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Insurers Will Have to Eat $12 Million in Tainted Spinach Claims, Says Court

Source: Business Insurance

Posted on 24 Aug 2009

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Two London-based underwriters have been ordered by a superior court judge to reimburse a California food retailer $12 million, the full amount of its product recall insurance policy, after the underwriters initially denied the claim that arose from damages related to a nationwide E. coli outbreak linked to spinach.

Salinas, Calif.-based Fresh Express Inc. purchased a product recall/brand protection policy from Lloyd’s of London Syndicate 2623/623 that was managed by Beazley and QBE Insurance (Europe) Ltd. Fresh Express filed a claim in September 2006 during the E. coli outbreak after initial investigations determined it had violated its own food safety policies and protocols in acquiring and processing some of its spinach, risking harm to others.

According to court papers, Fresh Express purchased spinach in August 2006 from two growers that were known suppliers to Natural Selection Foods, the San Juan Bautista, Calif.-based specialty salad supplier that ultimately was found to be the source of the contaminated spinach.

In one instance, Fresh Express found that it failed to conduct a food safety audit of a field prior to purchasing spinach. In the other case, Fresh Express purchased spinach from a lot placed on a list of “prohibited” fields by its food safety group because it was too close to a cattle feedlot, a known source of E. coli.

Ultimately, Fresh Express found no E. coli in any of its products and never made a recall. However, it did incur more than $12 million in expenses and sought to be reimbursed by its product recall insurers.

In denying the claim, Beazley and QBE argued, among other things, that Fresh Express’ purchasing errors did not fall within requirements set forth in the policy and that the company’s losses were excluded from coverage because they were caused by a “governmental ban” or “loss of confidence.” In the wake of the outbreak, the U.S. Food and Drug Administration warned the nation to not eat bagged fresh spinach.

In the ruling, Judge Susan M. Dauphine in the California Superior court in Monterey ruled that Fresh Express' purchasing errors were covered by the policy and that it had reasonable cause to believe those errors could lead to bodily injury.

“To adopt defendants’ interpretation of the policy…would render the coverage provisions under the policy meaningless,” the judge wrote.

Andy Running, an attorney with Kirkland & Ellis L.L.P. in Chicago who represented Fresh Express, said the “court recognized the purpose of recall coverage is to provide insurance for decisions made by policyholders, such as Fresh Express, in real time based on limited information.”