Klara de la Prida, 56, ingested the insect as she drank a bottle of cappuccino coffee liqueur bought for her as a Christmas present from the company's store at Lakeside shopping centre, in Thurrock, Essex.
The immediate effect on Mrs de la Prida was a serious bout of vomiting. In the proceeding weeks and months she developed an acute fear of earwigs and other insects. It became a compulsive behaviour, and she would inspect bread with a magnifying glass and strain all liquids.
Mrs de la Prida, from Woodford Green, Essex, also became petrified of earwigs coming into the house and still cannot do any gardening during the day. She said: "I am still afraid of insects. My neighbours think I am potty, because I go out to do my gardening after midnight, when I think the insects have all gone to sleep."
Her lawyers had argued that the phobia has prevented her from leading a normal life and caused great mental distress. Her GP noted shortly after the incident that she displayed "a fear of opaque liquids".
A medical report by Stuart Turner, a Harley Street psychiatrist, diagnosed her as suffering from a "specific phobia".
Although Marks & Spencer accepted the presence of the earwig in its product (the manufacturing company has since gone out of business), it denied it was responsible for her phobia.
The legal ground for Mrs de la Prida's claim was the famous case of Donoghue vs Stevenson, in 1932, in which the Scottish plaintiff found a snail in a bottle of ginger beer. As all law students know, the case established the "neighbour principle" - that people owe a duty of care to those whom they can foresee may be harmed by their actions.
Mrs de la Prida's barrister, Osama Daneshyar, said the case had set a standard for the amount that aggrieved parties can expect: "It was not a straightforward matter of fixing a figure. In the Donoghue case the facts and results became secondary to the need to establish liability, so I could find no figure for damages. This case means that plaintiffs will now have a standard to work with."
Mrs de la Prida said: "This will stay with me for ever. It is a paltry amount for all I have suffered, but I am glad it is over."
Marks & Spencer made the out-of-court settlement following a long-running litigation that began in 1996.