Mitigating Food Recall RisksA Guide for Brokers Serving Food-Related BusinessesReducing your clients’ exposure to a food-related recall

wwfi.com

WHITE PAPER

1 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

THE VERY REAL IMPACT OF A FOOD RECALL The average cost of a recall to a food company is $10 million in direct costs, in addition to brand damage and lost sales, according to a joint industry study by the Food Marketing Institute and the Grocery Manufacturers Association.

“If consumers can’t trust the companies they buy from, they most likely won’t pay for their products in the future,” said Lori Hunter, executive vice president, Worldwide Facilities, LLC.“ Today, a food recall can have a significant impact on both a business’s bottom line and its brand.”

Financial LossesWhen a food recall event occurs, a business is responsible for expenses associated with destroying or disposing of the contaminated product(s). It will also have to absorb the lost product’s value.

The business could also be forced by circumstances or the FDA to withdraw the contaminated product from the marketplace — a time-consuming and expensive process. During this time, a business may be forced to shut down all or part of its operations. Whether the shutdown is voluntary or required by a government agency, having to close the doors for any duration will result in lost income.

Finally, a contamination incident can lead to third-party claims. Customers such as large box stores and grocery chains that purchase food products often require suppliers to be contractually responsible to reimburse them in the event of a recall. In addition, companies that have used the contaminated product as an ingredient or component in their products might sue the business

Food recalls in the U.S. have increased 10%1 over the past five years, with the average food and beverage recall claim coming in at nearly $9.2 million in damages. Today, knowing how to mitigate food recall risks is critical for businesses that manufacture, grow and distribute food products. And, as the Food and Drug Administration (FDA) imposes stricter compliance laws, it’s critical for your business clients to understand how these changes can impact their operations.

This white paper looks at the top food recalls, the impact on food-related businesses, compliance challenges, and insurance coverage solutions that can help your clients lessen the financial and reputational impact of a recall event.

Potential Financial Losses of a Food Recall

• Loss of sales.

• Direct costs associated with notification to regulatory bodies, supply chain partners and consumers.

• Product retrieval, storage and destruction.

• The expense of sitting on an unsalable product.

• Labor costs associated with all of the above actions, as well as with investigating the cause.

• Litigation costs and expenses associated with agreed-upon or mandated governmental oversight post-incident.

22 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

Reputational DamageA company’s good reputation is a key factor in its brand’s success. A food recall or contamination incident can result in customers avoiding products produced by the company for weeks, for months or even for good — whether or not they bought the tainted product or became sick. The fact is, it can require considerable damage control to convince customers that you have indeed fixed the problem.

Today, media coverage and social networking can quickly spread the news of a food recall and have a lasting and influential impact on how consumers will react to a brand. In a Harris Interactive poll reported in Food Safety Magazine2 consumers indicated that 55% would switch brands temporarily following a recall, 15% would never again purchase a product that has been recalled and 21% would avoid purchasing any brand made by the manufacturer of a recalled product.

FOOD PRODUCT RECALL RISKSIf there is a suspected health risk at any stage of the food processing or packaging process, a food recall (voluntary or mandatory) will typically follow. Some of the most common reasons for a food recall are the presence of allergens, the presence of foreign substances, manufacturing and labeling errors, and contamination.

Food Allergens In 2019, a leading cause of food recalls in the United States was the presence of undeclared allergens, such as almonds, peanuts and soy. Today, food allergen risks continue to be a serious issue affecting the food processing industry, resulting in a high volume of costly liability claims. For businesses, the challenge isn’t just in controlling allergen cross-contamination in their own supply and processing chain, but in managing risks extending to ingredient suppliers, vendor packaging, storage facilities and even carriers transporting products.

“When quoting product contamination insurance for your clients, you need to understand the exposures for each individual risk,” said David Fiske, vice president of sales, Worldwide Facilities LLC. “For example, if the insured provides a product to a major retail chain, they have a third-party exposure. If the product sold to the retailer is

contaminated by an allergen or mislabeled because the label fails to mention the allergen, your insured could be exposed to a large third-party claim.”

Recognizing the challenges, the 2004 Food Allergen and Consumer Protection Act and the 2011 Food Safety Modernization Act are focusing more on food allergen contamination problems by implementing stricter practices, such as establishing separate processing areas, developing proper sanitation procedures and implementing worker training programs. In addition, the FDA advises that facilities that process milk, eggs, fish, shellfish, tree nuts, peanuts, wheat and soybeans consider replacing these types of foods and changing processing controls, if possible. It also recommends developing proper labeling of food products that fully discloses all recognized allergens, including certain dyes, food colorings, flavorings and/or preservatives, and conducting regular product label reviews to ensure that product updates reflect these formulation changes.

