Tainted spinach could highlight recall insurance.

Not only are insurers likely to play a major role in the ongoing legal and financial fallout from spinach contaminated by E. coli bacteria, the publicity over the tainted spinach could help boost sales of an insurance product designed to protect companies specifically from product recalls.

Several lawsuits related to the contamination have been filed so far, and more are expected. "For anybody who touched the vegetable anywhere on the supply chain, at the very least, the insurers will have to pay for their defenses, even if they aren't found liable" said Tim Dodge, director of research for the Independent Insurance Agents & Brokers of New York.

As of Oct. 6, 199 people in 26 states had been sickened, and three people had died, from eating fresh bagged spinach, according to the U.S. Food and Drug Administration.

The contamination has led to a massive, voluntary recall of fresh spinach.

"The recent E. coli outbreak involving bagged spinach is trouble for producers, the companies, supermarkets and restaurants that sold and served the spinach, and their insurers," said Scott Haworth of Sedgwick, Detert, Moran & Arnold in an e-mail to Best's Review. "Plaintiffs' lawyers will sue every player in the distribution chain from the producers on down the line, attempting to place the onus on the defendant and their insurers to hash out financial responsibility. Because the elderly and small children tend to be most adversely affected by [this strain of E. coli], these lawsuits will be emotionally charged, with clear public relations implications."

Most companies carry commercial general liability insurance and/or product liability coverage, which would cover the people who were hurt by ingesting tainted spinach. It could cover third parties, depending on contract wording, Dodge said. Some distributors or stores could require their vendors to include them as additional insureds on their policies, just as owners of a building site often require a general contractor to add them as additional insureds to the contractor's coverage.

However, Bill Harrison, managing director of Aon's Crisis Management Practice, said CGL policies often exclude cover of third-party recall and contamination liability. "Misunderstanding that point can be a terrible surprise to senior management at any ingredient supplier or co-packer," Harrison said. He pointed to product recall or product withdrawal insurance, which would come into play--if anyone bought it.

"It's one of the largest risks that is largely uninsured by the food industry: the risk of product contamination and recall. Most companies still do not insure, but that's changing quickly," Harrison said.

Product recall insurance--which includes business-interruption coverage related to recalls, plus the cost of the recall and replacement of products and additional costs such as public relations and speciality consulting--has available limits of as much as $200 million and deductibles that range widely, depending on a company's size and what it does, Harrison said.

A standard form for product recall insurance was approved by the Insurance Services Office in 2004, Dodge said, but Harrison noted the product has been around in other forms for 20 years. It's tough to measure the size of the market, but Harrison said it's among the fastest-growing areas in insurance, noting his office has grown from three people six years ago to more than 50 in 24 countries today.

Harrison said the most significant risk to companies involved in a recall is business interruption. "After public safety, the first concern they have financially is the loss of revenue and customer loyalty," Harrison said. "In a recall situation, if they're smart, the first thing they do is make sure the public is safe. Because morally, that's what a person should do, but from a cold-hearted business perspective, if the public doesn't perceive you're ... doing everything you can to protect them, they won't come back."

Product recall insurance can be triggered by accidental contamination or malicious product tampering, or even product extortion, which is when someone threatens to tamper with a product.

Chain restaurants have a tremendous risk of contamination, Harrison said. While traditional property/casualty perils such as fires or slip-and-fall cases are limited to individual restaurant locations, an incident of contamination in one restaurant can impact business for an entire chain, Harrison said. "One restaurant has an E. coli problem and it gets on the evening news; suddenly, all of your restaurants are in danger."

Food-borne Illness By the Numbers

199

Number of people sickened by E. coli in fresh spinach as of Oct. 6, 2006.

76 Million

Number of people in the United States sickened by food-home illness every year.

102

Number of people hospitalized from exposure to E. coli in fresh spinach as of Oct. 6, 2006.

325,000

Number of U.S. citizens hospitalized every year from food-borne illnesses.

Three

Confirmed deaths attributable to E. coli in spinach from the current outbreak.

5,000

Number of U.S. citizens who die from food-borne illness every year.

$10 billion to $83 billion

Estimated economic cost of food-borne illness.

19

Number of E. coli outbreaks since 1995 that have been traced back to lettuce or leafy greens.

2003

The last outbreak of E. coli in spinach, which led to the deaths of two people and illnesses in 16 others.

Source: U.S. Centers for Disease Control and Prevention, U.S. Food and Drug Administration (as of Oct. 6, 2006).

Loss/Risk Management Notes is compiled by Senior Associate Editor Meg Green.