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Huge spinach recall puts spotlight on contamination cover


While insurance is available in the market to cover most of the costs associated with the recall and subsequent nationwide near halt in spinach consumption, few fresh produce farmers, packagers and processors purchase comprehensive coverage, experts say.

Trust in existing quality control systems, the misconception that other insurance coverage will kick-in to cover the losses, or aversion to the high costs of the programs all have helped limit the growth of the line of coverage, experts say.

And, according to insurers and brokers, many produce companies think that incidents like the spinach-linked E. coli bacteria outbreak that has killed at least one and sickened more than 150 people in 23 states in recent weeks will never happen to them.

But those spinach producers whose product was contaminated and have purchased the appropriate coverage should be able to turn to their insurers to bear the costs associated with the E. coli outbreak, including the costs of the recall, business interruption and crisis management.

Health authorities late last week were still trying to determine the exact source of the E. coli outbreak, but had linked the outbreak strain to a leftover bag of spinach found in the home of a sickened person in New Mexico. The bag was packed by San Juan Bautista, Calif.-based Natural Selection Foods, the nation's largest supplier of specialty salads, which voluntarily recalled all of its spinach products Sept. 15.

Two fresh produce processors, Salinas, Calif.-based River Ranch Fresh Foods and West Caldwell, N.J.-based RLB Food Distributors, also have voluntarily recalled packaged spinach products supplied by Natural Selection.

Calls to Natural Selection and River Ranch seeking insurance information were not returned, while a spokesperson for RLB declined to discuss coverage issues.

Product recall experts say the spinach contamination situation is unique in that the contamination appears to be linked to one farm, but is affecting the whole industry as the U.S. Food and Drug Administration warned the nation to not eat bagged fresh spinach.

"You're not seeing one particular spinach brand having the problem, you're seeing it with multiple brands because it's been mixed with so many different manufacturers' bags of spinach and under so many different labels," said Bernie Steves, a senior vp with Chicago-based wholesaler Colemont Insurance Brokers of Illinois L.L.C.

Contamination cover

Any of those companies that are suffering financial losses from contaminated spinach likely would be covered under a product contamination policy, if it was purchased, experts say.

Unlike standalone product recall coverage, which only covers the costs associated with getting the contaminated product off the shelf and destroyed, a more comprehensive product contamination policy covers the cost of the recall, plus bigger costs such as business interruption, product rehabilitation and crisis management consulting.

Such risks are excluded from traditional commercial general liability policies.

"If an insured grower can point to the contamination occurring in their fields, water or product, we may have a business interruption loss," said Louis Lubrano, a senior vp in the crisis management division of AIG WorldSource, a unit of New York-based American International Group Inc. "And if this goes on for months and they can't sell the insured product, that could easily cost insurers money. That is where the public relations or crisis management aspect of the policy comes into play, to reassure the public that the product really is OK and mitigate the longer term business income losses."

In addition to the cost of the actual recall, a spinach grower or processor also needs to worry about future income losses associated with its damaged brand and the liability it faces from third parties whose brand names may be tarnished as a result of the contaminated spinach supplied to them, said Rick Shanks, national managing director of Aon Corp.'s agribusiness and food systems group based in Kansas City, Mo., noting that such coverage is available.

But for those spinach processors and packagers whose product was not contaminated, but that suffered a financial loss due to consumer fear, insurance recovery is unlikely, experts say.

"If an insured's product was not contaminated, it is just rejected due to a market scare, coverage is rarely available," said Mary Qualls, vp in the crisis management division of AIG WorldSource.

But while product recall and product contamination coverage is available and the market is more attractive today than it was several years ago, it's not industry standard to purchase it, experts say.

"It is a market that is underserved because people think it can't happen to them and that their quality control systems are so unique and specialized that...they do not purchase it," Ms. Qualls said. "What we always battle in this product line is the self-insurance aspect or the person that decides it won't happen to them."

There is a "misconception" that growers are either covered for the risk under another policy or it's never happened to them and never going to happen to them "when in reality, these things are occurring on a continuous basis," Mr. Steves said.

"It's still pretty slow in terms of companies really buying it," said Jane Hamilton, a senior vp with broker Beecher Carlson in Atlanta. "I don't think it's as prevalent as one might imagine it would be given...the events that do occur."

Ms. Hamilton noted, however, that the market has stabilized and she is encouraging her clients that have looked at product recall and product contamination coverage in the past to take another look.

The combination of the soft market and an increase in frequency and severity of product recall losses several years ago--particularly in the meat and poultry industry--sent many reinsurers and insurers running from the market, leaving buyers with inadequate and expensive coverage options (BI, July 29, 2002).

"Five to six years ago the product was much more expensive, the capacity was lower, the forms were tighter," Colemont's Mr. Steves said.

But the market has stabilized and more buyers today are seeing the product contamination product "as an affordable coverage, an available coverage and a necessary coverage," he said.

Not everyone convinced

Mike Benishek, risk manager for Palmetto, Fla.-based Pacific Tomato Growers Ltd., however, is still a nonbeliever.

"We've looked at (product recall coverage) and passed on it. For what we would get, it just doesn't make financial sense," he said. "If we get a load that goes bad on the delivery end, they just dispose of it in the dump and then we'll send them a free load or whatever makes them happy."

And in terms of the more comprehensive contamination coverage, Mr. Benishek said what "turned him off" was the "humongous" deductible.

A semitrailer load of tomatoes at average market prices is $12,800, he said. "Why would I want to buy a policy with a $100,000 deductible?"

Mr. Benishek noted that Pacific Tomato Growers is rated either "excellent" or "superior" in all of its packing houses and farms by a third-party food safety auditor.