Since the U.S. Food and Drug Administration (FDA) issued its initial alert of an apparent outbreak of spinach contaminated by E. coli bacteria (FDA Release #P06-131, Sept. 14, 2006), significant health and financial effects have reverberated nationwide. The FDA reports that, as of September 26, 2006, 183 cases of illness in 26 states due to E. coli infection have been reported to the Centers for Disease Control and Prevention (CDC), with 95 hospitalizations and one death. The Wall Street Journal has reported that five lawsuits have been filed by one law firm in Washington state, and numerous other suits are certain to follow. To date, food suppliers in Oregon, Washington, California and New Jersey have undertaken five recalls, impacting sales in numerous states and, in some instances, internationally. These recalls not only affect packaged spinach, but also processed food such as salad mixes and frozen pizza. (FDA Release #P06-146, Sept. 26, 2006.) It is highly likely that many more companies nationwide in the food service business, including restaurants, markets and institutions, have discarded spinach and spinach-containing foods, regardless of whether they were contaminated or recalled, and supermarkets and grocery stores have no doubt refunded monies or substituted other products sold to individual consumers.
With the growing consequences arising from these events, impacted companies will undoubtedly seek insurance coverage for judgments or settlements of lawsuits, litigation costs, product recall expenses, business interruption or slow down, destruction of stock, and a variety of incidental expenses such as public relations costs and incentives to bring back customers. While certain affected entities may have insurance specifically designed to cover product recalls and contaminated products, many others will not. The latter category of companies might then try to obtain insurance under their general liability or first-party property policies.
Specialty Insurance
Some of the impacted companies, such as large growers or suppliers, may have insurance to respond to losses from tainted food. One such insurance product is product recall insurance, which may include business interruption coverage for recalls and coverage for the cost of replacement of product and related incidental costs. This insurance has been offered for at least 20 years, and the Insurance Services Office (ISO) recently issued a form policy for this insurance. Another insurance product is product contamination insurance, which is designed to cover financial losses arising from tainted products. Whether these policies will cover the variety of losses arising from contaminated spinach will turn on their specific terms, which often may be manuscripted.
However, many of the companies impacted by the contaminated spinach situation may not have purchased such insurance, either because it was too expensive or, as in the case of companies downstream from the large growers and suppliers, the risks from contaminated food were perceived as relatively remote. See Business Insurance , Sept. 25, 2006. Such companies (and their lawyers) may then look to other forms of insurance.
General Liability Insurance
General liability insurance is insurance for third-party liabilities, designed to cover 'sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies.' The 'bodily injury' or 'property damage' must be caused by an 'occurrence' that takes place within the 'coverage territory.' General liability insurance typically also provides coverage for the cost to defend the insured against suits seeking such damages, and others place an affirmative duty to defend on the insurer.
With regard to bodily injury claims, suits involving sickness and death from contaminated spinach will typically fall within the definition of 'bodily injury.' A more difficult question arises of whether claims for emotional distress or fear of injury constitute 'bodily injury.' Many jurisdictions interpret liability policies to require some physical injury or physical manifestation for coverage, while a handful of jurisdictions allow coverage for emotional distress or fear of injury without physical manifestations.
If a policyholder can establish bodily injury and other requirements for coverage, then certain exclusions may bar coverage. In the property damage context, general liability policies generally do not provide coverage for damage solely to an insured's product. Such coverage may be available under first-party property insurance. Similarly, general liability coverage is not designed to cover recall expenses. Again, other insurance may be available for such expenses.
On the other hand, general liability coverage may respond if a policyholder's product is incorporated into and damages a third-party's product. In the contaminated spinach situation, examples may be bagged salad mix or frozen pizza.
Moreover, whether or not a policyholder's product physically injures other property may affect application of the impaired property exclusion of many policies. 'Impaired property' is typically defined to include 'tangible property, other than 'your product' . . ., that cannot be used or is less useful because . . . it incorporates 'your product' . . . that is known or thought to be defective, deficient, inadequate or dangerous.' 'Impaired property' is often excluded from coverage if it has not been physically injured and arises out of a defect, deficiency, inadequacy or dangerous condition of the policyholder's product. However, coverage may be available if the 'impaired product' is physically injured.
In light of the distinction between 'impaired property' that is or is not physically injured, consideration of the impaired property exclusion may also raise issues of proof for products that have been destroyed.
As noted above, general liability policies typically do not cover recall expenses for either the policyholder's product or for 'impaired property.' This is accomplished through an exclusion for 'damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of 'your product' . . . or 'impaired property' if such product . . . or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.' This language would appear to preclude coverage for the full gamut of recall expenses, including expenses to prevent or mitigate further damage. However, an aggressive policyholder bar undoubtedly will attempt to circumvent this language given the potentially high stakes involved in nationwide recalls.
The pollution exclusion, discussed above with regard to bodily injury, may also preclude property damage claims.
Given the reach of the contaminated spinach situation, potential targets for liability and their insurers may include a broad range of businesses, beginning with growers and fertilizer manufacturers, continuing through packagers, distributors and shippers and ending through points of sale, such as food processors, retail markets and restaurants. General liability policies often provide coverage for entities beyond the named insured - for instance, vendors' endorsements. Insurers should evaluate whether entities other than the named insured may be covered under their policies, as well as whether their own policyholders are potentially covered under other policies. To the extent that multiple policies may respond to a claim, issues may arise concerning priority of coverage and allocation, which will depend in part on application of other insurance clauses in the policies.
Insurers should also evaluate potential subrogation and contribution claims and whether the policyholder has taken appropriate measures to protect the insurers' subrogation and contribution rights. In this regard, upon receiving notice of an occurrence, suit or claim, an insurer should request identification of all other insurance potentially available to the policyholder and should remind the policyholder to provide timely and adequate notice to all such insurers. Failure of the policyholder to do so may result in forfeiture of coverage.
Property Insurance
First-party property insurance generally has two components: coverage for direct physical loss or damage of the policyholder's property and coverage for business interruption caused by or resulting from a covered cause of loss. Certain property policies are 'all risks' policies, which cover loss for all risks unless excluded. Other policies define and limit coverage to specified causes of loss. The policy language will be determinative of whether E. coli contamination of spinach is a covered cause of loss. Moreover, coverage questions may arise to the extent that property loss and business interruption may not be the result of actually contaminated spinach. In addition, issues may arise of whether purposeful destruction of product that may not be damaged constitutes a covered cause of loss.
Commercial property policies often contain 'sue and labor' clauses, which generally both permit and require the insured to take steps to prevent a threatened loss or, where a loss does occur, to diminish its scope. In return, the insurer may be liable for the expenses incurred by the insured. Availability of sue and labor reimbursement may depend on whether the work is undertaken in response to a covered cause of loss. Whether an insured is under a duty to mitigate particular types of damage also may be an issue.
Many commercial property policies provide contingent business interruption (CBI) coverage for the interruption of business as a direct result of physical damage to property not owned or operated by the insured that prevents (1) any supplier of goods and services to the insured from rendering its goods and services or (2) any direct receiver of goods and services from the insured from accepting such goods and services. Many buyers and users of spinach, such as food processors ( e.g., preparers of pre-packaged salad mixes, frozen and canned foods) and restaurants may claim business slow downs and lost sales from the temporary unavailability of spinach. A threshold question may exist as to whether such a losses are the direct result of physical damage to property. Complex issues of valuation may also arise in determining the amount of lost sales.
Conclusion
A broad range of insurance coverage issues will likely arise from the contaminated spinach situation. The foregoing provides a sampling of potential issues in light of reports to date.
Published November 1, 2006.
