Food Safety

Unknowns of the FDA’s New Rule

Insurers struggle to respond to a new regulation governing sanitary food transportation.
By: | February 20, 2017 • 6 min read

Anyone involved in the transportation of food products within the U.S. now shoulders additional responsibilities for ensuring the safety and sanitation of those goods.

The final rule on the Sanitary Transportation of Human and Animal Food, issued by the FDA as part of the Food Safety Modernization Act, introduced new standards for the shipping conditions of foods in open containers, the cleaning and maintenance of equipment, training and record-keeping.

In short, any food entering the U.S. distribution system — and any blemishes — will be under a magnifying glass.
If receivers notice anything about a shipment that falls short of the new standards — anything from obvious spoilage to a bit of dirt on the trailer floor — they have grounds to reject it. Every link in the food delivery supply chain — manufacturers, shippers, loaders, motor carriers, receivers and distributors — will all take on additional exposure as a result of the elevated standards.

“It’s really a two-pronged issue: liability and coverage,” said Alan Clark, senior executive general adjuster, Engle Martin & Associates. If a shipment is deemed unsuitable for consumption, who is at fault? And will standard general liability, property and motor truck cargo policies respond?

Shifting Liability

“The FDA took a position that they are not changing the law on liability, which was established by the Carmack Amendment” in 1935, said Sam Rizzitelli, transportation practice leader for the Americas, Allianz Global Corporate & Specialty.

Sam Rizzatelli, transportation practice leader for the Americas, Allianz Global Corporate & Specialty

“The Carmack Amendment will still be the fundamental law governing liability for goods in transit, but deviating from the amendment by use of contract will increase.”

The amendment states that if the shipper wants to hold a motor carrier liable for damaged goods, it must prove that the cargo was in good condition when handed over to the motor carrier, and that it was damaged by the time it was delivered to the receiver.

The new sanitary rule, while not changing the letter of the law, shifts the onus onto the motor carrier to uphold the transport instructions set by the shipper.

“Ultimately, it is the shipper’s responsibility to lay out specific conditions for the safe transport of food, but they can legally delegate that to other parties covered by the new regulation in a contract,” Rizzitelli said. “The practical reality is that the carrier ends up as the one stuck in the middle, so they have to do more in order to facilitate harmony in the supply chain around this issue.”

Definition of Loss

With this increased liability risk, the question hovering over motor carriers is, will insurance cover it?

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Motor truck cargo and property policies typically cover direct physical loss or damage to goods, but the new rule blurs the definition of “direct loss.” A receiver may reject a shipment as adulterated if they see that the new sanitary standards were not met, but no firm criteria to determine “adulteration” of goods have been set.

“The practical reality is that the carrier ends up being the one stuck in the middle, so they have to do more in order to facilitate peace in the supply chain around this issue.” — Sam Rizzitelli, transportation practice leader for the Americas, Allianz Global Corporate & Specialty

Direct physical loss is usually easy to see. Adulteration or contamination is not.

“If something is stolen, burned or spoiled, that’s easy to distinguish and easy to find in your coverage,” said Steve Silverman, vice president, inland marine, Berkshire Hathaway Specialty Insurance.

“With this law, goods may not necessarily be damaged, but can still be rejected. The question is whether there will still be coverage under the insurance policy for that loss.”

Take, for example, a shipment of fresh apples. The shipper requires the trailer to be kept at 35 degrees F.

When the apples arrive at their destination, the receiver takes the trailer’s temperature and finds it at 38 degrees. That would be enough for the receiver to reject the apples, even if the fruit is not spoiled and perfectly fit for human consumption.

Coverage Challenges

Current cargo and property policies held by motor carriers likely would not cover the rejected shipment, and underwriters are struggling to adapt to the new risk.

“The new sanitary rule will change how underwriters approach the risk,” Clark said. “There will need to be changes in language and endorsements added to policies.”

Insurers will be challenged to write coverage for the broader exposure without pushing prices so high that insureds can’t afford it.

“We’re struggling as an industry to come up with language that reflects this exposure. It’s difficult because we want to protect insureds, but at the same time, we don’t want to make coverage so broad that we have to price for higher loss assumptions that would make coverage unaffordable,” Silverman said.

Only time and an influx of claims stemming from the new rule will tell how the industry will adapt to the new standards. In the meantime, expect a spike in litigation as motor carriers, shippers, receivers and insurers debate what constitutes a loss and which player in the supply chain dropped the ball.

“We don’t know what the full impact will be,” Clark said.

Risk Mitigation

As of now, there are several steps motor carriers can take to shield themselves from liability. The new rule calls for more comprehensive training and record-keeping, so carriers have to update their procedures to stay compliant, though it would be wise to implement these risk management practices regardless.

“Employees have to be aware of their responsibilities. They have to understand whether the trailer meets the specifications for cleanliness set by the shipper to transport food, and if the refrigeration system is working,” Silverman said.