Foreign MatterForeign substances such as metal, glass and/or plastic are another common reason for food recalls. Other types of materials that can prompt a food recall are rubber, plant matter, and animal or insect contamination. Often, food products that are suspected of containing foreign substances are recalled in order to protect consumers from illness, choking and damage to internal organs.

To better mitigate allergen and contamination risks, your food processor clients should:

• Have a thorough understanding of the potential allergens they are working with.

• Assess new ingredients before they are added to existing products.

• Isolate all potential allergens

• Evaluate all product labeling and packaging for allergen risk language.

• Review and test recall procedures for all products.

3 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

It’s important to note that most recall policies will only respond if a foreign substance causes bodily injury. For example, ingesting an insect may not make a person ill and as such, this type of claim would not be considered a covered loss.

Manufacturing, Packaging and Labeling ErrorsManufacturing issues involving the processing and packaging of foods include product mislabeling errors. Malfunctions in the packaging process can also be a source of contamination by allowing bacteria and toxins to leak into food containers. Both the FDA and the United States Department of Agriculture’s Food Safety and Inspection Service have provisions allowing mislabeled food to be relabeled and resold, and each food company must comply with the agency that has jurisdiction over their products. Depending on the shelf life of products and other factors, some recalled products must be destroyed.

Bacterial ContaminationBacterial contamination was the No. 1 cause3 of almost all recalls posted by the USDA during the fourth quarter of 2018. In fact, 97.7%4 of the recalls under the jurisdiction of the FSIS were initiated because of bacterial contamination. Today, salmonella, E. coli and listeria monocytogenes are the three most common types of bacteria prompting food contamination recalls.

E. coli bacteria typically occurs when a person consumes undercooked meat, unpasteurized dairy products or produce that has become contaminated by water runoff near animals. In 2019, romaine lettuce-related E. coli outbreaks continued to make headlines for the third consecutive year.

Listeria bacteria is present in soil, water and some animals. Typically, listeria contamination occurs in improperly processed milk and meat products. According to Foodsafety.gov, unlike many other types of bacteria, listeria can continue to grow in the cold of the refrigerator5.

Salmonella accounted for 98.6%6 of the FSIS’s bacteria-related recalls in 2018. One of the largest outbreaks was traced to raw turkey products, resulting in recalls of more than 250,000 pounds of Jennie-O turkey in late 2018. This bacterium can go undetected until consumed because it doesn’t affect the taste, appearance or smell of the food

THE FDA, COMPLIANCE, LAWS AND PROPOSED INITIATIVES

The FDA’s Role in Food SafetyIn 2011, the Food Safety Modernization Act7 gave the FDA the power to prevent foodborne illness rather than just respond to it. Among other things, the law:

» Requires the FDA to mandate comprehensive controls across the food supply to prevent foodborne illness.

» Gives the FDA new authority to inspect food producers and processors.

» Gives the FDA the authority to compel a company to recall its products. Previously, the agency could only recommend a recall.

» Allows the FDA to collaborate with other government agencies to help improve food safety.

44 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

It has taken years for the FSMA to be fully implemented but today, the changes are currently in place and actively being enforced. To stay in compliance with new FDA changes, it’s important that your clients stay informed. The following are recent updates for 2020 and beyond.

Changes in FDA Compliance for Imported ProductsEarlier this year, the Food and Drug Administration took additional steps to ensure compliance with the Foreign Supplier Verification Program. This dovetails with the Food Safety Modernization Act’s (FSMA) recent focus on high-risk foods and emphasis on more stringent record-keeping requirements.

What this means for your clients is that all import operations with manufacturing, processing and growing exposures must ensure compliance with the FSMA’s new requirements, as it is the importer’s responsibility to assess the risks of imported food and verify that the risks are controlled. To enforce the new strategy, the FDA is conducting on-site inspections and issuing observation reports (known as “483s”) at foreign facilities; inspecting and testing at ports of entry, and refusing entry or issuing alerts if applicable; and, when necessary, suspending facility registrations. Your clients can be better prepared for this new regulatory landscape by:

» Staying updated on changes and knowing what to expect during an inspection.

» Conducting a mock inspection to identify any critical issues that the FDA is looking for and being prepared to address any noncompliance issues in advance.

» Working with an outside consultant to identify issues and ways to best correct them.

» Participating in the Voluntary Qualified Importer Program8 to help reduce the likelihood of inspection and testing at the border, and conducting an expedited review of said tests for the importation of food products.

