More on Melamine . . .
I was interviewed recently by Food Innovation Weekly on “Melamine, Recalls and Crisis Management.” This question-and-answer article discusses how the waves of melamine issues circling the globe affect the way a company should think about crisis management. I suspect that we’re not done hearing about melamine contamination and that the scope of fraud has yet to be fully uncovered. Some of the more interesting issues are safe dosage levels, product testing and what companies should or should not disclose to consumers.
Preparation for Melamine Issues- Updating Crisis Management Plans and Insurance Coverage
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While largely under the radar in the American press due to the compelling election cycle and historical meltdown in the financial markets, the news out of China concerning melamine has gone from bad to worse. Concern about Chinese dairies has morphed into a global crisis affecting what seems like an infinite number of products tainted with melamine.
Melamine has been intentionally introduced into animal feed, dairy products, pet food and other products because it can make diluted or poor-quality products appear to be higher in protein by elevating the total nitrogen content detected by some simple protein tests. Already, the FDA has identified a wide variety of products affected in the first wave of concerns about Chinese dairy products.
How should a food manufacturer or retailer prepare for a melamine issue? Any food company that imports any food ingredient or product from Asian markets should be concerned, and its first steps should be to update its crisis management plan and rehearse a melamine recall.
Food companies should also review with coverage counsel and their brokers whether they have—or can obtain—insurance coverage for financial exposure from melamine tainted products. Financially, a food company will be affected by a melamine issue in at least three ways: recall costs, loss of business and personal injury/consumer fraud claims. Standard comprehensive general liability (“CGL”) insurance may not cover any of these exposures. Most CGL policies do not cover recall costs. While recall and property insurance policies are available, the coverages offered by these policies also may be problematic.
Even personal injury or consumer fraud claims might be denied by CGL insurers. For example, many CGL policies will only provide coverage for occurances that arise out of events that are “accidental.” “Accident” is commonly defined as “a sudden, unforeseen or unintended event.” Even though a food company may have no knowledge of an upstream supplier’s fraudulent acts, some insurers are sure to argue that claims arising from products intentionally tainted by melamine are not covered.
The insurer's argument denying coverage is not a slam dunk and may not prevail. But, the key is to avoid (or minimize) the dispute with the insurer. To the extent possible, when placing insurance, a food company should obtain a representation or endorsement from its insurer that coverage will be extended to claims arising from melamine-tainted food.
Change You Can Expect: What President Obama May Do About Food-Borne Illness Surveillance
The Obama administration has promised sweeping changes in all corners of the federal government. We can expect the new President to push an ambitious legislative and administrative law agenda in 2009. What does this mean for food regulation? A partial answer may be gleaned by looking at the Improving Food-borne Illness Surveillance and Response Act of 2008, a bill Obama introduced last summer after he become the presumptive Democratic nominee.
Some things of note:
1. The bill appears targeted in large part on increasing the government’s “capacity” for detection of food-borne illness—both by increasing cooperation between local, state and federal agencies and by enhancing detection capability through proliferation of cutting-edge technology. The bill proposes $25 million in block grants to state and local agencies. As we've said before in this space, better detection capacity correlates to more detected outbreaks. More detected outbreaks translates to more food-borne illness claims and affects everyone in the food industry (especially restaurants and those selling fresh produce).
2. One of the five goals of the bill is to “Strengthen oversight of food safety at the retail level.” I’m unclear on exactly what is meant by this goal. Does this mean, for example, that Obama might be interested in granting FSIS the jurisdiction to inspect supermarket delis or butchers?
3. Also of interest is what does not seem to be included in the bill. Specifically, the two most talked about (and controversial) federal food safety reform ideas: (1) mandatory recall authority and (2) merger of FSIS and FDA food safety programs. Should we read into the bill that President-Elect Obama does not support these reforms? Time will tell. All that is certain is that change is coming . . .
More on Supply Chain Verification and Crisis Management
Food Safety Magazine’s latest issue focuses on “Industry in Crisis Mode.” The issue includes an article by Shaun Kennedy, director of the National Center for Food Protection and Defense (NCFPD). Mr. Kennedy provides a good overview of the elements of a supply chain verification program that any food seller should consider.
Mr. Kennedy acknowledges that costs for third-party audits, fixing supply chain problems, and establishing traceability can be high. To justify costs, he points to the recent experience of Maple Leaf Foods. According to Mr. Kennedy, Maple Leaf Foods incurred “direct costs to the company of over $20 million. The shareholder costs are even greater with its stock price having dropped by over 20% by the end of August since the announcement of the recall, a shift of over $200 million.” These costs do not include anything to compensate possible tort victims or to respond to inevitable products liability litigation (whether merited or not).
Forest Through the Trees: Lessons from a Crisis Management Case Study
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There was a nice article in the Canadian legal publication Law Times about the aftermath of the Maple Leaf Foods recall. The article praises Maple Leaf Foods for taking quick steps to salvage consumer confidence in the face of a Listeria outbreak across Canada. Specifically, the article discusses how Maple Leaf Foods CEO Michael McCain “immediately took responsibility for the plant outbreak.”
McCain is quoted as saying that “[g]oing through the crisis there are two advisors I’ve paid no attention to. The first are the lawyers, and the second are the accountants . . . . It’s not about money or legal liability, this is about being accountable for providing consumers with safe food.”
