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E. Coli Outbreak Not an ''Insured Event'' Under Product Recall Policy: $12 Million Judgment for Chiquita Brands Subsidiary Reversed

Wednesday, September 21, 2011
Michael L. Calder | Bloomberg Law Fresh Express, Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, No. H035246, 2011 BL 231596 (Cal. Ct. App. Sept. 8, 2011) A California appellate court held that an outbreak of E. coli linked to bagged fresh spinach was not an “Insured Event” under the terms of a “Malicious Contamination, Accidental Contamination and Products Extortion Insurance” policy. The court’s decision reversed a trial court’s $12 million policy limit award to Fresh Express, Inc., a subsidiary of Chiquita Brands.

The E. Coli Outbreak

On September 14, 2006, the U.S. Food and Drug Administration (FDA) issued an alert to consumers advising that they should not eat bagged fresh spinach due to an outbreak of E. coli 0157:H7. Within 24 hours, bagged spinach had been completely removed from store shelves throughout the United States. Although there had not been a recall order, Fresh Express, the nation’s largest producer of bagged fresh spinach, stopped harvesting, processing, and distributing its product. Fresh Express did not own any farms, but purchased its spinach from suppliers that practiced “good agricultural practices” (GAPs) designed to reduce the risk of contamination. One such practice was to prohibit the use of produce grown within one mile of a cattle yard because cattle are the primary source of E. coli. Fresh Express’s food safety consultants considered it a serious error to allow produce to enter Fresh Express’s processing plant if the produce did not come from a farm that followed GAPs. During the FDA’s investigation into the source of the outbreak, Fresh Express learned that it had made spot purchases of spinach grown by producers that did not use GAPs. However, by September 29, the FDA determined that the source of the outbreak was a single ranch that had not sold any of its produce to Fresh Express. Although Fresh Express made “errors” in the processing of its product, these errors were not the cause of the E. coli outbreak. As a result of the decreased demand for bagged fresh spinach and the drop in demand for all leafy greens in the wake of the outbreak, Fresh Express estimated its losses to be $18.8 million, all of which it attributed to the E. coli outbreak.

Accidental Contamination Insurance

Beazley Syndicate 2623/623 at Lloyd’s and QBE Insurance (Europe), Ltd. (collectively, Beazley) issued an accidental contamination insurance policy to Fresh Express with a $12 million limit of liability. The insuring agreement provided coverage for losses arising out of “Insured Events,” which was defined as including “Accidental Contamination.” The policy defined “Accidental Contamination” as “error by [Fresh Express] in the manufacture, production, processing, packaging . . . of any Insured Products . . . which causes [Fresh Express] to have a reasonable cause to believe that the use or consumption of such Insured Products has led to . . . bodily injury . . . .”

Trial Court Awards $12 Million

Fresh Express submitted a claim to Beazley, which denied coverage. Fresh Express filed suit against Beazley for breach of contract and bad faith. At trial, Fresh Express argued that its GAP violations were errors that led it to believe that its products were partially responsible for the E. coli outbreak. Fresh Express’s damages witnesses testified that the company’s losses were all attributable to the E. coli outbreak, which they assumed was the “Insured Event,” and no attempt was made to attribute any of the losses to Fresh Express’s “errors.” The trial court agreed that the “Insured Event” was the E. coli outbreak and awarded the $12 million policy limit. Beazley appealed.

The “Insured Event” Was Not the E. coli Outbreak

On appeal, Beazley did not dispute that an “Insured Event” of “Accidental Contamination” occurred. Rather, it argued that Fresh Express attributed all of its losses to the E. coli outbreak, which was not an “Insured Event.” Beazley maintained that the “Insured Event” was “Accidental Contamination,” i.e., errors made by Fresh Express in allowing non-GAP produce into its processing plant, but that none of Fresh Express’s damages were attributable to those errors. The appellate court held that the trial court erred in finding that the E. coli outbreak was the “Insured Event.” The court noted that the only type of “Insured Event” covered by the policy was “Accidental Contamination,” and that “Accidental Contamination” was defined as “error by Fresh Express.” Therefore, because Fresh Express was not the source of the outbreak, the outbreak was not the result of Fresh Express’s “errors.”

No Evidence That Fresh Express’s Errors Caused Damage

The court noted that the policy covered losses that were the direct result of errors by Fresh Express, but that there was no evidence presented at trial that any of Fresh Express’s errors were linked to the E. coli outbreak. Furthermore, the FDA did not know of Fresh Express’s errors when it issued its advisory. Thus, neither the E. coli outbreak nor the FDA advisory were the direct result of Fresh Express’s errors. Fresh Express argued that it could have sought an exemption from the FDA advisory, but for the “errors” it discovered during the search for the contamination source, and that the errors, therefore, were the cause of some of its damages. The court disagreed, noting that bagged spinach disappeared from store shelves within 24 hours of the advisory, which was before Fresh Express was able to confirm its spinach sources. Thus, there was no evidence presented at trial that an exemption from the FDA advisory would have eliminated Fresh Express’s losses. Accordingly, the court reversed the trial court’s judgment and remanded the case to be dismissed. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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