Fiscal Year 2020 FDA Surveillance Sampling AssignmentEarlier this year, the FDA began collecting and testing 270 romaine lettuce samples for E. coli and salmonella

bacteria in the California and Arizona growing regions. The FY20 FDA Surveillance Sampling Assignment takes samples from wholesalers, food service distribution centers and commercial facilities before it is commingled with other produce, allowing the FDA to quickly trace the lettuce to its point of origin when samples test positive for the presence of a human pathogen.

If Salmonella spp. or pathogenic E. coli is detected in a sample, the FDA will notify the farm of the findings and assist in taking the appropriate action to protect consumers. In the FY20 report, the FDA states that it “fully encourages voluntary corrective action and, in all cases, seeks to employ an approach of educating before and while we regulate.”

The FDA is considering multiple compliance and enforcement actions based on the available evidence and the satisfactory response of an operation to prevent future contamination. Actions may also include efforts to correct and prevent violations, and to remove tainted food from the market, as appropriate.

FY20 FDA Surveillance Sampling Assignment

In 2020, the FDA has begun prioritizing sampling efforts at registered domestic facilities and farms identified in 2017 as being a source of present foodborne illness outbreaks caused or possibly caused by romaine lettuce.

Samples will be collected with more frequency during production transition periods in March/April and October/November and will only be collected after harvest and not from farm fields.

5 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

Proposed “New Era” Food Code Initiatives on Deck for 2021 A full rewriting of the Food Code will occur in 2021 and will have significant updates relating to the FDA’s New Era of Smarter Food Safety approach. The agency’s Strategic Blueprint will outline how it plans to leverage technology and other tools to create a more digital, traceable and safer food system, building on the advances that have been and continue to be made in the FDA’s implementation of the Food Safety Modernization Act. The two proposed changes to the Food Code that could have a significant impact on businesses are:

A requirement to help ensure the safety of e-commerce. This would require stricter handling, packaging and transportation of food products — particularly with mail-order meal kits.

To enhance traditional retail food safety. This would expand the Food Code to require industry food safety management systems for all retail establishments.

Simply put, these proposed changes would result in even tighter controls on e-commerce and delivery models, and zero tolerance for noncompliance with the Food Code.

The 2021 revision will be the first full update of the Food Code in four years. In the meantime, you can read about all recent Food Code supplements and modifications by downloading the FDA’s Summary of Changes in the FDA Food Code.

COVERAGE SOLUTIONSFood processing and foodservice businesses face an array of reputational and financial risks that traditional casualty or liability insurance policies don’t. This is why prudent mitigation strategies are critical to protect companies from operational and financial impacts of a recall. Effective risk transfer solutions help support a proactive mitigation strategy.

Product Recall InsuranceMost commercial general liability policies do not provide insurance coverage for a product recall event. Product contamination coverage (sometimes referred to as CPI or contaminated products insurance), is a form of product recall coverage specifically designed for manufacturers or distributors of consumable or topical products that may sicken consumers if products become contaminated. Whether coverage is provided on a product recall form or a CPI form, the insurance is primarily a first-party, specialty policy that covers tampering, contamination, crisis management expenses and recall costs for the negative publicity that may ensue after a product is recalled. It can also help a business manage the negative fallout from a recall as a business works to repair its reputation. Third-party coverage can be added for risks that have a third-party exposure.

The most comprehensive form of coverage for recall related exposures is for insureds to purchase a stand-alone policy. Some package or general liability policies do offer some coverage, but when included in a general liability policy, coverage is typically limited to recall expenses only and not to items such as loss of income. Product Recall and Contaminated Products Insurance Coverage are often initiated by the accidental contamination (including mislabeling), malicious tampering of the insured’s product, adverse publicity or governmental mandate. Any insured

66 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

who manufactures a consumer product or is a grower, packer or shipper of food is one who should seriously consider purchasing stand-alone product recall or CPI coverage.

Product Recall or CPI Insurance Offers Coverage for the Following: » Loss of profits due to a recall incident.

» Costs associate with a voluntary or mandated recall

» Rehabilitation expenses/replacement costs.

» Critical crisis management services including Pre-Crisis Consulting services

» Product extortion costs.

» Assistance with governmental agencies, media and clients during and after a recall event.

» Third-party liability and loss of gross profit when added via endorsement.

» Extra expense costs for cleanup, product destruction and temporary workspace.

There are many other coverage enhancements that can be negotiated based on individual risk needs. These include providing coverage for intentionally impaired ingredients and unsubstantiated retail costs for example. One of the most current enhancements offered by a number of insurance carriers is Product Refusal coverage.

Product Refusal of Coverage Endorsement In a voluntary recall situation, most product recall insurance policies pay only for specific expenses and losses incurred when a company’s own product is being recalled — not for damages when the same type of product being recalled is grown, produced or shipped by another company.

