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New food safety law adds to recall risks

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New food safety law adds to recall risks

WASHINGTON—A new law designed to increase the safety of U.S. food products will add to the compliance duties of food processing and manufacturing companies and may boost interest in product recall insurance coverage at such companies, experts say.

President Obama last week signed the Food Safety Modernization Act, which gives the federal government more control over the nation's food supply and makes the food industry more accountable for its products. Under the law, such companies must evaluate potential hazards in their operations, monitor measures to prevent contamination, and have a plan in place to respond when contamination occurs.

Further, the law authorizes the Food and Drug Administration to mandate recalls, a power it did not have except in the case of baby formula. Previously, the FDA could only advise that a company recall a food product.

The law also seeks to protect the nation's food supply against deliberate contamination.

“This law is all about prevention. There will be new responsibilities for food companies and new safety laws that will require them to take responsibility for their food supply chain security,” said Rick Shanks, national managing director of Aon Risk Solutions' food system, agribusiness and beverage practice in Kansas City, Mo.

Massive recalls of spinach in 2006, peanut products in 2009 and eggs in 2010—both involving deadly contamination of products—most likely helped win passage of the bill, experts said.

The measure mandates inspections of food processing facilities and farms by the FDA. According to the food safety law, those facilities deemed to be “high risk” are to be inspected within five years of the enactment of the law and no less than three years thereafter. Facilities deemed as high risk based on the type of products they make, the ingredients they use or their history of recalls.

Domestic facilities not deemed to be high risk are to be inspected within seven years of the bill's enactment and five years thereafter.

“You're basically going to see a lot more policing by the FDA and it's going to force food producers to be on their "A game' if they're not already,” said Katherine Cahill, global managing director in Marsh Inc.'s global product risk practice in New York.

Food producers will be required to keep detailed records on their food safety and security protocols, as well as the process in which food is made and how it is packaged and distributed, Ms. Cahill said, noting that the detailed records will allow the FDA to trace a food product or ingredient to its origin. She added that most of the larger food producers already have such protocols and likely will undergo “tweaking and tightening” of those procedures.

“What this legislation will do is raise a lot of awareness and a level of uncertainty within the food and beverage industry,” said Bernie Steves, a managing director of Aon Risk Solutions' crisis management practice in Chicago. “The FDA will have the ability to issue a recall and conduct inspections, but what will the results be: more recalls?”

With new policy and procedures in place, it's likely there will be a surge in demand for product recall and contamination insurance, several brokers said.

Most large food producers carry comprehensive product recall coverage, said William Harrison, managing director of Marsh Inc.'s global product recall practice in Princeton, N.J., but they may want to clarify the terms and coverage types that their contractual manufacturers and ingredient suppliers carry.

Specialty policies that cover product recall, contamination and accidental contamination also often come with pre- and post-crisis management assistance, said Joseph Bermudez, Denver-based partner at Nelson Levine de Luca & Horst L.L.C., adding that those are the types of policies that food producers should seek to “help avoid any coverage gaps offered under general liability and umbrella policies, which have specific product recall exclusions.”

A surge in demand for product recall insurance is expected to come from growers, packagers and manufacturers, said Greg Benefield, senior vp and national practice leader of Willis Group Holdings P.L.C.'s food and beverage unit in Nashville, Tenn. Most of those groups in the food industry typically do not carry any type of product recall coverage, “because they believed they didn't have any risk or see the expense,” he said.

“As companies become more accustomed to the rules and acquainted with the act, I believe you will see more companies put insurance in place,” Mr. Benefield said. “With the FDA now having the authority to mandate a recall, I think you will see a rise in new capital in the market, but also a rise in claims.”