A Bitter Pill
In February, New York Attorney General Eric T. Schneiderman asked GNC, Target, Walmart, and Walgreens to stop selling a variety of store-brand nutritional supplements after DNA tests indicated that only 21 percent of the products contained the plant species listed on the labels, and more than a third contained plant species not on the labels.
Now, a multistate coalition of attorneys general pursuing an expanded probe of the nutritional supplement industry is asking Congress to launch a comprehensive inquiry and to consider a more robust oversight role for the Food and Drug Administration (FDA).
The Council for Responsible Nutrition (CRN), a supplement industry trade group, is questioning the validity of the New York attorney general’s DNA tests.
CRN says the tests have been “roundly criticized by botanical scientists who question whether DNA barcoding technology is an appropriate or validated test for determining the presence of herbal ingredients in finished botanical products.”
According to CRN, DNA can be damaged or removed during the manufacturing process. And since DNA barcoding does not indicate the amounts of ingredients found in the products, any contaminants found may be within “well-established legal thresholds that allow for trace amounts of some ingredients.”
VIDEO: CBS reports on the claims by the New York attorney general that some store brand supplements could “significantly endanger” consumers.
Jim Walters, managing director of Aon’s life sciences industry practice group, said the controversy is “a lot to do about nothing.”
But more than a dozen lawsuits have already been filed in connection with Schneiderman’s findings.
The most immediate exposure could be product liability if there is evidence of bodily harm — for instance, an allergic reaction to one of the unlabeled ingredients.
Phil Walls, chief clinical and compliance officer at myMatrixx, thinks such liability would be relatively narrow and potentially hard to prove.
“The repercussions would be proportional to the harm done. So if the product caused death, that’s going to be severe. But if it simply didn’t do what it was supposed to do, then I would think that the class action would be much smaller,” Walls said.
Walters agreed that any litigation would likely focus on bodily injury.
“In order for their product liability carriers to have a claim, there needs to be bodily injury, there needs to be a problem that’s not just something like they wouldn’t have bought it if they had known this and they seek reimbursement. That’s outside the scope of insurance,” Walters said.
“Think of the billions of dollars a year spent on supplements for people trying to drive better health results.” — Mark Ware, senior vice president and managing director, technology and life sciences industry practice, IMA Financial Group
Others, including Mark Ware, senior vice president and managing director of the technology and life sciences industry practice at IMA Financial Group, said allegations of harm could focus on health benefits denied to consumers who took a product that was missing the labeled active ingredient.
“Think of the billions of dollars a year spent on supplements for people trying to drive better health results.
“If they’re not driving those health results and they feel they’ve been injured, there’s going to be people banging on the door claiming all types of bodily injury because they haven’t been getting the benefits of the … supplements that have been touted as a benefit to them,” Ware said.
Ware sees broader liability issues, as well.
“This is going to trigger more than just potential product liability claims,” he said.
Companies that are publicly traded could see shareholder values impacted, potentially affecting directors and officers coverage, he said. There could also be allegations of false advertisement that could impact general liability policies.
“There are a lot of ways these claims could come about,” Ware said.
The manufacturers would likely be primary targets, but retailers may be exposed as well.
According to Ware, retailers are generally contractually indemnified and held harmless in the event of any claim or litigation due to a fault in a product.
But he pointed out, “As a retailer selling that product in your store, you will still have defense costs and could incur indemnification if [these manufacturers] don’t have the wherewithal to withstand the kind of class action suits that are coming their way.”
If the manufacturers are overseas, that may also make the retailers more attractive to plaintiff’s attorneys.
Either way, the party ultimately on the hook may be the manufacturer’s or retailer’s insurer. If the labeling discrepancies were due to outright fraud, as opposed to human error or equipment failure, that would trigger exclusions to coverage.
But such fraud may not be easy to prove.
“A court of law would have to judge that there was truly a fraudulent act and that they did it intentionally,” said Ware.
“Until fraud is proven, I don’t think these carriers are going to be able to walk away from it.”
“In any major litigation, carriers will point to exclusions to reserve their rights. So could you envision a situation where someone is reserving their right based on that? Yes. But I think that’s a stretch and I think they would have a hard time upholding that exclusion.”
And litigation could be quite costly.
“There’s a lot of ways these claims could come about, but I think in order to prove this, it’s going to take a little bit of time and a lot of litigation costs,” Ware said.
“I would imagine that the number of expert witnesses that are going be called in to testify for both sides would be lengthy, and it is simply a matter of who has the best experts. It’s just not an easy question to answer,” said myMatrixx’s Walls.
Ironically, if it comes down to a battle of expert testimony, the extensive resources that make the retail chains attractive targets for litigation would make them particularly formidable legal opponents as well.
The largest impact of the controversy could have to do with consumer perceptions of individual brands and the industry as a whole.
Walls, a former retail pharmacist, noted that, “If the company has a good reputation, you stock their products. If they don’t, you avoid them.
“People would always ask me the same question: ‘Which brand of supplements should I buy?’ And it always came down to nothing more than trust,” Walls said.
