The food and insurance industries are waiting anxiously to see how the new Food Safety Modernization Act (FSMA) will affect their businesses.
The FSMA, which was passed in January of this year, gives the Food and Drug Administration (FDA) increased authority in regulating and responding to food product contamination. It allows the FDA to suspend the services and production of food distributors or processors if a contamination is suspected.
The FDA can also now require recalls of food products, even if there is no proof that the contamination came from that source. In addition, facilities are now required to register as a food facility, with the FDA having the ability to suspend a facility’s license to produce food should they deem it necessary.
“The FDA [formerly] had the authority to say ‘you must recall this or else’ and people usually would follow the suggestions, but the FDA never had the clout to make the recommendations stick from the standpoint of regulatory compliance – but they do now,” says Buck Kidder, vice president at HCC Insurance Holdings in Mount Kisco, N.Y. “As a result, many insureds are concerned with the potential.”
Details of how exactly the FSMA will be carried out and how vigilant the FDA will be with its newfound power are still hazy, especially since funding for the Act is still up in the air, but one thing is clear: food manufacturing, processing and distributing companies need to take notice and be ready to protect themselves.
“The act requires the FDA to give food processors and distributors the ability to do a voluntary recall before they take it into their power,” says John Turner, product recall manager for XL in North America. “That is how it has always worked and we still think a majority of recalls will be ‘voluntary’, but if you have got a government entity behind you making you do it, it is not so much voluntary.”
Eric MacDougall, president of MRM Group in Harleysville, Pa., says the FSMA creates potential new opportunities for agents to provide recall protection. His company has already seen interest from smaller companies with under $30 million in revenue that never looked at coverage before, but now feel they need it.
“The Food Safety Act has a lot of insureds and potential customers nervous about what it is food processors will be required to do and how far reaching the government regulations will go,” he says. “Agents should be familiar with the FSMA and mention it to prospects. It is on everyone’s mind and a great opportunity for potential new sales.”
It’s also an area for potential liabilities to agents if they are not discussing the coverage with their clients, says Kidder.
“There is a good defensive aspect for agents by pointing out an exposure that exists and addressing it. You are not putting yourself on the carpet if something happens and they lose millions,” he says. “It protects a broker from his or her own E&O [errors and omissions] liability. You should at least go on record with a client that they have this exposure and let the client make the call. At least you are on record as having done your job.”
Bob Nevin, vice president of products liability for Lexington Insurance in Boston, says recalls are happening all the time, with at least 40 to 50 occurring per month, which should motivate companies to buy coverage. But most companies still don’t think they need it.
“Many companies feel that they have enough quality control, but then once a recall happens or a competitor has a recall, they want the coverage,” he says. “A lot of it is educating the buyer.”
Underwriters say agents need to be especially familiar with the wording of product recall forms because not all coverages are created equal. In addition, traditional product recall forms require proof that a contamination came from their client’s source to trigger coverage. That means insureds would not be covered against the FDA’s new authority.
“The coverage trigger of all recall policies is the presence of bacteria in a product,” says MacDougall. “The product has to be tested and show that it has this source, or the insured isn’t covered [on traditional recall policies]. Agents need to understand the differences in the forms and make sure that the triggers and wordings are addressing this new regulatory world we are living in.”
MRM Group is one of a handful companies that have addressed this issue with an endorsement for the new government regulations. MRM Group’s endorsement is called Recall Advantage and is backed by Lloyd’s of London. The form was crafted with the new mindset of federal regulators in mind and applies specifically to food.
“We are keeping the policy as proactive as possible and timely to what’s happening,” says MacDougall.
The company also hopes to make an announcement in September regarding an expansion of its product recall coverage on the non-food side.
XL also launched a new endorsement that specifically covers the FSMA. It uses language directly from the act to provide insureds with clarity and covers for Class 1 and Class 2 recalls that are associated with the suspension of a facility’s license to produce food.
The carrier also launched a new product recall platform in North America so it is now able to offer coverage through three platforms, with the other two being London and Bermuda.
Turner says there is a ton of potential in the product recall market and they have seen a slight increase in submissions, which they can attribute to the FSMA.
“A lot of companies are wondering how the FDA is going to use its newfound powers and increased budget and a lot of people are nervous,” he says. “That tends to lean them towards buying coverage for the first time.”
Lexington added an option in January to purchase protection against product withdrawal or recall expenses, including those that allege loss of profit resulting from a covered product recall event. The coverage is an enhancement to its standard general liability including primary products policy and offers a separate set of lower limits for insureds that do not want or need huge limits.
HCC launched a coverage enhancement last year in anticipation of the FSMA that also addresses the FDA’s new authority. It can be added by endorsement and amends the trigger wording to broaden the coverage.
Kidder says carriers are putting themselves at greater risk by adding coverage like this and so they are pricing this product sensibly by charging a modest additional premium for it.
He says, as of now, they haven’t seen any repercussions in terms of claims because of the FSMA, but it is too soon to tell what will happen and whether more carriers will continue to offer this coverage.
“Insurance companies, like everyone else, tend to be reactive,” says Kidder. “If there is going to be a floodgate of claims that are covered now that weren’t covered before this wording, there could be a change.”
For now, agents need to do their due diligence when it comes to working with clients and educating them about the FSMA and product recall coverage in general.
“This coverage is horrifically misunderstood, undersold, and mis-sold,” says Kidder. “So there are tremendous opportunities out there for brokers and agents if they took the time to get familiar with it and speak authoritatively to clients and prospects about the exposures and the means of addressing those exposures.”