KANSAS CITY, MISSOURI - Commentary by Ian Harrison, Lockton Global Risks, London, Product Recall Specialist
Responding to popular concern about food safety in the wake of a number of deaths last year, the U.S. Senate passed S510, the Food Safety Modernization Act, on November 30th, by a majority of 73-25. Leaders in the House which approved a more stringent version of the legislation more than a year ago, have indicated that they will accept the Senate bill, bypassing the conference process and speeding the legislation to President Obama. The legislation has drawn support across party lines, making it a virtual certainty that the new legislation will be on the statute book early in 2011.
The Act will bring into effect a raft of regulations that will require food manufacturers and farmers to apply scientific techniques as part of new food safety plans to prevent contaminated food entering the food chain and so help to restore consumer confidence in the safety of the food supply.
For the average consumer, the new regulations will mean more information about recalled products. The legislation requires grocery stores to prominently display recall notices or use loyalty cards and coupons to notify consumers. For businesses, the new regulations will usher in a new inspection regime and are likely to lead to a sharp increase in prosecutions.
Impact on food producers will be rapid and significant
All farms and food producers are subject to the Act and the legislation will apply to all whole and processed foods except meat, poultry and some egg products, which are regulated under separate laws by the U.S. Department of Agriculture. However, under an amendment brought by Sen. Jon Tester (D-Mont.), small farmers with revenue of less than $500,000 per year and those who sell directly to consumers at markets and farm stands should be exempt. This proposed exemption is now the topic of hot debate and it remains to be seen whether it will make it into the final legislation.
Instead of relying on government inspectors being in the right place at the right time to identify contamination, the new measures will require manufacturers and farmers to implement approaches to prevent contamination and then monitor their effectiveness going forward. Executives will be expected to demonstrate how processes have changed and to thoroughly document all new processes and procedures and to hold these records ready for inspection.
Rather than relying on manufacturers to report problems voluntarily, under the new Act the Food and Drug Administration (the FDA – the food industry's regulatory body) will have the authority to require manufacturers to recall food products. The Act also requires the FDA to regularly inspect farms and food-processing plants and to visit "high-risk" facilities. These are likely to include manufacturers of ingredients – such as milk products or peanuts - that are widely used in the food supply chain and can be the cause of concern in multiple products.
Currently, the agency inspects food-processing sites infrequently and rarely visits farms.
Early test cases likely
We believe the FDA will also seek to bring a number of early cases in order to put its new powers to the test and demonstrate to the industry how the legislation will be made to work in practice. Domestic producers will be at increased risk of prosecution and so will importers, mostly in neighboring countries in Latin America. Producers in the U.K. and elsewhere around the world will be required to verify that products grown and processed overseas meet U.S. safety standards.
Food companies will be placed in a difficult position if they are forced into making a recall on a precautionary basis without specific evidence that their end products are actually contaminated. Whereas in the past they would have been able to negotiate, under the new terms of the Act they can no longer rely on their own decision making process, leaving them open to recalls beyond their control.
How should businesses respond?
Underwriters will be anticipating an increase in recalls and prosecutions and will be factoring the likelihood of rising claims into their planning and pricing. This means CPI (contaminated product insurance) renewals may be more complex than in the past.
The implications for the Contaminated Products Insurance/Recall market could be significant. If both the size and frequency of recalls increase, insurance buyers for food processing and manufacturing firms need to carefully review their insurance coverage limits in the light of the increased exposure.