There’s an old joke about lawyers and clients.

A man is flying in a hot-air balloon and realizes he’s lost. He spots a guy down below. He lowers the balloon and shouts, “Excuse me, can you help me? I promised my friend I would meet him half an hour ago, but I don’t know where I am.”

The man below says: “Yes, you’re in a large red hot air balloon, hovering 30 feet above this field between 40 & 41 degrees latitude and about 74 degrees west longitude.”

“You must be an attorney,” says the balloonist.

“I am,” replies the man. “How did you know?”

“Well,” says the balloonist, “everything you have told me is technically correct, but it’s of absolutely no use to me and I still don’t know where I am.”

The man below says, “Ah, and I can tell from your reaction that you must be a client.”

“Well, yes,” replies the balloonist, “but how did you know?”

“Because,” says the man below, ” You’re in the same position as you were before we met, but somehow now it’s my fault.”

The point here (to the extent I have one) is that, once you have to rely on a litigator to clean up a mess you made, it may be too late.  But sometimes clients (even major corporate clients) do things thinking that they’re solving problems in the short term, and end up creating major long-term problems. That’s the situation in H.J. Heinz Co. v. Starr Surplus Lines Insurance Co., currently on appeal to the Third Circuit.

This case involves the rescission of a business insurance policy because of misrepresentations in the insurance application. (That’s a situation that you never want to be in.) According to the trial court decision, the risk manager for Heinz wanted to obtain a lower self-insured retention in the company’s product contamination insurance. Unfortunately, in an effort to accomplish his goal, he failed to disclose a substantial history of product contamination claims, including an incident in China involving baby cereal products that were contaminated with nitrite, resulting in a $12 million loss; another incident in China involving tuna-based baby food that was contaminated by mercury; an incident in the United States, in which a processing facility was found to be contaminated with listeria, resulting in a loss of $12.7 million; and other smaller losses, including one in Canada and two in New Zealand. The risk manager succeeded in obtaining a lower self-insured retention ($5 million, instead of $10 million or $20 million), but the problems began when the company was later sued for lead-tainted baby food.

The carrier, Starr, understandably raised the issue of intentional misrepresentation on the application, and the case was tried to an “advisory jury” on that issue for two days.  (20/20 hindsight is a wonderful thing, but I’m not sure why a policyholder would ever agree to an “advisory jury.” That sounds like being “almost pregnant.”)   Despite the bad facts, the jury came back with a verdict in Heinz’s favor, finding:

  1. Heinz had misrepresented material facts in the insurance application (bad finding for Heinz).
  1. Heinz had not deliberately omitted material information from the application (good finding for Heinz).
  1. Starr had waived its right to assert a rescission claim by agreeing to sell the policy despite actual knowledge of the incorrect information (good finding for Heinz). Apparently, Heinz had disclosed at least some of the complete and correct information in a prior policy application, and Starr’s underwriting file contained a newspaper article discussing the undisclosed product liability incidents.

Presented with the advisory jury’s findings, the trial judge essentially said, “Are you nuts?”  (In a bit of perhaps unintended humor, the judge stated that he departed from the advisory jury’s findings “only” on the answer to question 3, which of course was the question that, because of the judge’s reversal, led to the forfeiture of Heinz’s coverage.)

With respect to Heinz’s risk manager, the trial judge wrote: “His demeanor and evasiveness added to his loss of credibility. It was not credible that, as Global Insurance Director, he was without knowledge as to what information was required by the clear and unambiguous language of this standard Application form, commonly used in the industry.”

This is an interesting decision to read, in part because of the judge’s decision to negate a key finding by the advisory jury, but the bottom line is simple: Make sure your insurance applications are accurate. You may think you’re saving a few dollars now, but if a major claim rolls in, you could be in serious trouble. And no one needs a reported court decision floating around saying that he or she isn’t trustworthy.  Looks bad on a resume.

You can read the complete Heinz decision here.