Supply Chain Risk

Farm-to-Table’s Food Safety Perils

Restaurant patrons call for locally sourced menus, but short supply chains up the risk of foodborne illness.
By: | October 3, 2017 • 7 min read

The National Restaurant Association surveyed 1,298 members of the American Culinary Federation in October 2016, asking them to rate 169 items as a “hot trend,” “yesterday’s news,” or a “perennial favorite.”

The chefs and restaurateurs ranked ‘hyper-local sourcing’ as the No. 1 concept trend. Eighty percent of respondents called this a “hot trend.” Locally-sourced produce was ranked number five, and locally-sourced meat and seafood was ranked number six.

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A variety of factors are driving the farm-to-table trend, which focuses on sourcing products from suppliers located within 100 miles from the restaurant. Environmental sustainability is one of those factors.

As the effects of climate change become more evident and more widely publicized, consumers seek ways to reduce their carbon footprint. Trucking in food from an hour away versus from across the country significantly reduces the emissions generated from food transport.

An increased focus on health and wellness is another factor. More and more, diners not only want to consume fresh food, they also want to know just how fresh it is. Knowing that your salad is made of veggies harvested from an organic farm just 50 miles away makes that food seem more wholesome.

Finally, a desire to support small farmers and local businesses is another reason restaurant patrons want farm-to-table menus.

Food Safety Risks

Conventional wisdom suggests that eatery owners should be all for this trend, as shorter supply chains typically equal less risk.

Restaurateurs can go out and visit their supplier themselves, talk to the farmers in person and see their processes with their own two eyes — and be back at their businesses within a few hours. Delivery time is shortened. There are fewer middlemen.

Scott Aiello, vice president, product manager, industry practices, Liberty Mutual

But removing those intermediaries makes it harder to control food safety. Smaller suppliers might not be subject to the same regulatory oversight that a big producer would be, and they lack the resources of large commercial farms and food processors to do thorough and regular ingredient testing. Cutting out intermediaries could also mean reducing the number of quality control checkpoints.

If a farm-to-table restaurant has locations in multiple regions, the supply chain also grows fragmented since each location will use a different network of local suppliers. That makes it even harder to control food quality and ensure product consistency.

“Quick-serve restaurant chains have the special challenge of needing to be responsive to consumers’ growing interest in farm to table, but the volume of standard ingredients they require for national distribution exceed the capabilities of almost all local producers,” said John Quelch, food safety expert and Dean of the Miami Business School.

“They therefore have to work with and qualify many local producers to meet their quality control and food safety standards, which inevitably adds cost.”

It also adds liability.

Large commercial farms and food manufacturers are subject to more regulatory scrutiny and inspected far more frequently.

They are more likely to have established safety and food testing procedures and on-site inspectors. Small, local farmers are typically less experienced in food safety testing or USDA inspections.

“Dealing directly with small, individual farms means taking on a lot of the quality control responsibility yourself.” — Scott Aiello, vice president, product manager, industry practices, Liberty Mutual

“Large farms and manufacturers that are selling into Giant or Wegmans are going to be forced to meet certain standards. It’s harder to ascertain whether smaller operations are adhering to recognized standards,” said Martin Bucknavage, senior food safety extension associate, Penn State Department of Food Science.

“When you’re dealing with a food wholesaler, you can be fairly certain given their size and focus on the industry that they have the right controls in place and are dealing with reputable farms,” said Scott Aiello, vice president, product manager, industry practices, Liberty Mutual. “Dealing directly with small, individual farms means taking on a lot of the quality control responsibility yourself.”

Outbreak Aftermath

A foodborne illness outbreak can cause potentially irreparable reputational damage to a restaurant, on top of bodily harm to patrons.

“We’ve seen some restaurants in the past completely go out of business due to foodborne illness. Even massive chains have struggled with it,” Aiello said.

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Chipotle offers the most recent and high-profile example. The fast-casual Mexican chain touts its commitment to sourcing from local farms, not factories. Its website says it “served more than 30 million pounds of produce sourced from local farmers around the country in 2015.”

A recent norovirus outbreak was linked to Chipotle in July 2017, on the heels of previous norovirus, E. coli and salmonella outbreaks in 2015, sending their shares tumbling 13 percent. It also sparked a class-action lawsuit filed by shareholders, claiming the chain has misled them about its efforts to resolve its cleanliness and food safety issues.

Widespread illnesses can also lead to lawsuits from consumers seeking damages for their medical care, lost income, and pain and suffering.

Despite the risks, the farm-to-table movement shows no signs of stalling. And restaurant owners can serve locally sourced food safely as long as they do their due diligence.

“Have approved suppliers. Don’t just go down to the local farmers’ market and buy from whomever. Know who you’re buying from,” Bucknavage said. “You have to see for yourself that the farm is a legitimate business with quality and safety standards in place.”

Restaurateurs can start by checking a farm’s audit history. The USDA as well as other third parties provide farm inspections. Regular audits indicate that the farmer is trying to comply with federal food safety standards.

But it also requires a boots-on-the-ground approach.

“Pay attention to the layout of the farm — are animals being kept away from produce? Many outbreaks are linked to contamination of fresh fruits and veggies with animal waste. Are workers washing hands and keeping their equipment clean? How many times are the food products washed before delivery? What temperature control protocols are in place both on the farm at the time products are harvested and processed and while they are in transport?” Aiello said.

Martin Bucknavage, senior food safety extension associate, Penn State Department of Food Science

The farmer should have records to indicate when produce was picked and where, and how long it was stored, as well as what temperature it was stored under. He should also be able to detail how he applies fertilizers or pesticides, and how the irrigation system works.

“If you ask the farmer if he follows good agricultural practices, and he looks at you like you have two heads, that’s not a good sign,” Bucknavage said.

Farmers should also have controls to prevent the cross-contamination of allergens and proper labeling of allergens on any packaged products. Serving food that is not properly labeled for allergens can have negative effects similar to foodborne illness.

These tasks would ordinarily fall to a distributor when working with a larger supplier. Going farm-to-table requires restaurant owners and managers to take on these tasks themselves. They might not be able to inspect every farm every day, but they can instill food safety practices in the kitchen to guard against errors on the farmer’s part.

“You can check the temperature of the delivery truck and of the product. You will need to wash all the produce before use. You can make sure every employee is washing their hands,” Bucknavage said.

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Some quality control tasks should also be transferred back to the farmer, however, through precise contractual language.

“Contractual risk transfer is a cornerstone of risk management. It shouldn’t be viewed as less important just because you’re dealing with a small, family-run farm. A handshake won’t do it. Clear contracts hold people accountable,” said Aiello.

The contract can establish what a restaurant’s expectations are around the farmer’s food safety practices and stipulate what insurance he must maintain.

“That will mean there’s an extra layer of due diligence being done by the farmer’s underwriter as well,” Aiello said.

Insurance and Crisis Management

Should the worst happen, restaurant owners should have a crisis management plan at the ready, including expert resources on tap who can handle the PR and communications strategy in the event of an outbreak.

“Legal expertise can help you understand exactly what the allegations are against your restaurant if someone files a lawsuit, and whether the responsibility should be placed on your suppliers, and how to hold them accountable,” Aiello said.

Insurers with industry expertise can usually help to build these crisis management networks and tighten up contract language. General liability coverage as part of a business owner’s policy may pick up financial losses from litigation. Crisis management coverage may also be included in the BOP or available as an endorsement. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at kdwyer@lrp.com.

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 dreynolds@lrp.com.