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The US Food Safety Modernization Act (FSMA) represents the biggest change to the legislative landscape for the food and beverage sector since 1938. FSMA was signed into law in January 2011. However, the Food and Drug Administration (FDA) only published a number of the key rules and regulations for domestic and foreign firms that grow, harvest, manufacture, process, pack or hold human food in January 2013. Two more sets of draft rules were published more recently in July. While the first compliance date for the new FSMA rules is still at least a year away, and the consultation periods have recently been extended, most experts say it would be a mistake for companies to wait until the last minute to implement the changes required by the new rules. According to Joe Levitt, a partner with Hogan Lovells and former director of the FDA’s Center for Food Safety and Applied Nutrition, “The FDA has set a high bar with this proposed rule. Although food companies will be allowed to determine their own food safety steps, the FDA has included expectations of rigor and oversight at each step of the process. Food companies will need to be fully prepared.” What follows is a discussion about why new rules are being proposed, what’s included in the new rules, what food and beverage companies will need to do to comply, and how XL’s Product Recall Group can assist in making the entire process easier in this challenging and fast changing risk environment. Why a new law at this time? High-profile outbreaks of food borne illnesses over the last decade have caused widespread recognition that we need a new, modern food safety system in place that will prevent food safety problems from arising in the first place. The intent of FSMA is to identify risks, predict where such risks might arise, and then prevent those risks from manifesting as a threat to the consumer. During the last quarter of 2012, the FDA documented the highest amount of food recall activity seen in the past two years, according to ExpertRECALL Index. The good news is that in the first quarter of 2013, the FDA documented 316 food and beverage recalls initiated by 133 companies, down from 552 recalls in the fourth quarter of 2012. Broadly speaking however, we expect to see an increasing trend in the volume of recalls whilst the industry gears up to raise itself to the new regulatory standards driven by FSMA. This is exactly what we saw in the EU some 10 years ago after a similar major sea-change in legislation-driven regulatory risk. Here are the facts from the first quarter of this year based upon FDA information: • Allergens were the single largest cause of food recalls during the first quarter, accounting for approximately 34% of all recalls initiated. Allergens have been the largest cause of food recalls in the past 5 quarters. • Foodborne illness concerns, specifically Salmonella, Listeria and E. coli, accounted for about 25% of the recalls, down from 65% in the fourth quarter of 2012. • Foreign material in food products led to 13 recalls, which is significantly higher than the average of 2 recalls per quarter (due to foreign materials) from the previous 10 quarters. • Extraneous material was the largest cause of recalls of meat, poultry and processed egg products. More than half of these recalls were due to traces of plastic found in the products. (Note that the meat and poultry sector is under the jurisdiction of the USDA Food Safety & Inspection Service which recorded 25 further food industry recalls in addition to the FDA figures above.) • 36% of the FDA recalls were Class I events, 55% were deemed Class II events and 9% related to Class III. From the USDA figures 64% were Class I, 28% Class II and 8% Class III. This continues the pattern of the vast majority of food recalls being classified as Class I or II which encompass products deemed to present a real risk to public health. In addition to the frequency and severity of recalls, health authorities have become increasingly capable of linking foodborne illnesses to the source company. Also, there are new automatic adulterants and pathogenic strains to contend with– e.g., e.coli, “the big six” and now the 0104:H4 strain which resulted in over 50 deaths in the EU in 2011. Adding to the risk environment is the complexity of the modern global supply chain which makes it far harder, if not impossible, to watch your supply chain 365 / 24/7. Further challenges include public expectations of higher food safety standards and a non-stop media cycle including social media that can result in erroneous adverse publicity for companies that may actually have nothing wrong with their products. In addition to the manufacturing challenges, it is becoming increasingly important for companies to be prepared to respond to these issues in a crisis scenario in order to protect their brands and reputation. What do the new rules do? The FSMA proposed rules under current consultation are: • “Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption” • Foreign Supplier Verification Programs (FSVP) for Importers of Food for Humans and Animals Proposed Rule • Accreditation of Third-Party Auditors/Certification Bodies to Conduct Food Safety Audits and to Issue Certifications Proposed Rule • “Current Good Manufacturing Practices (cGMP’s) and Hazard Analysis and Risk-based Preventative Controls for human food (HARPC)” In this article we will mainly focus on the rule with arguably the broadest scope. This is the FDA’s proposed rule on “Current Good Manufacturing Practices (cGMP’s) and Hazard Analysis and Risk-based Preventative Controls for human food (HARPC)”, which was issued on January 4, 2013. This would require food processors, via a “qualified individual” with scientific and technical expertise, to develop a customized written food safety plan that includes: • Hazard analysis • Preventative controls • Monitoring procedures • Corrective action procedures • Verification procedures • A recall plan Specifically, the regulatory measures include more focus on prevention and requisite programs. HACCP-based programs – i.e. Hazard Analysis Critical Control Points Plans - have been in place throughout the supply chain for a number of years. Although HARPC is similar to HACCP, a food-safety system already mandatory for juice, seafood, meat and poultry, HARPC goes a bit further than HACCP. “The main difference between the two systems,” said Jenny Scott, senior advisor in FDA’s Office of Food Safety, “is that under HARPC, preventive controls may be required at points other than at critical control points, and critical limits (such as temperature and time-based kill step requirements) would not be required for all preventive controls.” Companies who are already HACCP certified or further advanced to GFSI (Global Food Safety Initiative) certification levels are likely to find it easier to meet the standards imposed by the new rules once implemented, but they will likely still have much to do to comply. For example all written food safety plans will need to be developed by a “qualified individual” with scientific and technical expertise. This is likely to be quite a challenge for some smaller companies that may not necessarily have such an individual in house. Other highlights of the new proposed rules • Record keeping and document management – The FDA will have broader authority to review company records. This proactive approach is intended to eliminate gaps in record content and documents – i.e., Hazard Analysis and Risk-Based Preventive Controls (HARPC) and to ensure that HARPC has been tailored to the individual facility and products and has been under continuous operation and review. • Import and third-party certifications – new provisions under “Foreign Supplier Verification Programs (FSVP)” require importers to verify compliance with US requirements. In other words, the importer needs to show that the foreign manufacturer complies with FSMA. The Act also provides for FDA inspections of foreign facilities if the FDA deems this necessary. • Allergen management – The FDA has proposed to define the term “‘cross-contact’ to mean the unintentional incorporation of a food allergen into a food and to define the term “food allergen” to mean a “major food allergen”. Businesses that handle such foods or ingredients will likely face increased requirements in the manufacturing and labeling of their products. • Food defense – new regulations specific to adulteration may impact current food defense plans and add requirements related to intentionally introduced hazards. • Track and trace – the Act provides for traceability pilot programs, which will lead to additional traceability record-keeping requirements for high-risk foods and a mandated FDA system. • Monitoring - Each facility must develop, establish and implement written monitoring procedures to ensure the monitoring of preventative controls. Additionally, records must be maintained documenting the implementation of monitoring procedures in essence to show that HARPC is a living document that is used and reviewed continuously rather than a document that is drafted, filed away and forgotten. • Corrective action - Written corrective action procedures must be established and implemented. Such corrective actions must be used if preventative controls are not properly implemented or an unanticipated problem occurs. The proposed rules have a staggered compliance date based on company size. Large companies would need to comply within a year from publication of the final rules. Small companies of 500 employees or fewer would have 2 years to comply, and very small companies would have 3 years. The FDA provides this time frame because there is real work for companies to come into compliance, which is why it’s important to start preparing now. This need is ever more acute since a recent court ruling stated that the FDA must complete and finalize all FSMA rules and regulations by mid-2015. Highlights of the Act already in force: Turning to FSMA generally, here are some of the key elements of FSMA already in force: • Mandatory recall authority – Since January 2011, the FDA has had mandatory recall authority. However this power has not been used in the two and half year lifespan of FSMA to date and XL expects that the vast majority of recalls will remain “voluntary” since most companies will likely not allow themselves to get to the stage of an ordered recall. • Registration – Food facilities have to be registered with the FDA, which now has the authority to suspend