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

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________

No. 16-1447
____________

H.J. HEINZ COMPANY,
Appellant

v.

STARR SURPLUS LINES INSURANCE COMPANY
____________

On Appeal from the United States District Court
for the Western District of Pennsylvania
(W.D. Pa. No. 2-15-cv-00631)
District Judge: Honorable Arthur J. Schwab
____________

Argued December 6, 2016
Before: FISHER, KRAUSE and MELLOY,* Circuit Judges.

(Filed: January 11, 2017)

Kevin P. Allen, Esq.
Eckert Seamans Cherin & Mellott
600 Grant Street
44th Floor, US Steel Tower
Pittsburgh, PA 15219

James R. Murray, Esq. [ARGUED]
Blank Rome
1825 Eye Street, N.W.
Washington, DC 20006

*
Honorable Michael J. Melloy, Senior Circuit Judge, United States Court of
Appeals for the Eighth Circuit, sitting by designation.
Jared Zola, Esq.
Blank Rome
405 Lexington Avenue
New York, NY 10174
Counsel for Appellant

Matthew B. Arnould, Esq.
Robert S. Frank, Jr., Esq. [ARGUED]
John A. Nadas, Esq.
Choate Hall & Stewart
Two International Place
Boston, MA 02110

Robert J. Marino, Esq.
J. David Ziegler, Esq.
Dickie McCamey & Chilcote
Two PPG Place, Suite 400
Pittsburgh, PA 15222
Counsel for Appellee
____________

OPINION*
____________

FISHER, Circuit Judge.

H.J. Heinz Company appeals the District Court’s order rescinding a product

contamination insurance policy it purchased from Starr Surplus Lines Insurance

Company. We will affirm.

I.

Heinz makes and sells food products worldwide. Starr is a global insurance

company that sells contaminated product insurance that protects food product companies

*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.
2
against losses arising from accidental contamination or government-imposed recall of

their products. Prior to 2013, Heinz purchased such insurance from insurers other than

Starr. Heinz’s coverage was subject to a $20 million self-insured retention, commonly

referred to as a “SIR.” Similar to a deductible, a SIR is the amount of a loss the insured

must bear before insurance coverage begins to respond.

Beginning in May 2014, Heinz sought proposals for contaminated product

insurance, including accidental contamination insurance, for the period covering July 1,

2014 to July 1, 2015. Heinz’s new global insurance director, Ian Ascher, was responsible

for preparing and certifying the accuracy of Heinz’s insurance application (the

“Application”). An insurance broker, Aon, acted for Heinz throughout the application

process and subsequent purchase of the policy (the “Policy”).

On June 6, 2014, Aon emailed Heinz’s application for an accidental contamination

insurance policy to Starr. The Application included Heinz’s loss history and a

certification signed by Heinz’s Ascher. Question 6e of the Application asked:

Has the Applicant, its premises, products or processes been the subject of
recommendations or complaints made by any regulatory body, internal or third
party audit over the past 12 months or have any fines or penalties been assessed
against the Applicant by any food or similar regulatory body over the last 3 years?

J.A. 2081. Heinz responded “NO” without further explanation or qualification. Question

11a asked:

In the last 10 years has the Applicant experienced a withdrawal, recall or
stock recovery of any products or has the Applicant been responsible for the costs
incurred by a third party in recalling or withdrawing any products, whether or not
insured or insurable under an accidental and malicious contamination policy?
3
J.A. 2083. Heinz did not fill in either the “YES” or “NO” box, but instead attached a

spreadsheet detailing the company’s loss history from 1998 to 2013. The loss history

disclosed only one loss over ten years greater than Heinz’s requested $5 million SIR.

J.A. 2085. In addition to the Application, Aon provided Starr with a loss ratio analysis

dated June 5, 2014. Like Heinz’s attached loss history, the loss ratio analysis projected

only one loss in excess of a $5 million SIR over a ten-year period. J.A. 2086. Two Starr

underwriters conducted independent analyses of the materials Aon submitted. They

concluded that Heinz’s requested $5 million SIR was appropriate. Heinz accepted Starr’s

proposal on June 27, and the Policy became effective on July 1.

Two weeks later, Chinese authorities informed Heinz that baby food it

manufactured in China was contaminated with lead (the “2014 China Lead Loss”). Heinz

recalled the product. On August 5, Heinz notified Starr of the loss and sought coverage

under the new Policy. Starr hired two outside firms to investigate Heinz’s claimed loss.

