Spinach contamination demonstrates need for recall and business interruption coverage

On Sept. 13, epidemiologists in New Mexico, Wisconsin and Oregon began discussing a cluster of E. coli infections associated with fresh spinach consumption and warned the Centers for Disease Control and Prevention that they suspected fresh-bagged spinach as the source of what could potentially become a nationwide problem. Nearly 30 days after that initial E. coli discovery, 199 cases of illness across 26 states have been reported to the Centers for Disease Control and Prevention — 102 of which resulted in hospitalization, 31 that resulted in a type of kidney failure called Hemolytic Uremic Syndrome, three that resulted in death and two, thus far, that resulted in lawsuits from people who required hospitalization and are seeking damages.

Those statistics, plus the spinach recall that occurred immediately after the outbreak, highlight the heightened need for proper insurance coverage in the agriculture industry.

“I think it is an area where agents need to give special attention,” said Pam Ritz, president of Austin, Texas-based Specialty Risk Management, a crisis management company that specializes in the recall and food borne illness marketplace. If nothing else, the massive spinach recall prompted many businesses to reevaluate the importance of proper business interruption and recall insurance, she said.

Assessing the outbreak

As people ill with E. coli O157:H7 began appearing in hospitals in September, the Food and Drug Administration moved quickly to contain the problem and advised consumers not to eat any fresh-bagged spinach. While the contaminated spinach originated from Salinas Valley, Calif., the advisory triggered recalls, often voluntary, from California to Washington, D.C., of spinach produced all along the West Coast. With no one to purchase the products and fear of making people sick, grocers pulled products from shelves, and baggers dumped spinach by the truck-load.

Just as staggering as the health statistics are the tallies of potential losses. In California, where three-quarters of all domestically grown spinach is harvested, farmers could endure up to $74 million in losses, according to early reports from researchers working with Western Growers, which represents produce farmers in California and Arizona. Even now, with the source of contamination discovered and spinach declared safe for sale, farmers are uncertain what the spinach market will bear. Some, fearing they’ll lose all spinach income due to consumers’ lack of appetite for the product, have decided to cut their losses and plant other, less valuable, winter crops like wheat instead.

“Right now, we know what we’re going to do for the next two weeks. After that? It’s up in the air,” said spinach grower Jack Vessey, 31, a fourth-generation farmer.

Adequate coverage

Potential losses are why insurance coverage has become critical. Additionally, Ritz said recall and business interruption is important is because of the current capabilities in viral and bacterial scientific investigation that did not exist 10 years ago.

The latest count released by the FDA said 199 people are sick, 102 people hospitalized and 31 with kidney failures. “How do we know that?” Ritz asked. “When it is a food product specifically, we can now take specimens from people who are sick and find matching DNA patterns — which is really called RNA when you get to the viral infection level — and know what product is making everyone sick.

“It’s been debatable in some cases in the past about whether or not the food made someone sick,”Ritz explained, “but with this kind of science and technology, the debate is over.

“I think [business interruption and product recall coverage] is going to become more and more of a need,” she added, “particularly in the food industry.”

According to Ritz, many food manufactures are familiar with various kinds of negligence claims, but they perhaps might not realize the importance of getting more product liability by endorsing it onto a general liability form or on a separate basis.

“There are strict product liability laws that exist in each and every state associated with products [initially] created by the auto industry years ago that are now being applied to food products,” Ritz said. But the food industry is turning into a manufacturing “Mecca,” she said, emphasizing the need for product recall coverage.

Twenty years ago, publicly traded restaurant and publicly traded manufacturing names in the food industry weren’t as prevalent as they are today. Now, food and manufacturers appear quite vogue. “Everything from salsa and chips to bread, you name it,” Ritz said. As a result, insurance agents need to expand their business. “Instead of taking old products and trying to apply it to a new industry, they need to think outside the box a little,” Ritz said. With food industry products being shipped away from the place of manufacture, a true products liability exposure arises.

“These exposures don’t routinely fall into package policies or general liability,” she explained, “However, the 2005 ISO forms do allow for some provisions, but you have to be astute enough to understand your clients’ needs as you craft the coverages.”

Prior to business interruption, it’s important to have product recall insurance in place, Ritz said. Product recall coverage does a couple things that other policies don’t do. “For business interruption coverages to trigger, you have to have physical damage,” she explained. “None of the factories that manufactured the spinach burnt down. None of them blew away. They are all still standing with no physical damage.” So, if those factories did not have product recall insurance in place, they could be left holding an empty bag.

Ritz said she believed general liability coverage wouldn’t help spinach packagers involved in the recall either, for the same reasons.

Specialty Risk Management combines a commercial package policy or a general liability form and a commercial property form, depending on company size and an agent’s sophistication as to what markets they have available. Agents also should pay attention to completed products and operations — something food manufacturers need, Ritz said. “Those who have a high profile also may want to buy separate products liability, because it’s a more specific product.”

The two lawsuits associated with the E. coli illnesses extend to the packagers, not just the growers of the contaminated spinach. Packagers and manufacturers that had to make a recall would have greatly benefited from recall insurance, according to Ritz, who noted recall insurance is a multi-faceted product.

When a recall is announced, focus turns to getting that product out of the general public’s hands. By that point, the government will hold a company to a standard, which includes a weekly report on the progress being made to ensure that the marketplace is free of that product. The mechanics of that process can be time consuming, often requiring crisis management.

“The company must send appropriate information to retailers to make sure that they don’t continue to sell it and, in some cases, return it, in some cases, destroy it,” Ritz explained. “All of that requires record keeping expense. Any downstream entities are going to want to charge money for getting rid of that stuff.”

Furthermore, a recall is particularly devastating because during the time when a company is not selling product, it faces additional costs. Recall policies can help with the additional costs of clearing the marketplace as well as the additional cost of crisis management response expense, Ritz said.

The next area of focus becomes how to replace the recalled product on the shelf with good product, and how to make up revenue from loss of sales and contracts. Ritz said a company could buy business interruption components not found in package policies to help with this.

Some components of recall features can be endorsed on ISO forms, but they may not be as thorough as stand-alone products.

“Remember, these stand alone products are multi-faceted products. They address the sequence that is going to be needed — crisis management; trying to analyze and recognize the problem; if there a recall, get the product back, transport it, destroy it, status it with the government, make sure it’s all gone from the marketplace and deal with the issue of customer impact; replace it; provide temporary funding for remarketing; and get back on your feet.”

Business interruption and product recall insurance make a complementary couple, Ritz said.

Reports from Associated Press contributed to this article.