$12 Million in Insurance Proceeds Awarded to Spinach Producer Caught up in 2006 E. Coli Outbreak
Kelley Drye Client Advisory
September 15, 2009

Last month, a California Superior Court held that the nation’s largest seller of fresh bagged spinach, Fresh Express Inc. of Salinas, California, was entitled to insurance coverage for the losses it suffered as a result of a 2006 nationwide E. coli outbreak, even though Fresh Express’s product was not the cause of the outbreak and was never the subject of a recall. See Fresh Express Inc. v. Beazley Syndicate, et al., No. M88545 (Cal. Super. Ct., County of Monterey Aug. 18, 2009). The decision is significant as one of the first to confirm the value of including a specialty recall and brand protection insurance policy – a form of coverage made available only recently – in any consumer product company’s risk management program. It also confirms that the “governmental ban” and “loss of confidence” exclusions often found in such policies should be construed narrowly so as not to compromise the broad applicability of coverage provided.

The 2006 E. Coli Outbreak and Fresh Express’s Response

A nationwide outbreak of illness caused by E. coli O157:H7 was announced by the Food and Drug Administration (“FDA”) in a press release issued on September 14, 2006. In its press release, the agency stated that it was “issuing an alert to consumers about an outbreak of E. coli O157:H7 in multiple states that may be associated with the consumption of produce. To date, preliminary epidemiological evidence suggests that bagged fresh spinach may be a possible cause of this outbreak.” (Emphasis added). Despite the preliminary nature of the evidence that was then available to the agency to link the outbreak to particular food products and the ongoing nature of the FDA investigation of the outbreak, the FDA press release advised that consumers should “not eat bagged fresh spinach at this time” and “[i]individuals who believe they may have experienced symptoms of illness after consuming bagged spinach are urged to contact their health care provider.” The agency defended its precautionary approach, stressing the serious nature of the illness caused by the E. coli O157:H7 organism:

Given the severity of this illness and the seriousness of the outbreak, FDA believes that a warning to consumers is needed. . . . E. coli O157:H7 causes diarrhea, often with bloody stools. Although most healthy adults can recover completely within a week, some people can develop a form of kidney failure called Hemolytic Uremic Syndrome (HUS). HUS is most likely to occur in young children and the elderly. The condition can lead to serious kidney damage and even death. To date, 50 cases of illness have been reported to the Centers for Disease Control and Prevention, including 8 cases of HUS and one death.

During September 2006, FDA issued additional press releases which provided ongoing updates concerning the FDA investigation and the products that were implicated in the outbreak, none of which implicated Fresh Express brand spinach. On September 29, 2006, FDA issued a press release which summarized the findings of its investigation, announcing that all of the spinach implicated in the outbreak was traced back to one company, Natural Selection Foods LLC of San Juan Bautista, California. FDA announced that Natural Selection Foods had issued a recall of all implicated products on September 15, 2006. Although Fresh Express products never were identified by FDA as a source of the E. coli outbreak and Fresh Express never conducted a product recall, Fresh Express, like other food companies, suffered millions of dollars in losses attributable to the E. coli outbreak. The FDA announcement had dampened demand for all fresh bagged spinach products. As a result, Fresh Express stopped its spinach harvesting and production and had to reimburse its purchasers and distributors for the products they were unable to sell. By the time Fresh Express products were cleared, a large amount of spinach had already perished and could not be sold.

According to the reported decision in Fresh Express, Inc. (see link above), Fresh Express responded to the September 2006 FDA announcement by assembling a response team and conducting a thorough food safety investigation and compliance audit. That investigation found that Fresh Express had purchased fresh spinach from two different growers under conditions that could present a food safety risk to consumers. Specifically, Fresh Express found that it had purchased fresh spinach from one grower without first conducting a food safety audit in accordance with the company's food safety risk management procedures. In addition, Fresh Express found that it had purchased spinach from another grower that had planted a spinach field sufficiently close to a cattle feedlot such that the runoff could pose a risk of E. coli contamination. Based on those findings Fresh Express concluded that it had a reasonable basis for concern about the potential food safety risk presented by its products.

Fresh Express’s Specialty Recall and Brand Protection Insurance

Fresh Express sought insurance coverage for the losses it experienced as a result of the FDA actions taken in connection with the E. coli outbreak by filing a claim with its insurers (the “Insurers”) under the “Accidental Contamination” provision of its “Total Recall+ Brand Protection Food/Beverage” insurance policy (the “Policy”). Although Fresh Express’s losses fit squarely within the coverage provided by the Policy, the Insurers denied coverage. Fresh Express countered by filing an insurance coverage lawsuit, alleging, among other things, that the company’s Insurers had wrongfully denied coverage and breached the contractual terms of the Policy.

