H.J. Heinz Company v. Starr Surplus Lines Insurance Company

675 Fed. Appx. 122 (2017)

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Nature of the Case

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Facts

P makes and sells food products worldwide. D is a global insurance company that sells contaminated product insurance that protects food product companies against losses arising from accidental contamination or government-imposed recall of their products. P had this type of insurance from insurers other than D. P’s coverage was subject to a $20 million self-insured retention, commonly referred to as a 'SIR.' P sought proposals for contaminated product insurance, including accidental contamination insurance, for the period covering July 1, 2014 to July 1, 2015. An insurance broker, Aon, acted for P throughout the application process and subsequent purchase of the policy (Policy). Aon emailed P's application for a policy to D which included P's loss history and a certification signed by P. The Application asked specific questions about prior losses and P responded by attaching a spreadsheet detailing P's loss history from 1998 to 2013. The loss history disclosed only one loss over ten years greater than P's requested $5 million SIR. Aon provided D with a loss ratio analysis dated June 5, 2014. The loss ratio analysis projected only one loss in excess of a $5 million SIR over a ten-year period. Two Starr underwriters conducted independent analyses of the materials. They concluded that P's requested $5 million SIR was appropriate. P accepted D's proposal on June 27, and the Policy became effective. Two weeks later, Chinese authorities informed P that baby food it manufactured in China was contaminated with lead. P recalled the product and notified D. D hired two outside firms to investigate P's claimed loss. D found out that, prior to Policy inception, P incurred a loss in excess of $10 million after the discovery of excessive levels of nitrite in baby food manufactured in China. P did not disclose this loss in its Application. D informed P that it was reserving its right to limit or withhold coverage under the Policy. P sued D seeking damages for breach of contract and bad faith and a declaration that D must indemnify P for the China Lead Loss claim. D asserted a counterclaim for rescission based on allegations that P omitted and misrepresented material information in its Application. The parties agreed to litigate D's counterclaim first. The jury found that D proved that P made material misrepresentations of fact in its insurance application, but that D waived its right to assert rescission. The district court agreed with the jury on misrepresentation but disagreed on a waiver. P appealed.