For example, let’s say that a variety of apples from a particular grower has tested positive for a pathogen. As a result of the contamination, the grower has voluntarily recalled its product. If your client also grows this type of apple, and now, because of the recall, vendors refuse to buy this variety from anyone, your client could be sitting on inventory with no market.

“This type of collateral damage due to a product refusal loss typically isn’t covered by product recall insurance,” Hunter said. “Unfortunately, after a product refusal, it can take months for demand to return to normal, financially blindsiding a business for damages caused by another company’s recall, as well as more significant recall costs.”

Product refusal of coverage is an endorsement that helps businesses recover some of their recall costs for expenses if a similar product from the insured’s competitor(s) is recalled, including extra expenses to remove the product from shelves and destroy, ship or replace it with a different product.*

Product refusal of coverage is an endorsement that provides financial protection for recalls caused by a similar product from another company.

It pays for a company’s recall costs if buyers refuse to accept the product or ask that it be removed from the marketplace due to contamination concerns, and can include more significant recall expenses, such as:

• Costs to remove the product from stores and destroy it.

• Costs to replace the recalled product with a replacement product.

• Cost of marketing/advertising to protect and recover the reputation of the retailer and the grower.

• Cost of consultants to evaluate how to handle the recall.

• Extra expenses to hire additional staff to field phone calls and record recall issues.

• Costs to dispose of products that can’t be sold.

• Loss of gross income.

7 • COPYRIGHT © 2020. WORLDWIDE FACILITIES, LLC. ALL RIGHTS RESERVED.

NOTES1 Hughes, Clyde, “Report: U.S. food recalls increased 10 percent over past 5 years”, UPI.com, Jan. 2019

2 Tyco Integrated Security, “Recall: The Food Industry’s Biggest Threat to Profitability”, Food Safety Magazine, Oct. 2012.

3 Beach, Coral, “Food recalls in final quarter of 2018 reveal problems with bacteria, labeling”, Food Safety News, Feb. 2019.

4 Q4 2019 Recall Index, “State of the Nation 2020”, SteriCycle.

5 U.S. Department of Health & Human Services, “Bacteria and Viruses”, Foodsafety.gov, April. 2019.

6 Q4 2019 Recall Index, “State of the Nation 2020”, SteriCycle.

7 U.S Food & Drug Administration, “Food Safety Modernization Act (FSMA)”, FDA.gov, April. 2020.

8 U.S Food & Drug Administration, “Voluntary Qualified Importer Program (VQIP)”, FDA.gov, Feb. 2020.

Additional sources: Allianz, Expert Risk Articles (October 2018), Risky Food and Food Safety Magazine.

*Refusal must typically occur within 90 days following the initial recall event.

HELPFUL RESOURCESSeparate government agencies are responsible for protecting different segments of the food supply. In addition to state and local public health agencies, your clients can access current information on state-specific recalls and outbreak alerts by visiting the following websites.

» Centers for Disease Control Foodborne Outbreaks

» Food and Drug Administration Recalls, Outbreaks & Emergencies

» USDA Recalls and Alerts

» Recalls, Market Withdrawals and Safety Alerts

CONCLUSIONWorldwide Facilities offers Product Recall coverage for all types of consumer products, and Contaminated Products insurance for consumable products so your clients can secure the protection they need before a recall event occurs. Let our extensive market reach and industry specialists help you find the right risk coverage to meet your clients’ individual needs. To learn more, please contact a Recall expert today.

DAVID FISKESenior Vice PresidentChicago, IL(312) 465-5305 dfiske@wwfi.com

LORI HUNTERExecutive Vice President Los Angeles, CA(213) 236-4585 lhunter@wwfi.com

ABOUT WORLDWIDE FACILITIESEstablished in 1970, Worldwide Facilities is a national

wholesale insurance broker, managing general agent, and

program underwriter. Our team of insurance specialists has

access to virtually every specialty domestic and international

insurance market.

HEADQUARTERS725 S. Figuroa Street, 19th Floor Los Angeles, CA 90014 (213) 236-4500

Visit wwfi.com for a full list of offices around the country

DISCLAIMERThis whitepaper is Copyright © 2020 by Worldwide Facilities, LLC. It may be freely redistributed in its entirety provided that this copyright notice is not removed. It may not be sold for profit or used in commercial documents without the written permission of the copyright holder. This whitepaper is provided “as is” without any express or implied warranty. This whitepaper is for educational purposes only and does not purport to provide legal advice. If you require legal advice, you should consult with an attorney. The information provided here is for reference use only and does not constitute the rendering of legal, financial, or other professional advice or recommendations by Worldwide Facilities. The listing of an organization or website does not imply any sort of endorsement and Worldwide Facilities takes no responsibility for the products, tools, and Internet sites listed.

CA LICENSE #0414108