, a Pennsylvania federal court ordered rescission of an accidental contamination and government recall insurance policy issued to the H.J. Heinz Company after Heinz sought $25 million from its insurer for its business interruption losses sustained due to lead in its baby cereal. The district court based the rescission on findings that Heinz materially misrepresented its claim history when it purchased the policy. Heinz claimed the incorrect information was an inadvertent error by its new Global Insurance Director. Although a jury agreed that Heinz’s errors were unintentional, the district court found that even unintentional material misrepresentations were sufficient to void the contract.
Last week, the Third Circuit affirmed the district court’s ruling, writing: “The 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 SIR, 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.’” The opinion is available here.
Previously, the Hunton & Williams insurance team identified the district court’s decision as offering one of the most important case lessons of 2016. The Third Circuit decision will certainly be a contender for the same honors in 2017. In short, the decision offers an important reminder that an insurance application is not just procedural hurdle to obtaining a policy; the facts and information provided therein may be a later bar to coverage if the information is inaccurate. Policyholders should work with critical personnel, thorough brokers and coverage counsel to ensure that application disclosures and submissions are sufficient.