How to be Prepared for the Food Safety Modernization Act

With 2016 just around the corner, food producers need to be ready for the effects of the FSMA. These regulations will require more proactive measures, so why not put them in place now?

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The Food Safety Modernization Act (FSMA), a federal law enacted in 2011, promised the most sweeping reform to the U.S. food system in more than 70 years, and in just a few months serious changes will take place. Key parts of the law are scheduled to take effect through 2016 with the intent to transition the nation’s food safety strategy from reactive (i.e., responding to recalls and outbreaks) to proactive. Too make sure they’re in compliance with the new regulations associated with the law, food producers should create a safety-centric culture.

Coincidentally, the Patient Protection and Affordable Care Act (PPACA) was enacted in 2010 and also provided a sweeping – but for the way the U.S. healthcare system operated, with a heavy emphasis on preventative care. The PPACA and FSMA are similar in their emphasis on preventing issues rather than reacting to issues. PPACA ensures that members of a healthcare plan can receive preventive care, immunizations, screenings, and tests with no cost share from the member. The belief is that if people are aware of their health and are in tune with how their body works they will be able to prevent or treat disease before it becomes expensive or a greater problem. The new FSMA requires Food Manufacturers to be aware of the products coming in to their facilities, and it provides a process to track problems back to the source in the rare event they still occur. The cost of food poisoning liability on a mass scale can be a staggering multi-million dollar problem.

Steve PhillabaumThe FSMA is now requiring Hazard Analysis & Critical Control Points (HACCP), a management system that addresses food safety through the analysis and control of biological, chemical and physical hazards from raw material production, procurement and handling, to manufacturing, distribution, and consumption of the finished product. The HACCP system contemplates decisions that standardize the use of sell-by date, use-by date and production date. The government and industry alike have found that operations leaders of Food Manufacturers tend to be analytical, driven by process and data and willing to do what it takes to get product out the door. The new act is aligning OSHA safety and process into a joint development and ownership of the whole production process. The industry is finding out that safety can be translated into something operations leaders understand: numbers. Preventive actions now consist of turning safety into numbers. With risk managers and operations employees working together, rework instances occur less, production shut downs are avoided, OSHA recordables are reduced, and productivity increases. When safety and operations departments work together, the product is superior and clients are retained.

The vulnerability assessment should be done and a company that is fully compliant with the new FSMA can take the next step to align ethical and financial values. Food fraud has been a problem and remains a concern going forward. Food fraud can be very common, such as mislabeled fish (e.g., shark meat not tuna) and cumen with peanut protein used to fill containers where the peanut is ground up with cumen seed so the volume fills the entire package. Sometimes food fraud can be fatal, such as perishable food being diverted to a reseller at a local fair using coolers to keep food safe. The lack of control in that environment is staggering. The FDA will expect a Hazard Analysis through an ingredient process flow chart going forward.

Perhaps the best way to prevent vulnerabilities in the entire manufacturing and distribution food chain is to understand how issues occur. The motivations, opportunities and control measures are elements that must be explored. High-cost products tend to be a significant motivating factor to commit fraud, and the nature of ingredient production or geographic location is an opportunistic factor. Therefore, control measures such as specific screening controls for vendor management are critical.

Employee Benefits

Preventive care – Companies should implement a wellness program that requires employees to complete an annual physical and a biometric screening. The biometric screening will provide a baseline of data showing current and potential medical issues. The wellness program should also help employees become more health conscious and understand the benefits of exercise and nutrition. An Employee Benefits Consultant can help guide a company through this process.

Cost Control – Employee Benefits are the second highest cost an organization faces. The price of healthcare continues to rise, so the healthier we can keep employees the better chance we have to manage the claims and keep costs down. That is a driving factor behind preventive care and wellness programs. An Employee Benefit Consultant can guide you through the process of going self-funded and managing your risk pool to reduce costs. 

Safety Awareness (in the food plant and on paper)

Partnerships should exist between the safety department and insurance broker to design and implement a customized safety program to reduce claims and impact the most significant driver of insurance costs: losses. Safety Assessment/Mock OSHA audit activities, site observations and training will reduce risk and lessen exposures, ensuring the safest site possible. Everyone should monitor risks and work to enforce a loss prevention program. An Insurance broker can assist in the development of a new safety program or review of an existing program and recommend changes.

Product Recall

Human error being what it is, mistakes will inevitably occur. Many large organizations purchase product recall insurance, but many other businesses do not. Based on current developments, and the benefit that this product provides to insureds, we believe that a decision not to purchase product recall coverage can have devastating repercussions. Product recall insurance is a unique policy that reimburses insureds for financial losses they sustain when it is likely that its product may be recalled. The coverage trigger under a product recall policy for a food and beverage company, for instance, would be the knowledge that an accidentally or maliciously contaminated product could cause bodily injury were it consumed. Even if the product results in a finding of no liability, the insured is reimbursed for certain financial costs related to the incident (e.g., media coverage, attorney costs, etc.).

Jason EdelmanProduct recall coverage is important. Simply put, many companies can be forced into bankruptcy because they did not have product recall cover. Large organizations have the resources to lessen the impact of a product recall. However, most organizations simply cannot absorb the related financial loss and can fail from the consequences. A product recall for a food manufacturer or distributor can be quite catastrophic since the product can reach so many people in a short period of time.

Contractual Risk Transfer

One way to reduce the cost of insurance is to use proper indemnification and insurance language in business contracts. By doing this, companies can limit their liability when working with outside parties and improve their risk to loss. Strong administrative controls, led by a food safety program, combined with a good loss picture, ultimately lead to lower insurance premiums and a safer operation. When possible, food manufacturers and distributors should attempt to transfer their risk of loss (e.g., claims for bodily injuries, property damage, environmental loss, etc.) to the other party. Doing so forces the other party to assume liability.

Depending on which side of the transaction you’re on, you should look to transfer that risk through contractual risk transfer anywhere you can. There are times when you may not have leverage in a transaction to transfer that risk, but at a minimum, in those situations you don’t want to be indemnifying the other party for their negligent acts.

In addition to the strong indemnification language, food manufacturers and distributors should try to be listed on the other party’s insurance as an additional insured on a primary and non-contributory basis. This way if you are sued, you can point to the indemnification language that’s working in your favor and you can show that you’re also listed as an additional insured so your coverage is also on that policy.

With 2016 just around the corner, food producers need to be ready for the effects of the FSMA. These regulations will require more proactive measures, so why not put them in place now? Doing so will make sure you’re ahead of the game and in compliance with these new requirements before they go into effect; and if you take the proper precautions, you can mitigate risks that are often overlooked.

Steve Phillabaum and Jason Edelman are Producers for The Graham Company. They can be reached at sphillabaum@grahamco.com and jedelman@grahamco.com

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