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Court rules against Fresh Express in recall insurance case

A California Court of Appeals reversed an earlier Superior Court decision thereby abandoning a $12 million judgment that Fresh Express Inc. had received against an insurance carrier to recover losses resulting from the 2006 E. coli outbreak associated with fresh spinach.

A three-judge panel ruled Sept. 8 that the Monterey County Superior Court had erred in interpreting the recall insurance policy that Salinas, CA-based Fresh Express had in place at the time with Lloyds of London.

Essentially, the court ruled that the losses occurred because of the E. coli outbreak itself rather than any “errors” of “accidental contamination” that Fresh Express had committed.

The court ruled that while errors by Fresh Express resulting in “accidental contamination” would have been covered under the terms of the policy, the E. coli outbreak, caused by others, was not a covered event.

“Fresh Express could recover losses under the policy only if it could establish that losses were attributable to its errors,” the court ruled.

Ed Loyd, a spokesman for Chiquita Brands LLC, which is the parent company of Fresh Express, issued the following statement via e-mail to The Produce News: “We are disappointed with the court’s ruling, and Fresh Express intends to seek reconsideration — and if necessary — a review of the Court of Appeal’s decision. We believe that there should be coverage under our total recall insurance policy. If the insurance industry held every insured policyholder to the standard laid out by the court in this decision, it would be unlikely that any coverage protection would be afforded to any produce company that holds a similar recall policy. This result is very unfortunate for our industry as many companies pay large amounts for policies with the good faith belief that there will be coverage under those policies in the event of a recall.”

Jasper Hempel, senior vice president of insurance services for Western Growers Association, based in Irvine, CA, who was not involved in the case in any way, was also disappointed with the ruling.

“This points out the need for every company in our industry to do a thorough review of their own recall insurance policies to see what is and is not covered,” he said.

Mr. Hempel said that since the 2006 E. coli outbreak associated with fresh spinach, WGA has had a team in place to secure meaningful and total recall insurance from insurance carriers, but it has largely been unsuccessful.

“We just haven’t been able to find a policy that covers all the recall triggers that can occur in our industry,” he said.

He said that it would have been helpful to the industry if the court would have upheld the lower court decision and ruled that the E. coli outbreak was a trigger event.

Because of the perishability of fresh produce and the typical lack of a smoking gun when contamination occurs, it has been very difficult to have a definitive traceback situation when there is a suspected food borne illness linked to fresh produce.

Mr. Hempel said that fresh fruit and vegetable recalls, which are almost always voluntary, can be triggered by several different occurrences.

He said that WGA continues to look for and negotiate with carriers to expand the list of occurrences that would be covered.

In the Fresh Express case, the facts were not disputed, but the interpretation of those facts was questioned and ultimately two courts disagreed.

In September 2006, the Food & Drug Administration issued an alert that advised consumers not to eat bagged fresh spinach due to its possible link to an E. coli outbreak. Because of this advisory, the production and shipping of bagged spinach was halted and the product was pulled from retail shelves around the country.

In the midst of the crisis, and before the FDA linked the outbreak to a specific brand, Fresh Express did an internal audit and discovered that it had purchased several lots of spinach during the time frame in question from outside growers that were not subject to the same food-safety procedures that the firm had in place for its own production. It also discovered that several of these growers supplied other bagged spinach suppliers as well, including the company that was ultimately found to be the source of the outbreak.

Over the next three months, Fresh Express estimated that it suffered $18 million in losses, including loss of profits and costs associated with its own recall of product.

Although Fresh Express was ultimately cleared as the source of the E. coli outbreak, the firm filed a claim against its total recall insurance policy claiming that the outbreak and the company’s response was a covered event and the firm should be compensated by the insurance carrier. Fresh Express’ total recall policy had a $12 million upper limit. The claim was denied by the insurer, and Fresh Express filed a lawsuit claiming $12 million in damages.

In August 2009, Monterey County Superior Court Judge Susan Dauphine ruled that Fresh Express could recover its losses under the policy because its errors — included violating its own internal purchasing policy — gave the producer reasonable cause to believe that its products were the source of contamination and prevented it from seeking a full exemption from the FDA’s advisory.

The specific insurance provider, Beazley, appealed the decision, claiming that the trial court erroneously defined the “insured event” under the policy as “the E. coli outbreak.”

Beazley argued that its policy specifically defined “accidental contamination” as a covered event, and in this case there was no accidental contamination by Fresh Express.

Beazley further argued that the losses incurred by Fresh Express were not the result of its failure to follow its own purchasing procedures but because of the E. coli outbreak itself, which resulted in the halting of sales of bagged spinach and the disposal of product that was already in the stores.

In the Court of Appeals, Fresh Express argued that the policy did not require that the “insured event” be the result of any error by Fresh Express. The firm claimed that all the policy required was that Fresh Express’ “errors were sufficiently serious to link it to the E. coli outbreak.”

Fresh Express maintained that the “insured event” was the product recall and the withdrawal of that product from the marketplace because the firm had “reasonable cause to believe” that the insured’s products could have caused harm if not removed from the market.

The court ruled for Beazley, stating that the losses that Fresh Express suffered were largely due to the loss of confidence in spinach by the public resulting in lack of demand for the product rather than either the recall or any errors that Fresh Express might have made.