PA District Court and a CA Appellate Court find material misrepresentation in policy applications, supporting the conventional wisdom that policyholders generally should prefer juries.

Pennsylvania / Heinz:    A jury originally found in favor of H.J. Heinz and against its excess insurer, Starr Insurance Co., in its efforts to collect on its $25MM Accidental Contamination and Government Recall insurance policy in a case pending in the Western District of Pennsylvania District Court. However, the District Court Judge disregarded the jury’s “advisory findings” and rescinded the policy in Starr’s favor.

Heinz had sought a declaratory judgment against Starr for business interruption costs of as much as $30MM related to alleged lead contamination in baby cereal it sold in China. Starr asserted a counterclaim seeking rescission of the policies alleging that Heinz had failed to advise of previous contamination incidents in its application for insurance.

The court, working with the trial counsel of both parties, established a decision-making approach so that the issues in the case could be decided in an orderly and efficient manner.  The case proceeded to trial on Starr’s counterclaim for rescission. Although the counterclaim sought equitable relief and was therefore a question for the court, the court decided to employ an advisory jury after consultation with counsel.  The advisory jury found that while Heinz had made material misrepresentations on its policy application, Starr had waived its rescission right because it was aware of the misrepresentations before it bound coverage.

The court accepted the advisory jury finding that Starr had proved by a preponderance of the evidence that Heinz had made material misrepresentations.  The court also agreed with the advisory jury that Starr did not prove by clear and convincing evidence that the material information was deliberately omitted.  The court did find, however, that Heinz intentionally omitted certain information under the preponderance of evidence standard. Because the “clear and convincing” burden is a higher standard of proof, the court did not disturb the findings of the advisory jury. However, the Judge disagreed with the advisory jury that Heinz had proved by a preponderance of the evidence that Starr waived the right to assert a rescission claim.

The court found that Heinz made material misrepresentations on the application for insurance by not affirmatively disclosing previous incidents in response to questions about whether it had been the subject of a government agency complaint within the preceding three years or had experienced any product recalls or withdrawals within the preceding ten years.

The court found that Heinz should have disclosed its recall and fine from 2013 relating to mercury-tainted baby food and the fact that in 2014 the Chinese government had found that its baby cereal products were contaminated with nitrite, forcing Heinz to destroy 245,000 pounds of the product.  The insurer also presented evidence to the jury that Heinz failed to disclose a recall of baby food in Canada and multiple product recalls in New Zealand involving pesto dip and canned spaghetti.

The court found that Heinz had made the misrepresentations for the purpose of reducing its premium and/or its SIR. It also found “not credible” the testimony by the company’s global insurance director’s that the non-disclosure was a result of his relative inexperience.

The court chose to disregard the jury’s advisory verdict on waiver by Starr of its claim for rescission due to insufficient evidence that the insurer had knowledge of the misrepresentations before it bound coverage. The jury had relied on Heinz’s evidence that Starr had access to the undisclosed information in policy applications in its files for different types of policies as well as a newspaper article discussing the incidents in the underwriting file for the policy at issue.  The court found however, that Starr could not be expected to review other policy applications for the information or otherwise verify the accuracy of Heinz’s representations. The court also found no evidence of delay by Starr in asserting its claim for rescission.  H.J. Heinz Co. v. Starr Surplus Lines Ins.Co., No. 15-cv-00631 (W.D. Pa. Feb. 1, 2016).

California / Goldsmith Seeds:  In an unpublished opinion, a California appellate court for the Sixth District, applying California law, affirmed a trial court’s rescission of a Great American Insurance Cos. excess policy issued to Goldsmith Seeds due to the policyholder’s failure to disclose information on its policy application of a previous plant pathogen outbreak.

Goldsmith Seeds sought coverage under the Great American policy for claims related to a Ralstonia pathogen outbreak at its Nicaraguan facilities.   The USDA ordered the destruction of the diseased inventory and Goldsmith paid $3.5MM in claims related to this outbreak.  Prior to the claims related to the Nicaraguan facility, the USDA found the Ralstonia pathogen was present in Goldsmith’s Kenyan geraniums, halting shipments to the U.S. and ordering 1,000 U.S. greenhouses to destroy the product. Goldsmith ultimately had to pay $4MM in claims related to this outbreak.  Goldsmith did not disclose this information in its March 2003 application to Great American, and coverage was bound.

The insurer denied coverage for the Nicaraguan claims based on Goldsmith’s non-disclosure of the Kenyan outbreak. Goldsmith instituted a coverage action in California state court alleging breach of contract, bad faith and negligence.  Great American asserted that the policy was void from its inception due to Goldsmith’s failure to disclose the Kenya outbreak.

As in Heinz, the trial judge determined that he would rule on the rescission defense after a jury trial, but requested that the jury provide advisory findings on factual issues regarding Great American’s affirmative defense. Thus, in a special verdict, the jury found that Great American failed to meet its burden of proof on its non-disclosure claim.  But the jury also found that Great American proved that the policyholder had indeed not disclosed the Kenyan claims and had it done so, the facts would have influenced Great American’s decision to issue the policy.  In the second trial phase focusing on rescission, the court ordered the policy rescinded.

Goldsmith argued on appeal that the trial court should not have disregarded the jury findings and that the trial judge erred in not finding Great American’s rescission defense was barred by a four-year statute of limitations. The appeals court, applying a de novo standard of review, rejected the statute of limitations argument on the grounds that it only applied to affirmative claims for rescission, not affirmative defenses raised to claims by another.

The appellate court also held that the trial court was free to disregard the jury advisory findings on rescission because the trial court had only requested the jury to render advisory verdicts on those issues.  The appellate court determined that, although rescission was an equitable issue and therefore reserved for the court, it was proper for the trial judge to seek advisory findings on facts from the jury.  According to California law, “where both legal and equitable issues are present, a jury may be empaneled to try the legal issues, and may also at the court’s discretion be asked for advisory verdicts as to the facts which may apply to the equitable issues.” Goldsmith Seeds v. Great Amn. Ins. Co., No. H037791 (Cal. Ct. App. Jan. 14, 2016).