## Facts

- H.J. Heinz Co. sought product contamination insurance and applied to Starr Surplus Lines Insurance Co. in May 2014, requesting a $5 million self-insured retention (lower than prior comparable $20 million retentions).
- In the application, Heinz answered “No” to a question about recent regulatory recommendations/complaints and fines/penalties, and did not directly answer a 10-year recall/withdrawal question, instead submitting loss materials implying only one loss exceeding $5 million in the prior decade and forecasting only one such loss in the next decade.
- Starr issued the contamination policy with a $5 million self-insured retention.
- About two weeks later, Heinz experienced a baby-food recall in China for lead contamination and submitted a claim.
- Starr’s investigation indicated Heinz had sustained substantial prior contamination-related losses, including a baby-food nitrate contamination event exceeding $10 million and other undisclosed incidents relevant to underwriting.
- Heinz sued for coverage in federal district court; Starr counterclaimed for rescission based on material misrepresentations under New York Insurance Law § 3105.
- In a bifurcated “Phase One” trial, a jury found (1) Heinz made material misrepresentations, but (2) Starr waived rescission.
- The district court set aside the jury’s waiver finding and entered judgment rescinding the policy, thereby denying coverage; Heinz appealed.

## Issues

1. Whether Heinz’s application responses and omissions constituted material misrepresentations permitting rescission under N.Y. Insurance Law § 3105.
2. Whether Starr waived its right to rescind by investigating the claim and not seeking rescission immediately after learning information suggesting misrepresentation.
3. Whether waiver could be resolved as a matter of law notwithstanding the jury’s contrary finding in the rescission phase.

## Decision

- The Third Circuit affirmed the judgment rescinding the policy.
- The court upheld rescission based on the jury’s findings that Heinz made misrepresentations and that they were material to Starr’s underwriting decision.
- The court agreed the record did not support waiver under New York law because Starr was entitled to a reasonable investigation period and acted within a reasonable time after developing sufficient information.
- The court held the district court properly rejected the jury’s waiver finding and decided waiver as a legal issue on essentially undisputed facts.

## Legal Principles

- Under N.Y. Insurance Law § 3105, a misrepresentation is a false statement of past or present fact made to induce issuance of an insurance contract.
- A misrepresentation is material if the insurer, had it known the true facts, would have refused to issue the policy or would have issued it only on different terms.
- Under New York law, rescission may be based on a material misrepresentation even absent intent to deceive.
- An insurer does not waive rescission merely by investigating a claim; it may investigate for a reasonable time before electing rescission, particularly where it reserves rights and does not clearly affirm the contract.
- Where waiver turns on legal standards applied to largely undisputed conduct and timing, a court may resolve waiver as a matter of law in the rescission proceeding.

## Conclusion

The court upheld rescission of Heinz’s contamination policy because Heinz’s application contained material misrepresentations affecting underwriting, and Starr’s post-claim investigation and timing did not amount to waiver under New York law.


H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., No. 16-1447, 2017 WL 108006 (3d Cir. Jan. 11, 2017)