During the investigation, the Starr employee responsible for the 2014 China Lead Loss

claim found out that, prior to Policy inception, Heinz incurred a loss in excess of $10

million after discovery of excessive levels of nitrite in baby food manufactured in China

(the “2014 China Nitrite Loss”). J.A. 2453-55. Heinz did not disclose this loss in its

Application. When Starr informed Heinz that it was reserving its right to limit or

withhold coverage under the Policy, Heinz responded with this lawsuit.

4
 Heinz filed its complaint in the District Court on May 14, 2015, seeking damages

for breach of contract and bad faith and a declaration that Starr must indemnify Heinz for

the 2014 China Lead Loss claim. In its answer, Starr asserted a counterclaim for

rescission based on allegations that Heinz omitted and misrepresented material

information in its Application.

The parties agreed to litigate Starr’s counterclaim first. On July 31, 2015, the

District Court issued a memorandum order concluding that New York law applied. J.A.

32-38. In December 2015, the District Court held a three-day trial before a seven-person

advisory jury. The jury found that Starr proved that Heinz made material

misrepresentations of fact in its insurance application, but that Starr waived its right to

assert rescission. On February 1, 2016, the District Court issued an opinion agreeing

with the jury on misrepresentation, but disagreeing on waiver. J.A. 1-27. The District

Court declared the Policy void ab initio and entered judgment for Starr. J.A. 26-27, 28.

Heinz timely appealed.

II.

The District Court had diversity jurisdiction under 28 U.S.C. § 1332. We have

jurisdiction under 28 U.S.C. § 1291. The District Court’s determination of the law

applicable to the Policy and its interpretation of the Policy’s provisions are legal issues

over which we exercise plenary review. Hammersmith v. TIG Ins. Co., 480 F.3d 220,

226 (3d Cir. 2007). We also exercise plenary review over the District Court’s legal

conclusions, In re Frescati Shipping Co., 718 F.3d 184, 196 (3d Cir. 2013), including
5
challenges to the legal standard expressed in jury instructions, United States v. Korey,

472 F.3d 89, 93 (3d Cir. 2007). The District Court’s findings of fact are reviewed for

clear error and deferred to in the ordinary case, “particularly when they are predicated on

credibility determinations.” United States v. Marcavage, 609 F.3d 264, 281 (3d Cir.

2010). A finding of fact is clearly erroneous if it is “completely devoid of minimum

evidentiary support displaying some hue of credibility or bears no rational relationship to

the supportive evidentiary data.” VICI Racing LLC v. T-Mobile USA, Inc., 763 F.3d 273,

283 (3d Cir. 2014) (internal quotation marks omitted). Where, as here, the District Court

rejected an advisory jury’s verdict, “on appeal its findings of fact are to be reviewed as if

there was no advisory jury recommendation.” Hayes v. Cmty. Gen. Osteopathic Hosp.,

940 F.2d 54, 57 (3d Cir. 1991).

III.

Heinz raises three primary arguments on appeal. First, Heinz contends the District

Court erred in concluding that New York law, rather than Pennsylvania law, governs

Starr’s rescission counterclaim. As a corollary to that point, Heinz argues that Starr’s

invocation of the Policy’s choice-of-law provision amounted to ratification of the Policy.

Second, Heinz asserts that the District Court misapplied New York rescission law by

holding Starr to the incorrect burden of proof and relieving Starr of its obligation to prove

every element of its prima facie case. Finally, Heinz submits that Starr waived its right to

assert rescission.

A.
6
 This case was adjudicated in the District Court for the Western District of

Pennsylvania. Since the court was sitting in diversity, it was bound to follow

Pennsylvania’s choice-of-law principles to determine the applicable substantive law. See

Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Heinz argues that the

District Court erred in applying New York law to Starr’s counterclaim.

The dispute over the applicable substantive law comes down to which provision of

the Policy governs the choice-of-law inquiry—the Policy’s choice-of-law provision or its

amendatory service-of-suit endorsement. The Policy’s choice-of-law provision reads:

The construction, validity and performance of this Policy will be governed
by the laws of the State of New York. The Insurer and the Insured hereby
expressly agree that all claims and disputes will be litigated in the Supreme Court
of the State of New York in and for the County of New York or in the U.S.
District Court for the Southern District of New York.