In the Policy, Fresh Express’s Insurers promise to “reimburse [Fresh Express] for losses as specified in this Policy arising out of Insured Events first discovered during the Policy Period.” Among other things, the Policy covers “Insured Events” including “Accidental Contamination,” which is defined as follows:

Error by [Fresh Express] in the manufacture, production, processing, preparation, assembly, blending, mixing, compounding, packaging or labeling (including instructions for use) of any Insured Products or error by [Fresh Express] in the storage or distribution of any Insured Products whilst in the care or custody of [Fresh Express] which causes [Fresh Express] to have reasonable cause to believe that the use or consumption of such Insured Products has led to or would lead to: (i) bodily injury, sickness, disease, or death of any person(s) or animals(s) physically manifesting itself by way of clear, obvious or visible symptoms within 120 days of use or consumption . . . .

This broad coverage is not unlimited, however, and the Policy contains a number of exclusions. Among the exclusions are provisions barring claims stemming from a “governmental ban” on a Fresh Express product or a “loss of confidence” in the Fresh Express brand.

The Court’s Decision

The court awarded Fresh Express the Policy’s full limits of $12 million because it concluded that the Insurers had breached the terms of the Policy by denying coverage in the face of clear evidence that Fresh Express had suffered losses due to “Accidental Contamination.”

The Insurers raised a number of defenses to coverage, including characterizing Fresh Express’s acts as “purchasing errors” not committed in the “manufacture, production, processing, preparation, assembly, blending, mixing, compounding, packaging or labeling” of its product, as required by the “Accidental Contamination” provision of the Policy. The court rejected that argument. It found that Fresh Express’s purchase of some spinach without conducting a safety audit and other spinach from a “prohibited” field near a cattle feedlot, in violation of its food safety practices, caused “errors” in the mixing and blending of that spinach with other spinach, raising the risk of spreading a contaminant. The court further found that Fresh Express had reasonable cause to believe that its errors had led to or would lead to injury to its customers.

The Insurers also argued that Fresh Express’s claim was barred under the Policy exclusions for claims stemming from a “governmental ban” or “loss of confidence.” The court rejected those arguments as well. It found that the FDA advisory warned consumers to avoid eating fresh bagged spinach but did not ban its sale or consumption. In fact, the court found that FDA lacked authority to ban spinach under the circumstances. The court further found that Fresh Express’s losses were not caused by either the FDA advisory or a loss of public confidence, but rather, by the 2006 E. coli outbreak. The court therefore concluded that Fresh Express’s claim was not excluded from coverage.

Significance of the Court’s Decision

This is one of the first court decisions to address the scope of coverage provided under a specialty food recall and brand protection insurance policy, a form of coverage made available only recently. It is therefore significant in establishing the value of an investment in such policies, in addition to other types of insurance coverage for food-related losses, when assessing your company’s risk management strategy. It is important to shop around for the best coverage available to protect your company’s unique risks. Several insurance companies’ policy provisions should be evaluated before selecting your coverage because similar policies may each contain different coverage language. In the event of a potential claim, your insurance contract must be evaluated again under the particular circumstances that caused your loss.

For More Information on Insurance Coverage

Insurance coverage is an important aspect of any food company’s risk management strategy. Kelley Drye & Warren’s Insurance Recovery Group has extensive experience representing commercial policyholders engaged in coverage disputes with their insurers. The Group has secured coverage on behalf of clients for, among other things, asbestos, lead, environmental, and other mass tort claims; class-action claims; first and third-party property damage claims; directors’ and officers’ liabilities; and residual value losses.

For More Information on Minimizing Food Safety Hazards

Equally important as insurance coverage is devising and putting in place company standards to decrease the likelihood of a foodborne illness or recall related loss in the first place. Kelley Drye & Warren’s Food and Drug Law Practice Group strives to integrate our clients’ business strategies with FDA compliance and to help resolve regulatory enforcement matters when they arise. Working side-by-side with business development and marketing professionals, we provide comprehensive regulatory counseling and assist in developing products, labels, and promotional materials that achieve our clients’ goals without running afoul of regulatory requirements. With close knowledge of FDA’s enforcement priorities and deep experience with the FTC’s regulation of advertising, our team can provide comprehensive legal advice with an eye toward giving clients a competitive edge. For more information on food safety, recalls, or other food and drug law matters, please contact:

Sarah Roller
(202) 342-8582