registration, effectively shutting down a facility’s ability to process and distribute its product. This power was used for the first time by the FDA in November 2012 after a 2 month voluntary suspension of operations. The New Mexico-based peanut product processor involved had its registration suspended for 6 months until May 2013, bringing the total to 8 months of suspended operations. What might happen to a company’s markets and reputation in such a scenario? • Detention – FDA can order administrative detention if there is a reason to believe that an article of food is adulterated or misbranded. Under this authority, an article of food can be detained for a reasonable period not to exceed 20 calendar days, after a detention order is issued. An additional 10 day detention period can be applied in certain circumstances. The entire detention period cannot exceed 30 days. The detention authority timeframes will be applied in a faster and shorter time frame when “perishable foods” are at issue. Companies may appeal a detention order and the type of food involved will determine the type and length of process. Managing recall risks: check your insurance coverage A limited degree of recall coverage is available as an extension from many general liability insurers but this is very limited in terms of application and scope. Product Contamination Insurance is specifically designed to meet the needs of the food and beverage industry and plugs the gap between general liability and property coverage which can otherwise expose a company to catastrophic loss. XL’s solution XL is at the vanguard of insurance, risk and crisis management solutions for the food and beverage sector in North America and elsewhere. We are one of very few insurers to have operated in this market continuously since the 1990’s. Our insurance products cover the financial loss elements of risks which are not covered by other insurances. XL’s Product Contamination Policy covers 3 types of Insured Event: • Accidental Contamination • Malicious Contamination • Product Extortion It is important to note that the main policy triggers are product contaminations and mislabeling and as such the triggers are far broader than a recall coverage extension which require an actual recall to take place, This becomes of even more limited use where companies often detect a contamination or mislabeling before product has left their custody and control such that they do not need to recall. Product Contamination Insurance also does not simply cover recall expenses and also indemnifies against the following types of financial loss: • Pre-Recall Expenses • Recall Expenses – far broader than extension style recall expenses e.g. covers cost of replacement and recall expenses incurred not just by the insured but by also by retailers, wholesalers and distributors • Third Party Recall Expenses • Increased Cost of Working • Loss of Gross Profits • Rehabilitation Expenses • Crisis Response Costs The standard policy includes some recall liability coverage and this can be further enhanced by endorsement to cover Customer Loss of Profit or more general Recall Liability for downstream exposures . Product Contamination Insurance is a continuously evolving line of coverage. By way of example following the passage of the FSMA, XL developed a Government Recall Endorsement tailored to FSMA risks, North American regulatory systems and indeed global supply chain risk environments food and beverage companies now face. By way of example, the XL Government Recall Endorsement covers voluntary or ordered Class I or II recalls as determined by the regulators even if an insured finds no evidence of contamination to their own products. At XL, we believe crisis management services are a key component to any coverage. We provide policy funds to help companies reduce and control the risks of a product contamination issue and provide resources and guidance during any crisis response to manage brand reputation risks. XL’s integrated solution provides risk transfer and crisis management via Response XL in one package. Response XL (our risk control and crisis management service) helps our clients achieve compliance and to mitigate and manage their risks. Through Response XL, we provide an array of expert advice to assist our clients in an actual or potential crisis scenario, which can be critical to a brand’s reputation and survival as well as whether a company retains its markets and remains in business. Response XL services are available to our clients from dollar one since XL will meet the all the initial costs even for issues which turn out to be non-issues or not to covered. In this way, we ensure that our clients get expert advice to assist in key decision making right from day one. _________________________________________________________John Turner has been involved in the product recall, product contamination and product liability risk sectors since the 1990s, both as an underwriter and as a loss adjuster.  He has had a special focus on the food and drink industry but also has considerable experience in product exposures across multiple sectors.

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Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

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