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

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

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Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

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“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

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But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]