Even if retailers find different manufacturers for their store brands, any loss of consumer trust would likely be directed at the store-brand name on the front of the bottle rather than the manufacturer listed on the back.
GNC has already moved to mitigate any loss of trust by agreeing to implement a new national testing regimen that exceeds current FDA requirements — and uses some of the same testing methods criticized by CRN.
“People would always ask me the same question: ‘Which brand of supplements should I buy?’ And it always came down to nothing more than trust.” — Phil Walls, chief clinical and compliance officer, myMatrixx
Its agreement with the New York attorney general’s office stipulates that “GNC will perform DNA barcoding on the ‘active’ plant ingredients used in its products [and] implement testing for contamination with allergens.”
“It puts them in a better defensive position,” Ware said, “unless they don’t follow through with their own guidelines.”
Without that follow-through, the move could be a double edged sword.
“If they had had [a testing regimen] in place and this had still happened, I would think that would increase liability,” said Walls.
The controversy may also affect the supplement industry’s regulatory framework, largely defined by the Dietary Supplement Health and Education Act of 1994 and Good Manufacturing Practices established by the FDA in 2007.
Some, like Walls, think current oversight is too lax.
“With supplements, there are no regulations at the manufacturer level, no regulations at the distributor level, no regulations at the retail level.
“Only at the point of the consumer do the regulations come into play. … The only restriction on supplement manufacturers is that they cannot make false claims, and no one knows if they have made false claims until that product hits the market,” he said.
And while “false claims” might refer to claims of benefit or efficacy, they “could also refer to what the products actually are, and could trigger the FDA’s involvement.”
“The regulatory oversight is, I think, stronger than what common knowledge in the consumer world knows. FDA is strongly regulating.”
But, he added, most supplement manufacturers “believe very strongly in their reputations and their quality of manufacturing and ingredients, so to some degree I think many would welcome additional oversight.”
As for any negative impact on those insuring the supplement industry, Walters is unconcerned.
“We believe adamantly that this should not affect rates, pricing or availability of coverage.
“This is something that should not be a big issue for the insurance underwriting community that underwrites this sort of business.”
Adjusting to the DOL’s Overtime Rules
At last, the Department of Labor released its proposed overtime rules, which extend overtime pay next year to workers earning a minimum salary of $921 per week or $47,892 annually. However, by the time the final rule is issued in 2016, the DOL estimates that the salary level will climb to $970 per week or $50,440 per year.
Other proposed changes involve continuously increasing the salary level each year and setting a higher standard for highly compensated employees, from the current $100,000 level to $122,148.
According to a White House press release, the proposed overtime change is expected to impact nearly 5 million workers — 56 percent of whom are women and 53 percent of whom have at least a college degree — and better reflect the intent of the Fair Labor Standards Act.
The Bush administration last updated the salary level in 2004, to $23,660 ($455 per week). Currently, though, that salary, “. . . is below the poverty threshold for a family of four and only eight percent of full-time salaried workers fall below it,” according to the release.
Gregory J. Kamer, founding partner at Kamer Zucker Abbott, a management labor employment law firm in Las Vegas, said the new regulations, if adopted, will require employers to decide whether they want to pay overtime or employ more workers.
“Clearly, the wage will go up or there will be more employment or [job] openings. That can be a hard call.”
“The changes that have been hinted at [regarding] duties could actually have a more significant business impact than even the salary increase.” — Lee Schreter, chairman of the board, Littler Mendelson
Lee Schreter, chairman of the board at Littler Mendelson in Atlanta, said companies will also need to spend time and money analyzing the regulations and informing employees of the changes.
“It’s a mistake to focus solely on the salary level,” she said. The changes to the duties requirements may create new legal standards for the courts to interpret.
“The changes that have been hinted at [regarding] duties could actually have a more significant business impact than even the salary increase.”
The changes may also limit opportunities for advancement, said Kerry Chou, senior practice leader at WorldatWork, an HR association based in Scottsdale, Ariz.
He noted that first-line supervisors who perform nonexempt duties but also manage employees by assisting in their hiring, promotions and discipline may lose the opportunity to develop skills and demonstrate their supervisory aptitude because of the proposed rules.
Other employers may mitigate the expense by preventing employees from working more than 40 hours each week or laying them off, he said.
The industries most affected by the new salary include retail and fast-food restaurants, he said, since their first-line supervisors tend to earn a lower average wage when compared to employees in other industries, such as engineering or technology manufacturing.
He said employers will need to make adjustments to employee pay and duties, workforce size, and develop new work rules that make them compliant with the new law.
“But at the end of the day,” he said, “they may negatively impact the employees [that the DOL rules] are trying to help.”
Schreter noted the DOL has asked employers for input on appropriate white-collar exemptions, such as what changes should be made to the duties test, if employees should be required to spend a minimum amount of time performing work that’s their primary duty to qualify for the exemption, and if California’s law that requires employees to spend half their time on primary duty tasks should serve as a model.