J.A. 2179 (boldface omitted). The service-of-suit endorsement “modifies the insurance

coverage form(s)” and provides, in relevant part:

It is agreed that in the event of [Starr’s] failure to pay the amount claimed
to be due hereunder, [Starr], at the request of the Insured, will submit to the
jurisdiction of a Court of competent jurisdiction within the United States and will
comply with all requirements necessary to give such Court jurisdiction and all
matters arising hereunder shall be determined in accordance with the law and
practice of such Court.

J.A. 2192 (emphasis added). The District Court concluded that the service-of-suit

endorsement does not supersede the Policy’s choice-of-law provision. J.A. 35.

Heinz asserts that our decision in Century Indemnity Co. v. Certain Underwriters

at Lloyd’s, 584 F.3d 513 (3d Cir. 2009), undermines the District Court’s choice-of-law

7
holding. Century Indemnity involved a dispute about a retrocessional insurance

agreement (a form of reinsurance of reinsurance) that included a service-of-suit clause

which we characterized as a “choice-of-law provision.” Id. at 533. While the service-of-

suit clause at issue contained a choice-of-law provision, there was no other choice-of-law

provision in the retrocessional agreement. The Heinz-Starr Policy, by contrast, contains

an unambiguous choice-of-law provision and a separate service-of-suit endorsement.

Century Indemnity does not control.

Aside from Century Indemnity, Heinz has little law on its side. The vast majority

of cases interpreting the phrase “law and practice of such Court” in a service-of-suit

clause read it “as a consent to jurisdiction by the insurer and a prohibition against an

insurer interfering with a forum initially chosen by the insured.” Chubb Custom Ins. Co.

v. Prudential Ins. Co. of Am., 948 A.2d 1285, 1292 (N.J. 2008); see James River Ins. Co.

v. Fortress Sys., LLC, No. 11-60558-CIV, 2012 WL 760773, at *4 n.2 (S.D. Fla. Mar. 8,

2012) (collecting cases). We therefore agree with the District Court that the Policy’s

service-of-suit endorsement does not supersede its choice-of-law provision.

Having found that the parties contracted for New York law to apply, the District

Court properly employed the two-part test of section 187 of the Restatement (Second) of

Conflict of Laws, as adopted by Pennsylvania courts, see Kruzits v. Okuma Mach. Tool,

Inc., 40 F.3d 52, 55 (3d Cir. 1994), to confirm that the parties’ contractual choice should

not be displaced, J.A. 35-37. We hold that the District Court was correct that New York

law governs Starr’s rescission counterclaim.
8
 But can Starr claim that the Policy should be rescinded as if it never existed, while

at the same time seek to have its choice-of-law provision apply to the dispute? Heinz

says no—by taking both actions at once, Starr ratified the Policy. We think the plain text

of the Policy’s choice-of-law provision—which states that the “validity … of this Policy

will be governed” by New York law, J.A. 2179 (emphasis added)—refutes this argument.

We accordingly decline Heinz’s invitation to render the Policy’s choice-of-law provision

a nullity.

B.

New York law entitles an insurer to rescind an insurance policy—thereby deeming

the policy void ab initio—“if it was issued in reliance on material misrepresentations.”

Fid. & Guar. Ins. Underwriters, Inc. v. Jasam Realty Corp., 540 F.3d 133, 139 (2d Cir.

2008); see Interboro Ins. Co. v. Fatmir, 933 N.Y.S.2d 343, 345 (App. Div. 2011). A

misrepresentation in an insurance application is a false statement “as to past or present

fact, made to the insurer by, or by the authority of, the applicant for insurance or the

prospective insured, at or before the making of the insurance contract as an inducement to

the making thereof.” N.Y. Ins. Law § 3105(a).

Heinz contends that the District Court held Starr to the incorrect burden of proof

and relieved Starr of its obligation to prove every element of its prima facie case. We

need not decide whether, under New York law, rescission must be proved by a

preponderance of the evidence (as the District Court held), rather than the more

demanding clear and convincing evidence standard. For in our view the District Court
9
was correct to hold, in the alternative, that Starr’s evidence met the clear and convincing

evidence standard. J.A. 10 n.14.

