foodborne illness and product recall - irmi

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In the past few years, food recalls seem to have become frequentand are often breaking news items. Even organizations with the bestsafety records and controls can sometimes find themselves dealingwith a product recall situation. Agribusinesses can be particularlyvulnerable. Managing a product recall is time consuming, costly, andpotentially damaging to the business and brand. This session willdiscuss the limitations on coverage within standard insurance poli-cies and the extent to which product recall insurance provides theinsured indemnification for their financial losses resulting from therecall of a product.

#IRMI2016

Foodborne Illness and Product Recall

#IRMI2016

Discussion on Serving an Underserved Market

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#IRMI2016

Foodborne Illness and Product Recall

#IRMI2016

Discussion on Serving an Underserved Market

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#IRMI2016

Today’s Objectives

•Why foodborne illness concerns are greater now than before•What the Food Safety Modernization Act (FSMA) means

to the Farm/Ag account •What ISO & AAIS contracts have to say about this•What (at least) one insurer is doing

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Food Safety Modernization Act (FSMA)

•Passed by Congress in December 2010 – largest expansion of food safety in U.S. since 1930’s• Enforced by the Food & Drug Administration (FDA)•Multiple delays to FSMA because of court challenges•New timelines for enforcement regulations with

implementation expected for late 2015 to mid 2016 have been met

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FSMA – FDA Authority Includes

• Mandatory recall of contaminated food products• Preventive controls & food safety plans at some processing

plants• Enhanced surveillance to investigate foodborne illness

outbreaks• Enhanced traceability within food distribution channels• Increased inspections of high risk food facilities• Expanded authority over foreign food imports

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FDA – 5 Key Elements of FSMA

1. Preventive Controls2. Inspection and Compliance3. Response4. Imported Food Safety5. Enhanced Partnerships

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Preventive Controls

FSMA provides the FDA with legislative mandate to REQUIRE comprehensive, prevention-based controls on the food supply.

Mandatory preventive controls for food facilitiesMandatory produce safety standardsAuthority to FDA to prevent intentional contamination

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Inspection & Compliance

Oversight to ensure compliance with regulations

Ability to respond when new problems emergee.g., establishing a mandated inspection frequency (based on risk), FDA access to industry records and food safety plans, and requiring testing to be done by accredited laboratories

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Response

Respond when NEW problems emerge:• Mandatory recall authority for ALL food products• Expanded authority to administratively detain certain products that

are in violation of the law• Authority to suspend a facility’s registration• Prohibiting a company from selling in the U.S.• Establishing pilot projects to enhance product tracing• Requiring additional recordkeeping by those facilities that

manufacture, process, pack, or hold foods designated as “high risk”8

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Imported Food Safety

• Do food imports meet U.S. Food Safety Standards? Require importers to verify that suppliers have adequate controls in

place Establish a third-party verification process Certification by credible third party for “high risk” foods entry into

U.S. Establish a voluntary qualified importer program Right to refuse entry into U.S. of foods from a foreign supplier where

the FDA has been denied access to their facilities or country9

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Enhanced Partnerships

• Authority to improve training of state, local, territorial and tribal food safety officials Multi-year grants to state/local agencies to develop and implement

strategies to enhance their food safety Similar strategies to enhance foreign governments and industries Authorizes FDA to rely on inspections by other federal, state, and

local agencies in order to meet its increased inspection mandate for domestic facilities

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Court Ordered Timelines

8/30/15 – preventive controls for both human and animal food10/31/15 – imported food and foreign suppliers, including Foreign Supplier Verification Program and Accreditation of Third Party Auditors 10/31/15 – produce safety3/31/16 – sanitary transportation practices for food and feed5/31/16 – intentional adulteration of food

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Key Considerations For Recalls

1. It happens more than you probably think it does2. Governmental oversight is only going to get stronger3. The costs are prohibitive4. The mistaken belief that “it won’t happen to our operation”5. Product Recall insurance is probably the first line of defense

What did we learn in basic risk management? Insure that which occurs infrequently but when it does produces catastrophic results.

