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Risk management catches up with food safety

Focus on mitigation includes insurance

Risk management catches up with food safety

Only six years ago, federal regulators had to “sweet talk” food manufacturers and suppliers into recalling contaminated food products quickly.

But food companies are now under stricter mandates that shift the focus from reaction to prevention and guide their actions when their products are at the center of outbreaks.

The Centers for Disease Control and Prevention estimates that each year 1 in 6 Americans gets sick from contaminated food or beverages and 3,000 die. The U.S. Food and Drug Administration Food Safety Modernization Act, signed into law by then-President Barack Obama on Jan. 4, 2011, shifts the focus of federal regulators from responding to contamination outbreaks to preventing them. While implementation of the law has been slow, several provisions were implemented in 2015 and 2016, and another key compliance date is in April.

The law has also accelerated growth in the insurance market for food recalls, with a sharp rise in insurers offering the coverage.

“For me, it’s really about being proactive and being preventive,” said Mike Robach, board chair of the Global Food Safety Initiative, a food industry group, and vice president of corporate food safety, quality and regulatory, at Cargill Inc. in Wayzata, Minnesota. “It is a mindset change.” The law was passed, experts say, largely in response to a salmonella outbreak at the now-defunct Lynchburg, Virginia-based Peanut Corp. of America. The 2008-2009 outbreak resulted in 714 reported cases of salmonella poisoning in 46 states and nine deaths, as well as several pet food recalls occurring around the same time.

In the two years prior to FSMA passage, a total of 1,527 foodborne disease outbreaks — 675 in 2009 and 852 in 2010 — were reported, resulting in 29,444 cases of illness, 1,184 hospitalizations and 23 deaths, according to a CDC report.

And recalls are common. Just in the past few weeks, big name brands including Hostess Brands L.L.C., Tupperware U.S. Inc. and Whole Foods Market Inc. have recalled goods for reasons that range from salmonella contamination to undeclared ingredients.

“The bottom line why FSMA came into being is that every year there were more cases of food poisoning,” said Jaydee Hanson, senior policy analyst at the Center for Food Safety, an environmental advocacy organization in Washington. “Finally, Congress decided that it needed to do something about it, and that something was to really give the FDA more authority to crack down on folks that weren’t following good food safety procedures.”

Before FSMA, federal food safety regulators could only cajole companies to recall contaminated products, but the statute, passed on a bipartisan basis, gave the FDA the authority to order recalls and shut down operations at production facilities if there is a significant risk to public health.

The FDA is responsible for regulating the safety of about 80% of the U.S. food supply as well as the safety of pet foods, with the remaining 20% regulated by USDA.

At the state level, only four states — Alaska, New Mexico, South Carolina and Texas — reportedly had authority to recall food products, but ordered recalls were rare before FSMA, according to a 2012 report by the U.S. Government Accountability Office.

The FDA “would fine a company and make life fairly miserable for a company, but did not have the power to force the company to recall a product,” said Kevin Velan, national product recall broking specialist for Willis Towers Watson P.L.C. in Chicago.

FDA previously had to “sweet talk” companies into recalling their products, Mr. Hanson of the Center for Food Safety said. “Now even though the FDA has this new authority, companies themselves are recalling their products much more quickly because they don’t want to be in the situation, just in terms of liability, that the FDA has to shut them down. They would much prefer to shut themselves down a little bit than the FDA shut them down totally.”

Shifting the mindset

The statute sets out a hazard analysis and risk-based prevention controls framework for companies to examine their operations and develop plans to ensure they do not distribute or transport contaminated human and pet food products, and applies to companies of all sizes except the smallest.

FSMA “opens the eyes of those companies that weren’t prevention-based and risk-based to really become that way and integrate their food safety departments, their people, their processes, within an enterprise risk management philosophy,” said Melanie Neumann of law firm Neumann Risk Services L.L.C. in Frankfort, Illinois.

Previously, the food industry was under a safety management system called hazard analysis and critical control point, which had done a good job of controlling risks in the industry for a long time, but this new FSMA regulation shifted to a framework that expanded the types of risks and controls that food companies must consider, she said.

“It’s making us as an industry stop long enough to think: What are all the risks around me and how can I reduce or mitigate those risks and then document that?” Ms. Neumann said.

FSMA elements can be divided into five key areas — preventive controls, inspection and compliance, imported food safety, response and enhanced partnerships — with seven foundational rules to implement the FSMA that became final in 2015 and 2016, according to the FDA.

The regulations governing these areas have different compliance dates depending on when they were published and the size of the businesses, but April 6, 2017, is the date for most businesses to comply with a regulation intended to help prevent the contamination of human and animal food during transportation by requiring companies transporting food by motor or rail vehicles to follow recognized best practices for hygiene, including the provision of appropriate temperature control, cleaning between loads and security measures.

