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By RICK SHANKS, national managing director of the Aon Risk Solutions Food System, Agribusiness and Beverage practice; and BERNIE STEVES, managing director of the Aon Risk Solutions Crisis Management practice

The Food Safety Modernization Act is one of the most important pieces of food safety legislation introduced in the last 70 years. It gives enormous new oversight powers to the Food and Drug Administration and mandates stricter safety protocols--all with the goal of reducing bacterial contamination in foods.

The first thing risk managers should do is read the bill. They will find that the final legislation has several key facts that stand out.

-- The FDA will have enhanced powers to monitor and prevent outbreaks and will have mandatory food recall authority.

-- There will be proposed tests throughout the system for dangerous pathogens.

-- Imported foods will have same standards as those grown in the United States.

-- Food defense from deliberate contamination events will take on a new meaning.

-- The FDA will establish pilot projects to identify new methods of tracking and tracing food, develop products to prevent and mitigate foodborne illness outbreaks, and improve its recordkeeping.

DOING THE RIGHT THING

Regardless of legislative action, most food providers act prudently to protect consumers. They want to provide a quality product that not only meets minimum regulatory standards but, more importantly, exceeds their customers' expectations. These companies are proud of their brand images and understand that preventing accidental or deliberate contamination events is critical to protecting their reputations.

Still, events happen. Recent surveys of food companies indicate that 42 percent of recalls stem from supplier-related raw material issues and 56 percent from internal process issues.

Organizations should have a comprehensive and quantitative review of their food safety management systems to better understand how they manage risks and exposures. Three key components of this review should include:

1. Risk Identification: Develop an understanding of your organization's key food safety and defense risks, such as food product development, supply chain, logistics, contract management and defenses.

2. Risk Prioritization: Consider which risks require the most attention and resources for investigation and management. If confronted with a food product emergency or crisis, for instance, management would then be supported by a blueprint for decision making on how best to deploy resources.

3. Risk Mitigation: Review management systems and strategies currently in place to either prevent or suppress the impact of a root-cause occurrence for prioritized risks.

CRISIS MANAGEMENT

An effective crisis management plan is a critical food safety tool as well. To effectively handle crises, organizations should establish a pre-incident planning process. This will allow an organization to respond effectively and efficiently in a crisis situation to help best protect lives, physical assets, corporate reputation and shareholder value. This is done by establishing emergency response capabilities and crisis management and business-contingency plans.

This enterprisewide preparation can include emergency response training and simulation of crisis management and business-continuity response situations. By implementing and practicing these response mechanisms, organizations are better positioned to face, address and overcome a crisis.

The next step to crisis management is incident response and recovery. A well-executed response--which includes product recall and traceability plans, product testing, potential alternate sourcing resources, consumer information hotlines and coordination with authorities (public health, regulators, homeland security)--is critical to remediating damage, assessing impact and accurately documenting recovery actions.

Lastly, post-incident analysis helps companies analyze loss impact, identify areas of weakness and strength, and decide where to tighten controls and dedicate additional resources for future events.

INSURANCE SOLUTIONS

Insurance coverage is available to address first-party exposures faced by companies and potential third-party exposures to customers. Third-party coverage is important for co-packers, co-manufacturers and ingredient suppliers. Two recent examples of ingredient contaminations include the recall of peanut products and the popular food-flavoring HVP, and although these companies may not have the "brand" exposure of larger food and beverage companies, they may still be held liable for the damage they cause.

Typically, product contamination insurance policies provide coverage for incidents of accidental or deliberate contamination, including product extortion. More recently and due to the FSMA, several carriers now offer "government recall" as an extension to these policies.

From a loss standpoint, these policies have the ability to provide broad first-party coverage including recall expense, loss of profits, brand rehabilitation expense, and the fees and expenses of consultants retained to assist the insured with the incident. More recently, some carriers have offered broader third-party coverage that includes recall costs, third-party or customer loss of profits, and recall liability coverage.

These policies can be structured in a number of ways depending upon the nature of the risk, products and the insured. It is important, however, to understand that insurance is only part of the answer. True risk management must begin with mitigating risk through proper pre-incident and crisis response planning, as described above.

January 1, 2011

Copyright 2011© LRP Publications