Innocent Misrepresentation on Insurance Application Can Lead to Rescission Insurer Not Required to Conduct a “Scavenger Hunt”February 16, 2016
When buying commercial insurance policies subject to New York law, if you want to reap the full benefits, you must disclose all relevant information elicited by questions on the policy application. If you fail to do so, and material information is later found to have been omitted or misrepresented, you as a policyholder may end up losing your valuable risk protection –even if the omission or misrepresentation was due to an innocent mistake.
Recently, in a $25 million coverage dispute involving lead-tainted baby food, U.S. District Judge Arthur J. Schwab of the Western District of Pennsylvania, applying New York law, held that Starr Surplus Lines Insurance Co. could rescind H.J. Heinz Co.'s insurance policy even though Starr had knowledge of the material misrepresentations Heinz had made on its policy application (H.J. Heinz Co v. Starr Surplus Lines Insurance Co., case number 2:15-cv-00631).
On the application, Heinz had failed to disclose a number of prior incidents in response to questions regarding whether it had been the subject of a government agency complaint within the preceding three years, or had experienced any product recalls or withdrawals in the preceding ten years. The evidence showed that Heinz had failed to inform Starr of a Chinese food safety agents' 2014 determination that Heinz's baby cereal products were contaminated with nitrite, or of its 2013 recall of mercury-tainted baby food and a corresponding fine by the Chinese government. Moreover, other smaller losses were not disclosed by Heinz. The Court found that Heinz's lack of full disclosure constituted intentional misrepresentations made for the purpose of obtaining a lower Self Insured Retention and/or to secure a lower premium.
Heinz, however, argued that Starr should have been aware of its misrepresentations at the time the policy was issued based on material contained in a prior application for a different policy and a newspaper article discussing those incidents contained in Starr's underwriting file. However, the judge ruled that Starr should not have been expected to review the application for a different type of insurance, independently verify the entries on Heinz's loss history, or determine whether Heinz disclosed something about one of its listed losses that may have engendered further inquiry.
The Court also held that there was no credible evidence demonstrating that Starr had delayed unreasonably in seeking rescission, because Starr's claims adjusters were in the midst of evaluating Heinz's claim when Heinz filed suit against Starr.
The Court ultimately entered a declaratory judgment in favor of Starr and against Heinz, rescinding the policy and finding it null and void ab initio.
The Heinz case is an important reminder for insureds with policies subject to New York law to ensure that they disclose all relevant information, and take care not to omit any information that is potentially elicited by questions in a policy application.
Under New York law, an insurer is not required to go on a "scavenger hunt" to look for information not contained in the application. Therefore, if policyholders, even unintentionally or mistakenly, fail to include material information that should have been disclosed, they could risk rescission of the policy and be forced to incur the full loss of any future claims.
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Copyright © 2016 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for informational purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.