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It Happens More Than You Think

• National Institute of Health – Foodborne Illnesses, April 14, 2016 Each year an estimated 48,000,000 people in the U.S.

experience a foodborne illness A foodborne illness is an infection or irritation of the

gastrointestinal tract caused by food or beverages that contain harmful bacteria, parasites, viruses, or chemicals

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Types of Harmful Bacteria

Salmonella Shigella Campylobacter jejuni Escherichia coli Listeria Monocytogenes Vibrio Clostridium Botulinum

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Three Types of Recalls

Class 1 – least severe class – “situations where the use of the product will not cause adverse health consequences”Class 2 – “situations where there is a remote probability of adverse health consequences from the use of the product”Class 3 – “situations where there is a reasonable probability that the use of the product will cause serious, adverse health consequences or death”

Source: Utah State University, Finance & Economics Newsletter, February 2015

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Some Product Recall Expenses

• Amounts spent to carry out the actual recall• Publishing expenses related to the recall• Retrieval of the recall products• Warehousing and subsequent disposal of the recalled products• Replacement of the recalled products• Lost sales and then recapture efforts for market share• If publicly traded – stock fluctuations

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ISO CGL/FL Coverages

CGL – 2. Exclusions –This insurance does not apply to:

n. Recall of Products, Work or Impaired PropertyFL – 2. Exclusions –This insurance does not apply to:

v. Recall of Products, Work or Impaired Property

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ISO Language

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Your text here

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AAIS Coverages

•GL-610 – Additional Exclusions That Apply Only To PD9. “We” do not pay for loss or expense incurred by “you” or anyone else arising out of the loss of use, disposal, withdrawal, recall, inspection, repair, replacement, adjustment, or removal (including any expenses involved in the withdrawal or recall) of “your work”, “products” or impaired property. This applies when the loss of use, disposal, withdrawal, recall, inspection, repair, replacement, adjustment, or removal was because of a known or suspected defect, deficiency or unsafe condition.

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One Insurer’s Response

• ACE Recall Plus• Targeted industries are food and beverage companies,

cosmetics, and pharmaceuticals (yes, this includes farm/ag ops)• Insured event(s) is adulterated product that results in or would

result in BI or PD

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One Insurer’s Response

• Base Coverage includes – “Recall Costs” & “Consultant Costs”• Available Endorsements Include Replacement Costs Loss of Gross Profit Extra Expenses Rehabilitation Expenses Consequential Damages Defense Costs Adverse Publicity

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Insuring Agreement

• We will reimburse you for:1. “Loss” to which this insurance applies, in excess of the applicable “self-insured retention” and any applicable “co-insurance”, up to the Limits of Insurance stated in the Declarations, that is caused by an “insured event” that is first discovered by you during the “policy period” and reported to us in compliance with the provisions of Condition R., (Notice of Loss); and2. “Consultant Costs” to which this insurance applies.

22ACE Recall Plus Insurance For Consumable Products Policy Form, REC-45371 (12/15)

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Definitions

• “Loss” means “pre-incident costs” and “recall costs”, that you have incurred directly and solely in connection with a covered “insured event”.• “Pre-incident costs” means the costs incurred by you for

chemical analysis and/or physical examination necessary to determine whether the “insured product(s)” has been “adulterated” or to determine what, if any, potential effect might result from the “adulterated” “insured product(s)”.


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Definitions

• “Adulterated” means:a) accidentally or unintentionally contaminated or impaired by a microbiological, chemical, allergen or physical hazard; orb) mislabeled; orc) deliberately, maliciously, illegally or allegedly tampered or threatened to be tampered.


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Definitions

• “Insured product(s)” …means: Any topical and ingestible product(s) for human use or consumption, including any of their ingredients, components or packaging, provided such product(s):

a. are in production by the “insured”;b. have been processed, manufactured, mixed, blended, compounded, packaged, handled or distributed by the “insured(s)” or by any contract manufacturer for the “insured(s)”; orc. are available for sale by the “insured(s)” or are sold on behalf of the “insured” by any distributor, wholesaler or retailer.