Yet the author of the Law Times article interviewed a Canadian corporate communications expert who noted that “McCain likely did listen to legal counsel.” The expert said that McCain’s “statement was an acknowledgment that if limiting legal liability was the main objective of the company’s response, it would be near impossible to restore its reputation.”
“‘The whole reason that Maple Leaf has been successful, and even though the recall has cost them $20 million in product [recalls], [is that] their reputation is intact,’” the expert is quoted as saying.
Finally, the best quote from the article: “[L]awyers need to understand that legal liability isn’t the only factor to consider in a crisis. But that’s not an easy pill for many lawyers to swallow. They believe future litigation is prejudiced if a CEO makes an apology, says [the expert].”
Developing A Strategy For Crisis Management
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An upcoming panel discussion at the Nutritional Law Symposium in Utah and a call from a reporter about the Maple Leaf Foods issue in Canada have me thinking a lot about crisis management. How a business responds at the outset of an alleged food-borne outbreak determines its fate in many ways.
Implementing a strategy from the start is a must to minimize the impact of a crisis. Yet the million- or billion-dollar question is, how do you develop the right save-the-business strategy when events are overwhelming and occurring at light speed? You need to bring together quality assurance, legal and food safety personnel (epidemiologists, microbiologists and other food safety experts) who can respond immediately to find the source of the outbreak and work with public health officials. A business must ascertain at the earliest possible moment the source and scope of the crisis. Once a business understands whether an outbreak is limited to a particular outlet or product line, and how many people might be affected, it can formulate a public relations, recall and legal strategy to limit exposure.
The key is execution. Everyone on the crisis management team must work in sync and understand their roles. And the secret to execution is preparation. Long before a crisis, a team (usually a combination of personnel from outside and inside the business) should be in place, rehearsed and ready. History is full of lessons: Some businesses executed crisis management well and emerged from dire crises stronger than before; others were unprepared, and their brands have long been forgotten.
Tomato Fallout - Recall Insurance Coverage Disputes
A fundamental difference between tomatoes and spinach is shelf life. Tomatoes can last in cold storage for many weeks. Leafy greens like spinach must be sold within about a week of harvest. Therefore tomatoes that can’t be sold now may be able to be sold after the FDA pinpoints the contamination source. Growers and suppliers may avoid at least some immediate economic impact.
Still, given the scope of the FDA warning, many will suffer economic loss. No doubt litigation between those in the supply chain will ensue.
From a legal perspective, what may be more interesting is the insurance fallout. Although the FDA has not issued a “recall,” claims will be made by suppliers, growers and retailers holding so-called “recall insurance.” Policy language varies.
Some policies may require an actual “recall” and preapproval from the insurer before a claim can be made. These policies may make recovery especially difficult for a policyholder. Other policies may include broader terms, for example covering a situation where product “withdrawal is made necessary by reason of determination by the insured or by any ruling of any governmental body that the use of such product or property could result in bodily injury or property damage, because of any known or suspected defect, deficiency, inadequacy or dangerous condition in it.”
Even for those holding broader recall insurance, expect insurers to push back. Insurers will argue that the FDA never made a “ruling” that, for example, tomatoes from New Mexico “could result in bodily injury or property damage.” Yet the FDA has warned consumers and retailers for nearly two weeks that these tomatoes have not been ruled out as a possible source of the outbreak. Enough may be at stake for the insurers to resist these claims and argue the narrow scope of recall insurance.
Businesses contemplating a claim under their recall insurance should be as strategic as possible. Tenders should be made promptly but carefully. Information documenting the claim should be collected thoroughly and systematically.
Yes, We Have No Tomatoes
By Guest Blogger Richard Goldfarb
Sunday, at a local restaurant, I saw a sign saying that there would be no fresh sliced tomatoes on my burger. Although it is quite clear that there are safe tomatoes available, the FDA has encouraged restaurants simply to cease selling them. This makes a lot of sense: rumors fly so rapidly and irresponsibly. Though, individual restaurants may take different steps; those that pride themselves on knowing the source of their heirloom tomatoes should be advertising that fact.
The problem is salmonella, in particular a strain called “saintpaul.” The FDA identified salmonella in tomatoes as a significant risk a year ago. Thus, they had the infrastructure in place to monitor and deal with the significant number of reported outbreaks this year. So far, no one knows the source of the problem, and all the FDA can do at this point is to list those tomatoes that have not been associated with the outbreaks:
• Cherry tomatoes
• Grape tomatoes
• Tomatoes sold with the stems on
• Homegrown tomatoes
In addition, the FDA lists those tomato-growing areas that have been ruled out in the outbreaks. This doesn’t mean that tomatoes grown in those areas will always be safe, but that they have not been linked to this outbreak. The FDA also reiterates its advice on the safe handling of fresh tomatoes and other fresh fruits, both in restaurants and at home. The CDC website provided a nice summary:
• Refrigerate within 2 hours or discard cut, peeled, or cooked tomatoes.
• Avoid purchasing bruised or damaged tomatoes and discard any that appear spoiled.
• Thoroughly wash all tomatoes under running water.
• Keep tomatoes that will be consumed raw separate from raw meats, raw seafood, and raw produce items.
• Wash cutting boards, dishes, utensils, and counter tops with hot water and soap when switching between types of food products.
The problem isn’t limited to the United States; New Zealand tomatoes have been implicated as well, and banned in Hong Kong. It was nice to know that the tomatoes we had with dinner last night were doubly safe: they were hothouse tomatoes sold with the stems on, and they were from British Columbia, one of the locales ruled out by the FDA.
