A Crisis Management E-Alert
HVP: 2010's First Major Ingredient-Driven Recall
Written By Attorneys: Joseph F. Bermudez, Jason Douglas Melichar and Suzanne M. Meintzer
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
Critically and with an unfortunate similarity to the past two years, 2010 is currently witnessing one, if not two, ingredient-driven recalls that will involve thousands of products and likely cost the food industry billions in associated recall costs. In 2008, the tomato/pepper recall unnecessarily devastated the tomato industry. Last year, in addition to the Plainview recall, the PCA recall sickened 714 people in 46 states and Canada, killed 9 individuals and caused the recall of over 3,900 products. Ingredient-driven recalls are insidious and can be catastrophic for any company involved with a contaminated supply chain. Importantly, ingredient-driven recalls raise unique and novel coverage issues under specialty, property and liability policies. 2010 is off to a bad start in what could be another dangerous and costly year for consumers, the food industry and insurers.
Late last month, the FDA began announcing individual company recalls associated with hydrolyzed vegetable protein ("HVP") manufactured by Basic Food Flavors, Inc. ("Basic Foods"). Yesterday, the FDA took the cautionary step of issuing a national consumer advisory in connection with the quickly expanding HVP recalls. HVP is a substance used by companies to add flavor to processed foods. Basic Foods initiated a recall due to Salmonella contamination. The number of recalls is rapidly growing and includes companies that distribute a wide variety of food products throughout the U.S and Canada. Fortunately, no illnesses have been associated with the recalls.
Dr. Jeff Farrar, Associate Commissioner for Food Safety in the FDA's Office of Foods, advised that many of the processed foods containing HVP include a kill step in their processes and will not be recalled. However, Dr. Jenny Scott, a senior advisor with the FDA's Center for Food Safety and Applied Nutrition publically stated her belief that the HVP associated recalls will likely involve "thousands of food products". If Dr. Scott's prediction is accurate, the cost to the food industry will be enormous. As we witnessed with the tomato/pepper, PCA and Plainview recalls, the cost for some companies involved with the contaminated supply chain will be catastrophically lethal.
Ingredient-driven recalls are costly because months can pass before a contaminated ingredient is identified. The tomato/pepper and PCA recalls illustrate the issue as the respective investigations took several months to identify the contaminant source. Unfortunately, we are currently witnessing another excruciatingly long investigation that may lead to another wide spread ingredient-driven recall.
In late January, the FSIS quietly announced that Daniele International Inc. ("Daniele") was recalling approximately 1,240,000 pounds of ready-to-eat ("RTE") Italian sausage products, including salami. Because contaminated RTEs are particularly dangerous, as no kill step is executed by a consumer before consumption, this recall should have been alarming, yet little publicity followed.
Surprisingly, the FSIS recall announcement contained a link to the Centers for Disease Control and Prevention ("CDC") website. With a simple click, we quickly learned that the salami recall is associated with a national outbreak of Salmonella. Moreover, we learned that the investigation has been underway since July 1, 2009. Over the past eight months, 245 people from 44 states and the District of Columbia have been infected with the matching outbreak strain of Salmonella Montevideo.
The identification of Daniele should have completed the investigation. Unfortunately, the mystery continues as the outbreak expands. The FDA joined the investigation as officials realized that the outbreak is not limited to Daniele's meat products.
Over the past several weeks, it appeared that pepper may have been the source of the Salmonella. Initially, imported black pepper was the main suspect; however, the investigation subsequently focused on crushed red pepper as the culprit. Currently, the focus has expanded as the FDA is investigating the supply chain of black and red pepper. Over the past week, the FDA has announced recalls involving pepper suppliers. Certain of the recalls span the current outbreak period. While the FDA continues to investigate the possibility that pepper is the source of the Salmonella outbreak, it has yet to reach a conclusion.
The food industry has suffered a particularly bad week. In addition to the FDA HVP advisory, a new report issued by the Product Safety Project provided that food-borne illness costs the U.S. $152 billion annually in health care and related costs. Though the report did not address recall costs, this shocking amount underscores the devastating impact food recalls have on the U.S. economy as well as those harmed in the associated outbreaks. Additionally, the HVP recalls are providing support for a wide range of legislative measures aimed at re-tooling the FDA and dramatically changing the regulatory landscape.
By their nature, ingredient-driven recalls require immediate, intelligent and comprehensive engagement by insureds, brokers and insurers. As we have previously discussed, a company involved with a contaminated supply chain will not be fully protected by a traditional insurance portfolio consisting merely of general liability and property/business interruption policies. As illustrated before, an ingredient-driven recall may be catastrophic and economically fatal to many of the companies surprised by their involvement. Small and mid-size companies that participate, whether knowingly or unknowingly, in domestic and global supply chains must be properly prepared for their involvement in ingredient-driven recalls.
Ingredient-driven recalls also raise unique and novel coverage issues that will be addressed on a first impression basis by a majority of U.S. jurisdictions. As we have seen over the past few years, very little case law is currently on the books that directly address the coverage issues raised by these recalls.
2010 has already emerged as a fascinating, if not another frustrating, year for the food industry and its insurers. With an increasingly hostile regulatory environment, an increase in multi-state outbreaks and an increase in the number of smaller and mid-size companies entering the global supply chain, insureds, brokers and insurers must work together to address the gaps contained in a traditional insurance portfolio.
fFor further analysis of Crisis Management coverage issues involving, international and domestic food contamination and product recalls; trade disruption; supply chain management; brand risk; political risk; terrorism; kidnap & ransom; cyber attack; and other emerging issues such as climate change, nanotechnology or pandemics, please contact Joe Bermudez, who leads NLdH's Crisis Management team. NLdH is an internationally recognized leader in representing the insurance industry in all coverage areas, including Crisis Management matters.