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Definitions

• “Recall costs” means the following costs and expenses listed below incurred by you or your retailers or other third parties arising out of an “insured event”:

1. The cost of newspaper, magazine or any printed advertising (whether electronic or otherwise), radio and television announcements or commercials, as well as the cost of correspondence regarding or concerning the recall.2. The cost of shipping the “insured product(s)” from any purchaser, distributor or user to the place or places that you designate.3. The cost to rent additional warehouse or storage space.


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Definitions

• “Recall Costs” continued:4. The cost of hiring additional persons other than regular employees to assist with the recall of the “insured product(s)”.5. Overtime paid to non-salaried employees and additional compensation pair to other than non-salaried employees for work devoted exclusively to the recall of the “insured product(s)”.6. Employees’ travel, transportation, and lodging expenses directly attributable to the recall of the “insured product(s).


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Definitions

• “Recall Costs” continued:

7. The cost of disposal of the “insured product(s)”, to the extent that specific methods of disposal other than those usually employed for trash discarding or disposal, are required to avoid “BI” or “PD” as a result of such disposal.

8. Expenses incurred for the proper disposal of the unused packaging and point-of-purchase marketing material of a recalled “insured product(s)” if such packaging or material cannot reasonably be reused.

9. Retail slotting fees and cancellation fees for any advertising or promotional program which were scheduled but which were unable to be executed because of an “insured event”.

10. Retail fees as required by contract not otherwise listed.28ACE Recall Plus Insurance For Consumable Products Policy Form, REC-45371 (12/15)

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Definitions

• “Consultant Costs” means the fees and expenses incurred by you for the advisory services of the Crisis Consultants referred to in First Steps In A Crisis attached to this policy to assist you (1) in responding to events or incidents that have the potential to lead to an “insured event” or (2) in response to an actual “insured event”. “Consultant Costs” do not include any of the costs defined in Definition N.

o Note: Definition N is “recall costs” as previously defined


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Endorsements

• Rehabilitation Expenses can be included by endorsement

“Rehabilitation Expenses” means expenses incurred by you as a direct result of an “insured event” to re-establish the “insured product(s)” to a reasonably projected level of sales or market share anticipated prior to the “insured event”.

30ACE Recall Plus Insurance For Consumable Products Endorsements

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Endorsements

• Adverse Publicity Coverage can be endorsed “Insured event” includes “adverse publicity” and the use of this

endorsement DELETES the exclusion for “adverse publicity” in the policy “Adverse publicity” means the naming of both the “insured(s)” and the

“insured product(s)” in any local, regional or national media, including, but not limited to, radio, television, newspapers, magazines, the Internet or any governmental publication, during the “policy period”, with the implication that the “insured product(s)” is adulterated and that the consumption, exposure to, or use of such “insured product(s)” has resulted in or would result in “BI” or “PD”.


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Endorsements

• Consequential Damages” can be added by endorsement Means the amounts, costs, expenses or economic loss a “customer”

has incurred or suffered over a period of 12 months caused solely and directly in connection with a covered “insured event” and for which you are legally obligated to reimburse or pay that “customer”. “Customer” means parties with whom the insured has directly

contracted or indirectly supplied their “insured product(s)”. Does NOT include any fines, fees, penalties, punitive, or exemplary

damages. Does not include any loss or expense recoverable in other parts of the policy.


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Endorsements

• Extortion Costs can be added by endorsement

“Extortion monies” means any monies paid by the “insured(s)” or lost in transit subsequent to a “product extortion” demand. For the purpose of this insurance policy, the term monies includes cash, monetary instruments, bullion or fair market value of any securities, tangible property or services.

1. “Extortion monies” paid by the insured in direct response to an “product extortion” demand.