The District Court found that Heinz intentionally made four material

misrepresentations of fact about its loss history in its answers to Questions 6e and 11a of

the Application. J.A. 9 n.12, 10 n.14, 19-20. “Failure to disclose is as much a

misrepresentation as a false affirmative statement.” Vander Veer v. Cont’l Cas. Co., 312

N.E.2d 156, 157 (N.Y. 1974) (per curiam). A misrepresentation is material “if the insurer

would not have issued the policy had it known the facts misrepresented.” Meah v. A.

Aleem Constr., Inc., 963 N.Y.S.2d 714, 717 (App. Div. 2013) (internal quotation marks

omitted); see N.Y. Ins. Law § 3105(b)(1). The issue whether a misrepresentation is

sufficiently material to void a policy is generally a question of fact. See Lenhard v.

Genesee Patrons Co-op. Ins. Co., 818 N.Y.S.2d 644, 646 (App. Div. 2006). But to

“establish materiality as a matter of law, the insurer must present documentation

concerning its underwriting practices, such as underwriting manuals, bulletins, or rules

pertaining to similar risks, that show that it would not have issued the same policy if the

correct information had been disclosed in the application.” Meah, 963 N.Y.S.2d at 717

(internal quotation marks omitted). Starr did just that, and the District Court credited all

this evidence in concluding that Starr would not have offered Heinz the Policy at a $5

million SIR if it knew about the misrepresentations. J.A. 5, 21, 22. We discern no error

in the District Court’s findings regarding misrepresentation and materiality.

Heinz argues that the District Court erred in relying on testimony of Starr
10
underwriters that, in Heinz’s view, was conclusory and self-serving. But the testimony of

Starr’s underwriters was far from conclusory; it was supported by Starr’s internal

documentation. See Schirmer v. Penkert, 840 N.Y.S.2d 796, 799 (App. Div. 2007)

(“Conclusory statements by insurance company employees, unsupported by documentary

evidence, are insufficient to establish materiality as a matter of law.” (emphasis added)).

And in any event, the materiality of Heinz’s misrepresentation is self-evident. For the

ten-year period identified in the Application, Heinz disclosed only one loss in excess of a

$5 million SIR. In reality, however, Heinz experienced three losses exceeding a $5

million SIR, totaling more than $20 million, a figure far exceeding the single $5.8 million

disclosed loss. Heinz’s misrepresentations were of such magnitude that they deprived

Starr of “its freedom of choice in determining whether to accept or reject the risk upon

full disclosure of all the facts which might reasonably affect that choice.” L. Smirlock

Realty Corp. v. Title Guarantee Co., 421 N.Y.S.2d 232, 236 (App. Div. 1979), aff’d as

modified, 418 N.E.2d 650 (N.Y. 1981). It is “obvious,” id. at 237, that Starr, or any other

similarly situated insurer, would not have issued the Policy with a $5 million SIR.

The District Court then held that “Starr properly relied upon the representations of

Heinz in the application process coupled with the Certification.” J.A. 20. Heinz says that

the District Court relieved Starr of its burden of proving reliance. We agree. It is well-

established that rescission of an insurance policy requires proof that the policy “was

issued in reliance on material misrepresentations.” Jasam Realty, 540 F.3d at 139

(emphasis added); see N.Y. Ins. Law § 3105(a) (requiring “inducement”). The District
11
Court erred in not holding Starr to its burden of proving reliance. We conclude, however,

that the District Court’s error was harmless and does not require reversal. “An error will

be deemed harmless only if it is highly probable that the error did not affect the outcome

of the case … .” Avaya Inc. v. Telecom Labs, Inc., 838 F.3d 354, 396 (3d Cir. 2016)

(internal quotation marks omitted). Though the District Court did not cite directly to the

record, there is overwhelming evidence that Starr relied on Heinz’s misrepresentations in

the Application and the attached loss history in offering the Policy with a $5 million SIR.

Starr underwriters testified that they looked to Heinz’s loss history in calculating the

appropriate risk and conducting their loss ratio analysis. And the Policy’s certification,

signed by Ascher, stated that he would inform Starr of any material changes to Heinz’s

risk. Ascher knew about the 2014 China Nitrite Loss during June, but did not inform

Starr. See J.A. 2248 (loss history figures in Ascher’s June 2014 presentation to Heinz

senior management). We think it highly probable that, had the District Court properly

held Starr to its burden of proving reliance, the outcome would be the same. In sum, we

find no reversible error in the District Court’s conclusion that Starr proved by clear and

convincing evidence that Heinz made material misrepresentations in its Application upon

which Starr reasonably relied.