Schreter said that California’s law “flunks,” adding that it has spawned a lot of litigation in the state, and that it requires employers to figure out a way to monitor and record the amount of time executives spend performing exempt activities.
Ideally, she would like to eliminate the duties test altogether, but says it’s not possible given its current statutory structure.
A Global Perspective
As any traveler knows, the world is full of uncertainty and dangerous places, where the challenges of simply trying to run a profitable business far from home are complicated by even greater risks, such as political violence, civil unrest, credit risk, corruption, expropriation of private assets by the government, and more.
Anyone doubting this need only take a look at current events. Some 70 percent of the world’s nations currently have serious corruption problems throughout their governmental and civil service framework. Nearly 40 percent of all nations are experiencing some form of significant civil unrest. Signs of economic distress are everywhere, from falling oil prices to Eurozone debt crises to economic slowdown in China.
Despite such geopolitical risks, the world still needs its businesses to continue running amid dangers that range from warfare and terrorism to punishing economic conditions caused by international sanctions, to simple graft and hostility toward foreigners.
For global and multinational companies, keeping an eye on their political risk profile is as important as handling worker safety, environmental impact, products liability, or any other insurable risk. Thankfully, political risk exposures are insurable as well, and Starr Companies is there to provide its clients with robust political risk insurance coverage, a suite of unique support services that truly is second to none, and the ability to educate clients on how to manage their political risk.
Political risk hazards generally fall into one of the following categories:
Breach of Contract and Non-Honoring of Financial Obligations
These related hazards involve the failure of a local actor to uphold their contractual or financial obligations to a foreign investor, and the inability or unwillingness of local authorities to intercede on the foreign investor’s behalf. This is perhaps the most common form of political risk hazard, as it is a major problem in any environment where there is substantial economic instability and/or corruption.
Confiscation of Property
Also known as “expropriation,” “ownership risk” and “nationalization,” this is when a government seizes property or assets without compensating the owners for them. An overt example of expropriation would be a revolutionary government seizing an office building or a factory belonging to a foreign-owned corporation. An example of creeping expropriation would be a series of successive events by a government to gradually deprive an investor of their property rights.
This is when the local laws change in such a way as to constrict foreign investors’ economic activity in some way. It could range from creeping expropriation to changing taxation or labor laws that might simply make it far less profitable or far less efficient for a foreign entity to operate in a local jurisdiction.
Inconvertability of Currency
Also known as “transfer risk,” this is when a government takes action to prevent the conversion of local currency to another form of currency, making it difficult or impossible for foreign investors to transfer their profits elsewhere. This tends to happen in countries undergoing some kind of political crisis, like when Zaire—now the Democratic Republic of Congo—declared a new national currency in 1980.
Property or income losses stemming from violence committed for political purposes, including, but not limited to declared and undeclared warfare, hostile actions taken by foreign or international forces, civil war, revolution, insurrection and civil strife (politically motivated terrorism or sabotage).
Kidnap and Ransom
Political violence might also manifest itself as a kidnap, ransom and extortion hazard, but that is typically covered by a separate, specialized policy.
To protect against these risks, insurers can provide comprehensive and custom-tailored political risk solutions, which at a client’s request can be broadened to cover investment contract repudiation, currency inconvertibility and political violence. Such policies typically last for periods of 5 to 10 years. Protected assets for this coverage include fixed assets (e.g., a factory, farm, warehouse or office), mobile assets (e.g., harvested natural resources, raw or manufactured inventory or mobile equipment), leased assets (e.g., aircraft, watercraft or construction vehicles) and investment interests in assets abroad (e.g., money dedicated to funding a foreign project, held in a host country bank and subject to expropriation).
Kidnap & ransom coverage protects company personnel and family by providing financial reimbursement for such an event. Depending on the insurer, some K&R programs also provide independent expert consultancy before and after a potential act of kidnapping, ransom or extortion.
Great insurance coverage isn’t enough to adequately protect against political risk, however. Businesses need extra support to stay on top of their exposures, and to know what the latest geopolitical developments are.
Starr Companies, for example, does this through Global Risk Intelligence, a specialized team of political risk experts with long-standing backgrounds in national intelligence and international affairs. GRI delivers to Starr clients a unique risk advisory service that spans the gamut of commercial property & casualty exposures. GRI also produces two assets that are extremely helpful. The first is the Executive Intelligence Brief, a world-class monthly analysis of ongoing geopolitical developments (especially in emerging markets) available exclusively to a carefully selected readership of top executives. The second is the Global Risk Matrix, a quarterly ranking of the overall political security risk of every country on the planet.
The world’s geopolitical landscape is changing at a remarkable pace, with new risks and uncertainties arising in even the unlikeliest of places. And yet, as business becomes ever more globalized, insurers can provide their clients with tailored coverage to absorb the losses that stem from political turmoil. By finding the right insurer, with the financial strength to cover their risks as well as the analytical acumen to help turn risk into opportunity, businesses can create partners in prosperity anywhere in the world.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.