2. “Extortion monies” lost due to the destruction, disappearance, confiscation or wrongful appropriation of “extortion monies” while being handled or conveyed for delivery by anyone who is authorized by you to have custody thereof; provided that the “product extortion” demand which gave rise to the delivery is covered by this insurance.


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Endorsements

Extortion expenses (cont’d)3. Expenses or fees which are incurred and paid by you solely as a direct result of a “product extortion” demand, including the following:

a. The amount paid by you as a “reward” to an “informant” for information relevant to a specific “product extortion” demand. Will not be paid to officers, members, partners, employees, etc.b. Interest due on any loan made to you by a financial institution for the purpose of paying “extortion monies”.c. Reasonable costs for travel & accommodations incurred while negotiating these demandsd. Reasonable increased security costs due to these demands for a period of up to 90 days. Must be recommended by Security Consultant hired by insurer.


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Endorsements

• “Product Extortion” means any threat or related series of threats to cause an “insured product(s)” to become “adulterated” communicated to the “insured(s)” for the purpose of demanding “extortion”.


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Endorsements

• Ingredient Coverage endorsement The following is added to the definition of “insured

product(s)”Any property of which such good(s) or product(s) form a part, after physical possession of such goods or product(s) have been released by the “insured” to others. However, coverage will apply only if the “insured” would be legally obligated to reimburse the customer for “loss” arising out of an “insured event”.


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Endorsements

• Extra Expense added by endorsement means the reasonable and necessary expenses you incur during the “period of restoration” that you would have not incurred if there had been no “loss” resulting fro man “insured event” to: Maintain employment of your workforce Minimize the “suspension” of business if you cannot continue “operations”. Avoid or minimize the “suspension” of business to continue at the described

premises or at a replacement or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.

Does NOT include “loss of gross profit”, any costs to repair, restore or replace the “insured product(s)” or any expenses recoverable elsewhere in the policy. “Suspension” and “period of restoration” are quite similarly defined to what we would find in a Business Income coverage form. Coverage is provided for a maximum of 12 months.


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Endorsements

• Loss Of Gross Profits can be endorsed and means your sales revenue projected prior to the happening of an “insured event”. But which has been lost during a period of 12 months beginning after the decrease in sales attributable to and caused directly by an “insured event”, less:

1. the variable costs that would have been incurred during the same period, but which have been saved as a result of not making those sales (including the cost of raw materials and all other saved costs); and

2. the increased sales of another “insured product(s)” within the same product line as the affected product(s) claimed in the “loss” as a result of an “insured event”.


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Endorsements

• Replacement Costs can be added by endorsement – Means:1. The total amount of refunds you give to purchasers for the affected “insured product(s)”, not to exceed the initial purchasing price of the goods sold.2. The direct costs to repair the affected “insured product(s)”, including the cost to repair unsold stock.3. The direct cost to produce or acquire a like replacement product if the affected “insured product(s)” cannot be repaired.4. The direct cost of unsold finished stock if the affected “insured product(s)” cannot be repaired, reconditioned, decontaminated or otherwise treated so as to render it marketable.5. The direct cost related to removal and installation of the repaired or replaced “insured product(s)”.The actual cost to redistribute any restored, repaired or replaced “insured product(s)”.


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What We’ve Addressed

• Why foodborne illness concerns are greater now than before• What the Food Safety Modernization Act (FSMA) means to the

Farm/Ag account • What ISO and AAIS contracts have to say about this• What (at least) one insurer is doing

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Resources and Sources

ACE Recall Plus Insurance For Consumable Products Policy Form, REC-45371 (12/15) and related endorsementsNational Institute of Health – www.nia.govCenters for Disease Control and Prevention – www.cdc.gov/foodnetFood & Drug Administration - www.fda.gov/safety/recalls and

www.fda.goc/food/guidanceregulations/FSMA

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Notes

This file is set up for duplexed printing. Therefore, there are pages that are intentionally leftblank. If you print this file, we suggest that you set your printer to duplex.

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foodborne illness and product recall - irmi

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