C.

The District Court rejected the advisory jury’s recommendation that Heinz proved

by a preponderance of the evidence that Starr waived its right to assert rescission. Under

New York law, waiver is “the voluntary and intentional relinquishment of a known
12
right”; proof of waiver “requires evidence of a clear manifestation of intent, and cannot

be lightly inferred.” Chi. Ins. Co. v. Kreitzer & Vogelman, 265 F. Supp. 2d 335, 343

(S.D.N.Y. 2003) (citations and internal quotation marks omitted). The issue whether an

insurer waives its right to rescind a policy is a question of fact. See Amrep Corp. v. Am.

Home Assurance Corp., 440 N.Y.S.2d 244, 247 (App. Div. 1981). Heinz suggests that

the District Court misapplied New York law and misconstrued the relevant evidence. But

in our view, the District Court predicated its waiver analysis on a proper understanding of

New York law, and its findings of fact are otherwise free from clear error.

Heinz raises two independent grounds of waiver. First, Heinz says Starr agreed to

sell the Policy despite sufficient knowledge of Heinz’s misrepresentations. An insurer

has sufficient knowledge of a misrepresentation if it has been provided with information

“sufficiently indicative of something more to be tantamount to notice of the unrevealed.”

Friedman v. Prudential Life Ins. Co. of Am., 589 F. Supp. 1017, 1024 (S.D.N.Y. 1984).

In particular, Heinz points to emails indicating that one of Starr’s underwriters read a

March 2014 internet article reporting on Heinz’s Canada loss, as well as information

regarding a 2008 loss that Heinz claims it disclosed in a prior application for a different

kind of insurance policy. The District Court concluded, “based upon the credibility of the

witnesses,” that “[t]hese items, without more, would not trigger a reasonably prudent

insurer to follow-up further.” J.A. 12. We cannot say that the District Court’s factual

finding is “completely devoid of minimum evidentiary support displaying some hue of

credibility.” VICI Racing, 763 F.3d at 283 (internal quotation marks omitted). And we
13
find unconvincing Heinz’s contention that Starr committed waiver as a matter of law.

Seeing no error, legal or factual, we reject Heinz’s first waiver argument.

We are likewise not persuaded by Heinz’s submission that Starr failed to promptly

assert rescission after a reasonable period of investigation. “New York law requires a

party seeking rescission of a contract to act without unreasonable delay upon learning the

grounds for rescission.” Cont’l Cas. Co. v. Marshall Granger & Co., LLP, 6 F. Supp. 3d

380, 393 (S.D.N.Y. 2014). But an insurer need not “make a rushed and uninformed

decision; it is entitled to a reasonable period of time in which to investigate the potential

basis for rescission. Only if the insurer delayed unreasonably in seeking rescission will it

be found to have forfeited its right to do so.” Id. (citations omitted).

Heinz argues that it disclosed the 2014 China Nitrite Loss to Starr’s third-party

investigators by January 2015, several months before this lawsuit began. Even though no

Starr employee knew about the investigators’ findings until late-April 2015, Heinz

attempts to impute the knowledge of Starr’s investigators to Starr itself. The District

Court rejected this argument, holding that the investigators were agents hired for a

“limited purpose which did not include underwriting and investigating grounds for

rescission.” J.A. 26 n.23. This Court need not reach the agency question, for even

assuming the investigators’ knowledge can be attributed to Starr, the delay is this case

was entirely reasonable. Starr’s investigation was still ongoing when Heinz filed this suit

in May 2015, and Starr claimed rescission the following month. Courts applying New

York rescission law have found investigation periods from six to twelve months to be
14
reasonable. See Marshall Granger, 6 F. Supp. 3d at 395 (collecting cases). We are of the

view that the five-month period between January 2015 and the filing of Starr’s rescission

counterclaim on June 16, 2015, was wholly unobjectionable.

Heinz does not convince us that the District Court erred in concluding that Starr

agreed to sell the Policy despite sufficient knowledge of Heinz’s misrepresentations. Nor

do we take issue with District Court’s conclusion that Starr promptly sought rescission

following a reasonable period of investigation after gaining sufficient knowledge of the

misrepresentations. We therefore agree with the District Court that Heinz failed to prove

that Starr waived its right to assert rescission.

IV.

For the foregoing reasons, we will affirm the judgment of the District Court.

15