Tainted Food Recalls Create Widespread Risks To Manage

If a Hollywood screenwriter was shopping around a script called “Eating Dangerously in America,” you might associate it with a new reality TV show. Sadly, however, that title can be used to illustrate a new reality for many businesses feeling the effects of the massive international recall of peanuts last year.

The result was one of the largest food recalls this country has ever experienced–prompted by the discovery of salmonella linked to products from Peanut Corp. of America. Those peanuts are alleged to have sickened more than 690 people in 46 states, killed nine, and resulted in the recall of nearly 3,900 peanut products.

While the enormity of this recall is striking in terms of the widespread effect it had on people and businesses, even more so is the fact that PCA supplied a mere 1 percent of the nation's peanut products. Conservative estimates place recall costs for the food industry at well over $1 billion.

While the damage caused by these tainted products sickened people and wreaked havoc on the nation's food supply system, it also had detrimental effects on global food supply chains.

Following closely on the heels of the PCA recall was the more recent Setton Farms pistachio recall. Companies that used Setton Farm's pistachios in manufacturing their products will also have to conduct voluntary recalls.

In addition, like the PCA fiasco, the Setton Farms recall is also international in scope, since potentially contaminated products were exported to other countries.

It's important to understand that a recall affects far more products than it might seem at first glance. There are thousands of peanut-related products, many of which are staples in the diets of average Americans.

Big companies are not the only ones troubled by these recalls, as companies in food-related industries of all sizes risk grievous harm to their reputation, brand equity and their bottom line.

Unfortunately for some companies dealing with potentially tainted food products, it will be their last recall because they will use all their financial resources in dealing with such a crisis.

However, whether a company dealing with the recall is a national producer of food products or a local caterer, each is at risk in the context of the global food supply chain.

There are many potential reasons for the increase in food-related product recalls and the expanded scope of their impact on the local, national and global food supply chain. It's no wonder local food producers are experiencing business and profitability challenges.

Given the globalization and complexity associated with the food supply chain, the centralization of food manufacturing and distribution processes, and the increased appetite for processed and raw foods, small businesses have a particularly difficult time navigating the food system.

Even with the resources that larger companies have, there are many hurdles and challenges to consider–such as the presence of pharmaceuticals in the water, global warming and evolved pathogens.

Companies large and small find these challenges and their financial impact particularly difficult to swallow.

The costs involved in cases of food-borne contamination, for example, are staggering. Food-borne diseases cause an estimated 76 million illnesses, 325,000 hospitalizations and 5,000 deaths each year in the United States. The U.S. Agriculture Department's Economic Research Service estimates the annual cost due to food-borne pathogens is in the range of $6.6-to-$37.1 billion.

Another related cost to the food industry is product liability litigation. Indeed, over the past several years, there has been a steady increase in the number and variety of product liability lawsuits.

The risk of such lawsuits is present not only for companies involved in the food industry but also for firms that source and supply goods within the United States and around the world. In today's global economy, products purchased by Americans are often fully supplied or contain components grown, packaged or manufactured in locations around the world.

And the inherent risks and quality controls required to manage global supply chains are numerous. Fully identifying these risks and understanding how they impact a company's supply chain controls should be a top priority of management and include feedback and buy-in from all levels of the organization.

While risk profiles vary greatly, based upon a company's overall product mix, distribution channels and strategies, all companies need to put quality control-procedures in to place.

Some key factors to consider when establishing an effective quality control process include:

o Planning and strategy (proactive preparation)

o Contracts, enforceability by jurisdiction, records retention and documentation

o Recall process (a formal written plan, widely disseminated)

o Incident investigation

o Crisis response and process management

o Media communication

o Employee communication

o Regulatory notification

o Broad and tailored insurance coverage

Companies that develop and implement various aspects of the quality-control process should consider establishing a cross-functional team, including individuals with specialized expertise and a range of responsibilities.

These individuals should include representatives from the following corporate functions: product procurement, distribution management, legal, risk management, treasury, human resources and accounting, as well as corporate communications.

Members of the cross-functional team should be positioned to discuss exposures, required controls, standards, regulatory/compliance, available resources and contractual protections.

A key aspect of the proactive risk management of product liabilities is the management of contractual relationships and purchasing appropriate levels of insurance coverage and capacity.

Understanding and verifying contractual obligations between suppliers, distributors and end users can be confusing for an organization. The ability to verify the certification of adequate and appropriate insurance coverage can often be achieved with U.S.-based companies, but foreign firms may be challenged and often struggle to meet these standards.

Vendors or additional insured coverage grants are often unavailable. Indemnification agreement language varies widely and often is unenforceable in many jurisdictions.

Most often the strongest contractual protection available is simply securing the insurance coverage. (See the accompanying infographic for the various insurance coverages firms should consider.)

However, it is important to recognize that not all insurance policies and insurance companies are created equal. An important consideration is the financial stability of the insurance provider and partners in the supply chain.

Product liability claims can arise over a broad period of time–therefore the long-term financial strength of the insurance carrier is critical.

Standard general liability contracts include coverage for the first named insured's product liability exposures. It is important, however, to understand the level of coverage provided and where potential gaps in coverage may exist, based on a company's internal assessment of risk factors.

The breadth of insurance coverage available in the market today varies greatly from one insurance carrier to the next. Companies should seek to understand this diversity and partner with insurance carriers with strong underwriting, claims and risk control expertise.

In conclusion, the continued expansion of the global economy and supply chain requires all companies, whether large or small, to remain vigilant in their efforts to understand their exposures to risk and proactively manage it.

There are many activities companies can undertake to minimize and mitigate these risks. For risks that cannot be fully mitigated, the risk must be assumed or transferred by way of insurance coverage.

An important next step for those companies interested in transferring the risk is to wisely select the insurance broker and carrier that can best meet their needs.

Joseph F. Bermudez is an attorney with Cozen O'Connor and a member of the Global Insurance Group. He leads the Food Contamination and Product Recall Coverage Practice Area. Mitchell Schmidt is senior vice president, custom casualty for ACE USA, based in Philadelphia, Pa.