PITTSBURGH (CN) – Material misrepresentations that H.J. Heinz Co.’s intentionally included in its insurance application will cost the company its policy, a federal judge ruled.
The Monday decision comes after Heinz faced a three-day trial before an advisory jury over Starr Surplus Lines Insurance’s bid to rescind its policy.
Evidence revealed that, in a June 2014 application for product-contamination insurance, Heinz failed to disclose three losses that would have dissuaded underwriters from issuing the policy they did.
The three events included a “silent recall” of baby cereal contaminated with nitrate that cost Heinz $12 million in January 2014; a fine from the Chinese government in 2013 over mercury found in Heinz tuna-based baby food; and a loss of at least $12.7 million in 2008 when the U.S. Department of Agriculture found Heinz’s facility in San Diego contaminated with Listeria.
Heinz actually had reported the Listeria occurrence on the application but marked a dash on the space to enter the amount of the loss associated with that event, thus implying that there were no financial losses.
Schwab’s 27-page decision describes the man responsible for filling out Heinz’s application, former global insurance director Ian Ascher, as a “sophisticated business person in an executive position at Heinz” who “considered himself to be an ‘expert’ on matters relating to insurance.”
Though Ascher claimed ignorance and unintentional misrepresentation, Ascher included all of the undisclosed application information in a memo to Heinz senior management regarding the need for a lower self-insured retention.
“Simply put, if this information was sufficiently important for Mr. Ascher to include in a presentation memorandum to the Heinz senior management, it was sufficiently important to include on the Application, yet Mr. Ascher failed to do so,” the ruling states.
Ascher intentionally misrepresented information in applying for insurance, the court found, because he knew that Heinz senior management would not approve of holding an insurance policy with Starr unless Heinz could secure a lower self-insured retention, which is the amount of the loss that the policyholder has to retain before the insurance company will begin to pay on any loss.
Jurors gave Heinz a break on whether the omissions on its application were deliberate, saying Starr failed to prove this “under the ‘clear and convincing’ burden.”
On this point, “the court will not disturb the findings of the advisory jury,” the ruling states.
Schwab disagreed with the jury on another question that the jury decided in Heinz’s favor.
“This case, based on the facts that were fully developed at trial, warrants this extraordinary equitable remedy,” Schwab decided.
“While Starr was not ‘perfect’ in its assessment and underwriting practices, perfection is not the standard,” the ruling continues.
Schwab praised Starr underwriters for acting “professionally and prudently, and they should not have been expected to look at an application for a different type of insurance submitted at some other time, or to independently verify the entries of Heinz’s loss history or to determine whether, at some point in history, Heinz disclosed something about one of the listed losses that might have prompted further inquiry, in order to properly assess the risk.”
“The information provided by Heinz to Starr under these circumstances was not ‘sufficiently indicative of something more to be tantamount to notice of the unrevealed,’ Schwab added.
Before seeking to rescind Heinz’s policy, Starr had paid approximately $190 million in claims on 2,500 polices but “had not previously sought to rescind any policy,” the court noted.
Heinz did not return a request for comment.
Schwab complimented the “excellent trial counsel of both parties” in letting this policy-rescission issue go before an advisory jury.
Though Heinz took the position that there were “no material misrepresentations of fact” during the application process, Schwab says witness testimonies “told a different story.” (Emphasis in original.)
“Starr has adequately demonstrated that Heinz made material misrepresentations, misrepresentations that this court finds were intentional,” the ruling states,
Heinz’s misrepresentations were material “because Starr’s underwriters would have declined coverage if all application questions been answered completely,” the decision continues.
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