Companies transporting food must meet the cleaning requirements and properly maintain certain records, including documents of the products transported in their vehicles, and take steps to avoid cross contamination, including documenting when trucks are first used to transport one product and reused to transport a different product — steps that many large manufacturers were already taking, said Glenn Drees, managing director of food and agribusiness for Arthur J. Gallagher & Co. in Cincinnati.

“They might have some changes to their record keeping, but the biggest impact is on people doing importing, transportation and smaller manufacturers that may not have had this level of documentation, this level of controls,” he said.

Limited penalties

In 2014, Peanut Corp. owners Stewart Parnell, of Lynchburg, Virginia, and Michael Parnell, of Midlothian, Virginia, were convicted of conspiracy, mail and wire fraud, and the introduction of misbranded food into interstate commerce.

Stewart Parnell was also convicted of the introduction of adulterated food and obstruction of justice — all convictions arising from the unlawful sale of salmonellatainted peanuts and peanut products.

In 2015, Stewart Parnell was sentenced to serve 336 months in prison followed by three years of supervised release, while his brother Michael was sentenced to serve 240 months in prison to be followed by three years of supervised release.

The brothers, who are serving their sentences in federal prison, are appealing the convictions.

But the Parnell convictions and prison sentences highlight the limitations of the FSMA, which is the absence of stiff criminal penalties for persons or companies intentionally engaged in actions that cause outbreaks, said Mr. Hanson of the Center for Food Safety.

While the statute holds company officials and directors responsible for knowingly shipping out contaminated food products, provisions that would make shipping adulterated product a felony were lost in the FSMA negotiations, he said, noting that the Parnells were convicted for conspiracy and fraud charges and that Sen. Patrick Leahy, D-Vt., introduced legislation to implement criminal penalties in  these instances.

The FSMA does target some specific actions highlighted in the Peanut Corp. case. For example, the company had gone to a different tester with a different portion of its product after the first portion tested positive for salmonella, and it then sent the clean report to customers. The law requires customers be provided with all testing reports, Mr. Hanson said.

Another limitation that emerged as part of the compromise to pass the FSMA is that the FDA pays for inspections, unlike in many countries in the European Union where companies pay, and the FDA depends on Congress to appropriate funds, Mr. Hanson said. The lack of resources led to slow rule development and implementation of FSMA provisions, which the center sued the agency over, reaching a court-overseen agreement on implementation deadlines.

Given the bipartisan support for FSMA, there is little concern that the law itself will be reversed by the new Congress, but the bigger threat is that Congress will not sufficiently fund the FDA to enable it to fully implement FSMA requirements or that the FDA under President Donald Trump will not focus on enforcement of its provisions, he said.

“The FDA is going to have to constantly beg Congress for enough money to do its basic functions because Congress has not decided to give it a fee-based system that works,” Mr. Hanson said.

In addition, small companies have different time frames to comply, must only comply with particular elements of FSMA or may even be exempt, said Ms. Neumann, the food safety lawyer.

“A lot of people can argue, and I don’t necessarily disagree, ‘Isn’t it the small companies that have the biggest risk?’” she said.

Plentiful insurance

The coverage for contamination outbreaks is relatively young, with only three insurers writing it initially, but as food recalls have ramped up, especially over the past 10 years, more than 20 insurers now offer recall policies, keeping pricing flat to relatively soft, said Brandon Sielen, the national product recall broking specialist for Willis Towers Watson in Scottsdale, Arizona.

Limits of about $10 million per occurrence category are available. Categories are business interruption, lost profits, recall expenses, brand/image expenses and crisis responses, said Gallagher’s Mr. Drees.

The coverage is triggered in situations where there is a government-mandated Class 1 or 2 recall or if an in-house laboratory or third-party test shows contamination, but not in the event of quality issues, Mr. Sielen said. Class 1 means a situation in which there is a reasonable probability that the use of or exposure to a violative product will cause serious adverse health consequences or death; and Class 2 means that use of or exposure to a violative product may cause temporary or medically reversible adverse health consequences, or where the probability of serious adverse health consequences is remote.

Retentions are usually high, as “it’s really a (catastrophe) coverage, it’s not a frequency type of coverage,” Mr. Sielen said.

For example, a 2006 E. coli outbreak linked to fresh spinach in California caused an estimated $100 million economic loss to the spinach industry, while tomato growers and shippers lost an estimated $145 million in revenue due to

a food safety advisory that erroneously associated a 2008 salmonella outbreak to tomatoes initially, with peppers later deemed to be the source of the contamination, according to the GAO report.

But like employment practices liability insurance or cyber coverage, risk managers often do not purchase food contamination coverage until they experience an incident, Mr. Drees said.

“I think FSMA has increased peoples’ awareness of the need for it,” he said. “Insurance buyers tend to have a coverage quoted to them a couple of times before they buy it, or they have to have a near miss.” 



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