The ongoing coverage litigation between H.J. Heinz Company and Starr Surplus Lines Insurance Company in the U.S. District Court for the Western District of Pennsylvania has yielded another important decision that is instructive in rescission matters. As a follow up to our previous report on October 22, 2015 on the court’s order that Starr must produce information from its underwriting files involving other policyholders, the court has now set guidelines for the burden of proof and jury instructions in the $25 million coverage dispute set for trial in mid-December of this year.
Heinz filed a declaratory judgment against Starr alleging breach of contract when Starr refused to provide coverage under a product contamination policy for claims involving lead discovered in baby cereal sold in China. Starr then filed a counterclaim for rescission of the policy due to Heinz’s alleged failure to mention previous contamination incidents, including tainted Chinese baby food incidents in both 2013 and 2014, when it applied for the policy.
Under the applicable New York law, an insurer may rescind a policy based on two separate theories. Rescission can be based on either an intentional or unintentional misrepresentation of material facts in the insured’s application. Alternatively, an insurer may seek to rescind if the insured has failed to disclose material facts when the application specifically requires disclosure. However, the Court stated that a failure to disclose material facts can support rescission only if it is found that the insured intended to defraud the insurer.
Because a material omission must be intentional, but a material misrepresentation need not be, the court applied different burdens of proof. To prevail on a misrepresentation theory, Starr must prove that Heinz misrepresented facts only by a preponderance of the evidence. Conversely, to prevail based on a material omission theory, Starr must prove its case with clear and convincing evidence. This higher standard of proof reflects the requirement that an omission can support rescission only if the insured intended to defraud the insurer.
Rescission cases are challenging for insurers as courts are reluctant to void coverage. However, as shown by this recent ruling, an insurer’s burden of proof is lower in instances where the insured affirmatively has misrepresented material facts in the application than it is when an insurer is attempting to rescind based on an insured’s intentional failure to disclose material facts when applying for coverage.