E.coli outbreak not an insured event for faultless marketer who sustains consequential losses

Posted in: Insurance Law by Steven Vartabedian on

There are few consumer warnings that strike more fear in the public’s mind than the announcement of an E. coli outbreak. The potential consequence of eating a seemingly wholesome yet contaminated food item is deadly. No less fearful of such an announcement are marketers of the produce in question. Even if an investigation into the source of the contamination later absolves a particular party of placing any of the contaminated items into the marketplace, the damage may already have been done to the innocent company. So how does such a company protect itself against such a situation? The common answer is to seek insurance. As the below discussion explains, Fresh Express insured itself, but to no avail.

The FDA issued an alert in 2006 warning consumers to not eat bagged fresh spinach because of an outbreak of E. coli 0157: H7. Two weeks later, this advisory notice was withdrawn, as the source of the outbreak was identified. Fresh Express, the world’s largest bagged spinach producer (Dole being the only other producer with a large market share), suffered significant business losses even though it was not the source of the outbreak. Fresh Express had insured itself (at an annual cost of $300,000) under an “Accidental Contamination” policy that provided business loss coverage for “[e]rror by [Fresh Express]” in the preparation or distribution of its products while in its care which “causes Fresh Express to have reasonable cause to believe that the use or consumption of the products” would lead to bodily injury or death. The insurer denied coverage and Fresh Express sued for the policy limit of $12 million.

In Fresh Express, Inc v. Beazley Syndicate (filed Sept. 8, 2011, certified for publication October 4, 2011) 2011 DJDAR 14972, the California Court of Appeal, Sixth Appellate District reversed the Monterey Superior Court court-trial judgment for $12 million in favor Fresh Express. The appellate court disagreed with Fresh Express’s claim (accepted by the trial court) that all the policy required was that Fresh Express committed an error that was sufficiently serious to link it to the E. coli outbreak. Rather, stated the court, the policy restricts recoverable losses to those arising out of and because of an error by Fresh Express, causing it to believe use of the product would cause injury to consumers.

The appellate court does not question that there was substantial evidence that Fresh Express had made errors within the meaning of the policy: evidence that it had made spot purchase during the relevant time period from suppliers not food-safety-audit certified by Fresh Express. For example, Fresh Express’s certification policy was to not permit produce grown within 1 mile of a cattle yard because cattle are a primary source of E. coli. Two days after the FDA advisory was issued E. coli infected individuals implicated Fresh Express as a possible source of spinach they had eaten. Fresh Express only learned its product was not the source of the outbreak 15 days after the advisory was issued.

However, determined the appellate court, Fresh Express did not present substantial evidence of a nexus between Fresh Express’s errors and the E. coli outbreak. While it did suffer damage as a result of pulling its product off of retail shelves and the apparent decrease in demand for the product due to public concern over safety of the product (lost profits, contractual losses, credit costs, disposal expenses and rebranding costs included), none of those losses were proven to be due to events covered by the policy.

I imagine Fresh Express would have liked to have argued that, because it ended up not culpable for the contamination that caused the plunge of the bagged spinach market, it should be place in no worse a position than that of the responsible party. Had it been the source of the contamination, it would have been able to prove the causation demanded by the appellate court and recover for its losses. But that is not the way things work when it comes to interpreting the meaning of “insured event” under an insurance policy. What triggered coverage in this case was error of the insured, and the court reasoned that such error had to cause the injury.

In hindsight, the plaintiff here probably wishes it could turn back the clock and insure against the risk of not only its own errors, but also errors more broadly defined as including those committed by others in the bagged spinach industry. But to insure that risk, the premium might have been prohibitive or the insurer may even have declined to insure that broad a risk.

Perhaps a question for another day is, assuming the exact policy provision as was present in this case, does the insured prove causation if the FDA’s investigation is closed without a definitive result, failing to absolve the insured of responsibility as a source of contamination?

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