Grower Loses $12 Million Award

A state appeals court overturned a $12 million judgment won by produce giant Fresh Express for losses the Salinas salad maker suffered during the E. coli outbreak on bagged spinach in 2006, the Monterey Herald reports.

Fresh Express, which markets bagged spinach and other fresh greens, filed a breach of contract suit in 2008 against its insurers, QBE Insurance Ltd. and a Lloyd’s of London unit, for allegedly failing to cover company losses after the outbreak, which triggered a nationwide federal advisory against bagged fresh spinach.

The company, which said it suffered $18.8 million in losses between September and December 2006 because of the E. coli outbreak, had prevailed in a five-week, 2009 court trial before Monterey County Superior Court Judge Susan Dauphine. Fresh Express was awarded the $12 million limit under its “recall-and-brand-protection” insurance policy.

But the state 6th District Court of Appeal, in a decision released Thursday, overturned the award and said Fresh Express’ losses weren’t covered by the policy because they did not result from an “insured event.”

Fresh Express is a Chiquita Brands subsidiary with $1 billion in annual sales. A Chiquita Brands spokesman in Cincinnati said Friday that the company would seek a review of the decision.

“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,” said Ed Loyd, Chiquita’s communications director.

The 26-page decision by the three-judge appellate panel provides a detailed look at one produce giant’s experiences during the September 2006 E. coli outbreak that shook the produce industry, caused about 270 people to get sick, and led to three deaths.

On Sept. 14, 2006, with contamination cases mounting, FDA issued a national advisory against eating bagged fresh spinach. Within a day the product disappeared from grocery stores. Sales of other fresh produce sagged, and the industry began a long effort to recover consumer confidence by installing new food safety procedures.

The outbreak was later traced to contaminated spinach processed by Natural Selection Foods and grown at one San Benito County ranch near a cattle feeding area where the particularly virulent strain of E. coli was discovered.

No bagged spinach from any other producers, including Fresh Express, was ever implicated.

Fresh Express said the company’s losses included $6 million on spinach sales, $4.25 million on non-spinach products, $2.1 million for contract payments and $1.3 million in “rebranding” costs, the court decision said.

The company put in a claim under a policy covering malicious contamination, accidental contamination or product extortion for which it paid about $300,000 for a 12-month period. The insurer denied the claim, and Fresh Express filed suit.

The trial court ruled the E. coli outbreak itself was an “insured event” and was covered by the policy.

That ruling hinged on the fact that Fresh Express had purchased spinach in August 2006 from two ranches that hadn’t met the company’s own food-safety rules for fresh bagged spinach. The trial court concluded that constituted a serious error under the policy’s “accidental contamination” coverage.

The insurance company contended the policy didn’t cover losses attributable to the E. coli outbreak, as a whole. Fresh Express argued that the purchasing errors were a sufficiently serious link to the E. coli outbreak and that its losses should be covered.

The appellate court said the policy language “unambiguously rebuts” Fresh Express’s view, and the only covered losses would be those that directly resulted from errors by Fresh Express.

But the timing of events goes against Fresh Express’s effort to link its losses to the discovery of the “spot purchases” it made from noncertified company suppliers, the court said.

“After all, spinach had disappeared from grocery store shelves throughout the country, and … the public had lost confidence in not only spinach but all leafy greens,” the appellate court said. “All of these events occurred before Fresh Express obtained information about the sources of its spinach.”

The court ordered the case back to the trial court for dismissal. It also said the insurance company should recover its appellate costs.

Source: Monterey Herald