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FSMA: Review risk mitigation strategies and insurance policies

The rules have been released for 120 days of public comment.

February 6, 2013
KEYWORDS FSMA
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FDA released for 120 days of public comment the first two of five food safety standards. The Preventive Controls for Human Food Rule would require food processors—whether they manufacture, process, pack or store food—to develop formal plans to prevent their products from causing foodborne illness through contamination.

The Produce Safety Rule would require farms that grow, harvest, pack or hold fruits and vegetables to follow science- and risk-based standards for the production and harvesting of their produce. These standards focus on preventing contamination in the growing, harvesting, packing and holding processes.

According to Jonathan Cohen, partner with Gilbert LLP, processors at all levels of the food supply chain should be aware that FSMA and related rules could change the effectiveness of their current risk management and mitigation strategies. Gilbert LLP specializes in insurance recovery for policyholders, bankruptcy law, dispute resolution and strategic risk management.

Because food processors still have time before these two proposed rules go into effect, and before FDA proposes other rules, they need to review their insurance and indemnification agreements to ensure they protect themselves in this evolving legal environment, says Cohen.

“Most food processors do have HACCP plans, but the FDA’s new proposed rules put into place detailed requirements that some companies’ current plans may not entirely satisfy.” Many processors have used the time to prepare while waiting for FSMA, says Cohen. “But at least some companies will need to take additional steps to comply.”

Insurance companies are already up to speed. “To the extent that insurers look critically at the preventive plans that potential policyholders have in place, insurers may focus on the proposed rules’ requirements even before those rules become effective (which could take some time),” says Cohen. “Companies that are not in compliance with current good manufacturing [practices] should take steps to comply, and they should keep in mind that the FDA’s new proposed rules would revise the cGMPs. Particularly contamination/recall insurers may have obligations to assist their policyholders in accomplishing that.

“Depending on the type of insurance policy and the specific language used, insurers may be required to play a role in, or pay for, some of the costs of establishing a safe food processing plant,” adds Cohen. “Insurers thus likely will pay close attention to the requirements under FDA’s new rules.”

If an insured processor makes an undocumented change to its process, the insurer could be held liable. “Most policies do not allow the insurer to evade liability by claiming that the food company made a change to its food safety protocols,” says Cohen. “Insurers may try to argue that material changes to their food safety protocols change the risk and violate the policies; policyholders have strong counterarguments and should be prepared to enforce their policy rights.”

Cohen suggests food manufacturers regularly consider what risks their businesses present and what protections their policies and indemnification agreements give them. “This can be a two-step process. First, food manufacturers should identify risks, and changing risk, as specifically as possible. For example, it may be a good start for a company to say, ‘I recognize we have risk because we import supplies from international suppliers,’ but that may not be as helpful as breaking the risk into narrow bites—for instance, ‘I am concerned about supply interruptions from hurricanes,’ or ‘I am concerned about pandemics affecting my foreign-supplied ingredients,’ or ‘I am concerned about lack of adequate quality control at a specific facility in China.

“Once they identify specific, detailed risks, the companies then can match those risks against the insurance and indemnifications that they have in place and evaluate whether those risks are covered,” adds Cohen. “Second, food companies should review their insurance policies in light of the changing legal environment (both changing food law and changing insurance law) to ensure their policies give them the best protection possible for the premiums they wish to spend.”

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