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Nutritional Supplements

A Bitter Pill

A probe of the nutritional supplement industry may be costly for insurers as well as brand reputations.
By: | August 31, 2015 • 7 min read

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.

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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.

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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.

Insurers Pay

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.”

Jim Walters, managing director, Aon life sciences industry practice group

Jim Walters, managing director, Aon life sciences industry practice group

Walters agreed.

“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.

Reputational Risk

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.”

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Walters disagreed.

“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.”

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]