Spinach contamination demonstrates need for recall and business interruption coverages

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.

Those statistics, plus the spinach recall that occurred immediately after the outbreak, highlight the 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, which specializes in the recall and food borne illness marketplace. The 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 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. Grocers pulled products from shelves, and baggers dumped spinach by the truckload.

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 Western Growers, which represents produce farmers in California and Arizona. Last year’s spinach crop in California was valued at $258.3 million, and each acre lost amounts to a roughly $3,500 hit for the farmer, the Associated Press reported.

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.

“Everybody’s just trying to regroup,” Teresa Thorne of the Alliance for Food and Farming told AP.

Given the potential for losses, recall and business interruption coverages are critical, according to Ritz, especially in light of today’s viral and bacterial scientific capabilities.

“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.”

She thinks business interruption and product recall coverage are going to be needed more in the food industry, although food manufacturers might not realize the importance of more product liability protection. “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.

Since food products are being shipped, there is a true products liability exposure, one which doesn’t routinely fall into package policies or general liability.

Prior to business interruption, product recall insurance should be in place, Ritz said. “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 recall insurance in place, they could be left holding an empty bag.

Ritz said general liability coverage wouldn’t have helped 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. “Those products do a good job of taking care of issues of bodily injury and property damage.

“Those who have a high profile also may want to buy separate products liability because it’s a more specific product,” she added.

The two lawsuits associated with the E. coli illnesses extend to the packagers, not just the growers of the contaminated spinach. When a recall is announced, focus turns to getting that product out of the public’s hands. The government requires a weekly report on the progress being made to ensure that the marketplace is free of that product. The process can be time consuming, resource consuming and staff 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.”

Recall policies can help with the additional costs of clearing the marketplace and crisis management, costs that can be devastating because they arise at a time when the company’s revenues have slowed because it is not selling product.

Next the focus becomes how to replace the recalled product with good product, and how to make up revenue from loss of sales and contracts. For this, Ritz said a company could buy business interruption features not found in package policies.

Product recall and business interruption can be a “one-two punch that really knocks the wind out of a company,” Ritz said. “Unless you’ve got money in the bank, it is hard to stay in business when that happens. The liability lawsuits particularly hurts small to midsize manufacturers.”

Stand-alone products

While some of these coverages can be endorsed on ISO forms, Ritz recommends some agents consider 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 is 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.”

The two coverages complement one another. “Remember that in all product liability issues, you can be charged compensatory, punitive and exemplary damages. The limit on that is willful and intentional disregard or reckless behavior,” Ritz said. “I would argue that the very nature of how you handle a recall builds the defense for your liability, particularly with regard to your behavior. Did you care enough to go get rid of it? Did you care enough to tell everybody what to do? That will certainly be a standard that juries will look at.

“Let the general liability deal with any injuries that may have happened,” she said.

Despite the need for such coverage, Ritz stressed that many underwriters don’t understand the market and some agents are not comfortable selling nonstandard products. “They don’t feel comfortable talking about how these coverages fit together and what their unique purposes are. It’s a very tough sell,” she said.

But the products don’t sell themselves. “Food manufacturing tends to be a low margin business. You’ve got to make the sell on this because it’s not a product that people look for. They are relatively new forms of coverage in the marketplace so it requires some work and the agent has to be comfortable enough to explain to somebody why it’s important and how business interruption can cost them a lot more money than the factory burning down.”

Reports from Associated Press contributed to this article.