Pennsylvania Record

Saturday, October 19, 2019

Underwriting important for insurance policies in product contamination claims

By Robert Lawson | Jan 9, 2017

PITTSBURGH – A Pennsylvania federal court made a ruling last year using New York law determining that an insurer could rescind its product contamination policy because of an insured’s material misrepresentations made during the application process concerning its loss history.

The case is H.J. Heinz Co. v. Starr Surplus Lines Insurance Co. The court offered some points on good underwriting practices that can help to protect an insurer from unknown risks such as this. Chris Kennedy, managing partner for Kennedy & Kennedy law firm, said the choice of law helped recover damages for the plaintiff, the insurer. 

"The choice of law in this matter was a contractual decision made by the parties and under Pennsylvania choice of law provision, the contract language prevailed," Kennedy told the Pennsylvania Record in an email. "The outcome would have been different using a different state's laws. New York allowed for recovery for unintentional misrepresentations. The court made its decision based on its reading of New York Law."

Strong underwriting is the key to avoiding the risks to an insurer when it comes to product contamination. The Food Safety Modernization Act (FSMA) was passed in 2011. It has been regarded by many as a major reform to the Federal Food, Drug and Cosmetic Act's food safety provisions.

It has given more power to the U.S. Food and Drug Administration (FDA) and added more layers of compliance for the food industry. Manufacturers, processors, packers, distributors and others in the industry are accountable to higher standards. This is likely to lead to more voluntary recalls to avoid the mandate recall from the FDA if it finds a reasonable probability that a food item will cause adverse health effects to humans or animals.

The FSMA doesn't require the FDA to be absolutely certain the product will cause such health consequences, however, to require recalling the product. Whether the recall is voluntary or mandatory is not relevant to strong underwriting principles though. Recalls are part of an insured’s loss history. This is why the court, using New York law, was able to help Starr recover damages.

The court held that Heinz failed to disclose six different losses in response to questions. Though Heinz said it did not believe the losses to be materials to the policy, nor covered under it. The court ultimately held that recovery under both unintentional and intentional failures to disclose the information is permitted in New York.

Knowledge of such information related to product contamination in advance of writing a risk helps insurers properly evaluate exposure to risk. It also helps determine the most appropriate terms to bind coverage.

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Pennsylvania Western District Court U.S. Food and Drug Administration (FDA)