Although there has been considerable speculation and the cause of the outbreak has not formally been identified, the likely culprit is now thought to be beansprouts grown in Northern Germany.
Already 38 people have died including one child- and thousands have become seriously ill mainly in Germany. Serious complications have included haemolytic uraemic syndrome which can cause chronic kidney disease and blood disorders.
The European Commission has now lifted it’s restrictions on sales of Spanish vegetables but the industry has lost millions of Euros in sales and is seeking EU funds to bail them out. Currently €210 million is on the table but losses are claimed far in excess of these figures.
These losses are not because the products were faulty or contaminated, but because the authorities in Germany made premature announcements about the source of the e-coli infection, banned the sales of cucumbers from Spain, and consumers naturally refused to buy this produce and indeed other salad vegetables.
The losses suffered by farmers are:
(i) stock loss – where hundreds of tonnes of perishable goods have been destroyed;
(ii) significant business interruption losses due to lack of orders and dramatic falls in prices, unrecoverable wage and overhead costs;
(iii) long term reputation damage – which is difficult to quantify or predict how long it may take to recover;
(iv) additional work due to the crisis, including the costs of destruction of the produce; costs of rehabilitating the good name of Spanish produce.
Whilst economic damage alone is estimated at more than €200 million per week in Spain, in other European countries farmers have faced similar falls in market demand, not only for cucumbers, but for tomatoes, aubergines and even fruit! The final figures may never be quantified.
Who is going to pay these costs? Can farmers find insurance cover for such risks? Is the insurance industry infected by e-coli?
Agroinsurance
Farmers in Spain are mainly insured by a pool of companies known as “Agroseguro” (Agroinsurance) which exists to support development and investment in agriculture. High risks arising from agriculture are insured through a public reinsurance programme, which guarantees continuity of cover. Spanish consortia reinsure this pool, with a number of reinsurers in the London market participating in the coverage.
As many small farmers cannot afford significant premiums for these activities public funds subsidise them. “Agroseguro” is regulated under Law 87/1978, 28th December, Agricultural Combined Insurance.
The main crop risks covered by Law 87/1978 relate to climate conditions, such as persistent hail, fire, frost risks and abnormal drops in temperature for certain types of product, drought, snow, rain or flooding.
Law 87/1978 provides a clear definition of which risks are insurable. They include natural risks beyond the farmers’ control and these are established by technical studies which provide the framework. This research is supported by the Ministry of Agriculture through the Agriculture Insurance National Entity (“ENESA”). Each year the government will decide which losses incurred will be covered and when compensation will be paid.
Unfortunately the damage inflicted on Spanish farmers in the “cucumber crisis” are not related to climate or other natural events beyond the farmers’ control. The Agroinsurance will not respond to these claims and producers will have to look elsewhere for compensation.
The current crisis has been caused by Government agencies in Germany making statements and taking steps to prevent the sale of Spanish produce. This has had a knock-on effect to other markets, for example Russia banned the importation of vegetables from the EU resulting in significant losses. Policies to cover such political risks are not usually considered (nor would they be affordable) by the farming community!
Spanish farmers’ associations are already pursuing claims in Germany: more widely the European Union is offering major “bail out” payments to rescue this sector. We may all end up paying for Germany’s hasty actions.
Brand Protection Insurance
What other types of policy might be available in a crisis situation of this type?
“Brand Protection Policies” are an established product and may provide cover to include: accidental contamination, malicious contaminations or product extortion.
Accidental contamination is the most common occurrence. This arises where manufacturers or their employees make a genuine error in the production, packaging or labelling of a product which could cause injury to consumers or damage to other property e.g. where one product is incorporated into another. For example if cucumbers had been grown using accidentally contaminated water or fertilisers and this had made them dangerous to health prompting a recall, this type of insurance could respond.
Malicious contamination may arise where a disgruntled employee or former employee has deliberately contaminated or threatened to contaminate products causing a recall, with all the associated costs. Deliberate contamination of produce with a chemical that is not approved for human use could cause danger to health and consequent product withdrawal, which might fall within this category or risk.
Product extortion claims can arise where a business is threatened with product contamination unless money is paid or other demands are met by the producer.
In the current “cucumber” crisis it is unlikely that policies of this type would respond. It seems on current information that there has been no actual contamination of the Spanish cucumbers or indeed other produce that has been withdrawn, save the local German grown beansprouts. Accidental contamination has not arisen, save through incorrect public announcements by the German authorities.
Could an insured assert that the German authorities had deliberately acted in a malicious way to stigmatise Spanish cucumbers and cause them to be withdrawn from the market and destroyed? Depending on the policy wording and coverage, this might be an arguable point, although it could be difficult to demonstrate that government authorities had acted in an intentionally malicious way to spread incorrect information. Product extortion cover is unlikely to respond to this type of case, unless, again it could be shown that an individual or organisation were making demands on the producer while threatening or causing contamination of the goods.
As neither the current Spanish agricultural insurance system nor Brand Protection Policies are likely to provide coverage for the claims of affected farmers is there a gap in the market? There is always room for new insurance products. The way to cover such risks may be by a semi-public “Agroseguro” Policy where the State has a keen role. The Insurance industry is always adapting to new circumstances and thinking of creative ways to provide insurance products in business sectors: could the “cucumber crisis” stimulate the industry to meet this need?