E. coli expedites 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 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, three that resulted in death and two, thus far, that resulted in lawsuits from sick people 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.

“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 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 contamination originated from Salinas Valley, Calif., the advisory triggered recalls, often voluntary across the nation. 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.

In California, where three-quarters of all domestically grown spinach is harvested, farmers could endure up to $74 million in losses because of the recall, according to researchers working with 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 with the source of contamination discovered and spinach declared safe for sale, farmers are uncertain what the market will bear. Some farmers, fearing they’ll lose income due to consumers lack of appetite for spinach, have decided to cut their losses and plant other, less valuable, winter crops 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, a fourth-generation farmer. Vessey’s crops sprout from the Imperial Valley, more than 400 miles south of where the contamination was traced. Even so, the E. coli contamination has threatened his bottom line as uncertain demand wreaks havoc with his growing schedule.

Spinach is big business in the Imperial Valley and Yuma, Ariz. The areas along the U.S.-Mexico border account for nearly all the winter spinach grown in this country. The Imperial Valley produced more than 30.5 million pounds of the vegetable in 2005 with a gross value of $19.8 million–an increase of nearly $5.2 million over the previous year, according to the county crop report.

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

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

“We can now take specimens from people who are sick and find matching DNA patterns … and know what product is making everyone sick,” Ritz said. “It’s been debatable in some cases in the past about whether or not the food made someone sick, but with this kind of science and technology, the debate is over.”

Many food manufacturers are familiar with negligence claims, but they might not realize the importance of getting more product liability by endorsing it onto a general liability form or on a separate basis, Ritz noted.

“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,” she said. But the food industry is turning into a manufacturing “mecca,” fueling the need for recall coverage.

Today, food and manufacturers’ brands are important in “everything from salsa and chips to bread, you name it,” Ritz said. “The food industry is really developing as a niche market, and a lot of farmers are turning their crops over to higher margin crops.”

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 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 added. “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.

She believes general liability policies won’t help spinach packagers in a recall, for the same reasons.

Agents also should pay attention to completed products and operations, Ritz said. “Those who have a high profile also may want to buy separate products liability, because it’s a more specific product.”

The lawsuits associated with the E. coli illness extend to the contaminated spinach packagers, not just growers. Packagers and manufacturers that made a recall would have benefited from recall insurance, Ritz said.

When a recall is announced, focus turns to getting that product out of the public’s hands. The government will require a company to make a weekly report on the progress being made to ensure that the marketplace is free of that product, she explained. That 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 said. “That requires record keeping expense. Any downstream entities are going to want to charge money for getting rid of that stuff.”

Also, a recall is devastating because during the time when a company cannot sell 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.

“I buy recall because I need money to get the product back or make sure it is destroyed,” she said. “I need money to do the crisis management required when suddenly everyone agrees the product is bad — everything from phone calls, hotlines, e-mails, letters to physical follow-ups.”

The next area of focus becomes replacing the recalled product with good product, and making up revenue from lost sales and contracts. Business interruption components not found in package policies can help with this, Ritz said. Some components of recall features can be endorsed on ISO forms, but they may not be as thorough as stand-alone products, she added.

“Remember, these [products] address the sequence that is going to be needed — crisis management; 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 customer impact; replace it; provide temporary funding for remarket; and get back on your feet.

“Remember that in all product liability issues, you can be charged compensatory, punitive and exemplary damages. The limiter 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.”

Knowing how to sell
Despite the seeming need for such coverage, many underwriters don’t sell recall insurance because they don’t understand the market, Ritz said. The agent needs to be comfortable selling surplus lines because business interruption and product recall coverage is a nonstandard product, she noted. “My take is that people just aren’t comfortable selling these stand alone programs and products. They don’t feel comfortable talking about how these coverages fit together and what their unique purposes are,” she said.

Plus, she added, “Food manufacturing tends to be a low margin business. There are relatively new forms of coverage in the marketplace, so it requires some work, and the agent has to be comfortable explaining why it is important and how business interruption can cost them a lot more money than the factory burning down.”

Yet not having coverage can be fatal. Product recall and business interruption is a “one-two punch and 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 mid-size manufacturers.”

Reports from Associated Press contributed to this article.