The shipper and motor carrier also have to agree on how temperature will be monitored. The sanitary rule calls for a record of that agreement, written procedures utilized by the carrier to get the trailer in order, and documentation of training. Records must be kept for up to one year.

“Employees have to be aware of their responsibilities. They have to understand whether the trailer meets the specifications for cleanliness set by the shipper to transport food, and if the refrigeration system is working.” – Steve Silverman, vice president, inland marine, Berkshire Hathaway Specialty Insurance

“Motor carriers will have to keep records of exactly how they are meeting conditions set by the shipper,” Clark said. “How often is the trailer being maintained, and who is doing that work? How is the temperature being tracked and controlled?”

Carriers should also take care not to waive certain rights through contracts with shippers, such as the right to establish protocol to determine whether a shipment should be deemed a loss.

“Some contracts may appear to be in good faith but really aren’t. They may be biased in that the shipper sets the amount of damages the motor carrier will be responsible for paying, without setting a procedure to investigate a claim of contamination,” Clark said.

Motor carriers should rely on their insurer’s claims adjusters to challenge whether goods have been adulterated. Going back to the apple shipment, for example, an adjuster could take the internal temperature of an apple to show that it was not affected by the change in temperature in the trailer.

“With this law, liability will shift contractually from shippers and loaders to the motor carriers, so it’s important to understand what you’re signing when it involves shipping,” Silverman said.

“Smaller carriers may not have the staff or resources to devote to scrutinizing contracts. They sign a document because they need the load, without understanding what they’re picking up in additional liability.”

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Clear communication with shippers and diligent documentation is the best way to avoid claims.

“Insurers, industry associations and transportation lawyers are all trying to grapple with the issue with respect to the underwriter’s obligation and what insureds are responsible for, so we can design an appropriate coverage,” Silverman said.

“The most important thing is that risk managers at every step of the supply chain understand the law and how it uniquely applies to them, and make sure that employees understand what they have to do to comply.” &

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

More from Risk & Insurance

More from Risk & Insurance

Absence Management

Establishing Balance With Volunteers

It’s good business to allow job-leave for volunteer emergency responders, whether or not state laws apply.
By: | January 10, 2018 • 7 min read

If 2017 had a moniker, it might be “the year of the natural disasters,” thanks to a phenomenal array of catastrophic or severe events— hurricanes, tornadoes, wildfires, ice storms and floods.

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Combined with smaller-scale fires and other emergencies, these incidents tax the resources of local and state emergency services, often prompting the need to call volunteer emergency responders into action.

But as lean as most organizations are already running, volunteer activities can sometimes cause friction between employees and employers. Handling conflicts the wrong way can potentially lead to legal headaches, harm employee morale and batter a company’s reputation.

State by State Variations

Most employers are aware of the various federal and state leave laws protecting their employees, including family and medical leave, pregnancy leave and military leave. But leave laws that protect the livelihoods of volunteer emergency responders are more likely to fly under the radar of some HR managers and risk managers.

Such laws don’t exist in every state, but more than 20 states do have some type of law in place to protect volunteers including emergency responders, firefighters, disaster workers, medical responders, ambulance drivers or peace officers.

Marti Cardi, vice president of Product Compliance for Matrix Absence Management

The laws vary broadly. Nearly all specify that such leave be unpaid, and that employees disclose their volunteer status to employers and provide documentation for each leave. But there is a spectrum of variations in terms of what may trigger an eligible leave. Some, for instance, apply for any emergency that prompts a call from the volunteer’s affiliated responder group. Others may require a government declaration of emergency for the law to be triggered.

While many of the laws do not explicitly require employers to let employees leave work when called to an emergency during a shift, most specify that an employee may be late or even miss work entirely without facing termination or any other adverse employment action.

Some states mandate a maximum number of unpaid leave days that a volunteer can claim. But others may place more significant burdens on employers. In California, for instance, employers with 50 or more employees are required to grant up to 14 days of unpaid leave for training activities in addition to any leave taken to respond to emergency events. For multistate employers, keeping on top of what obligations may apply in each circumstance can be a challenge.

Significant Risks

Large or mid-sized employers may rely on absence management providers to keep them in compliance. For smaller employers though, it may be as simple as looking up a state’s law via Google to find out what’s required. However, checking in with the state department of labor or the company’s attorney may be the best way to get the correct facts.

“I would caution that just because you don’t find something [on the internet], it doesn’t mean it’s not there,” said absence management and employment law attorney Marti Cardi, vice president of Product Compliance for Matrix Absence Management.

For example, Cardi said, an obscure Texas law provides job-protected leave for volunteer ham radio operators called into service during an emergency.

Cardi said employers should task HR to investigate the laws in each state the company operates in, and to ensure that supervisors are educated about the existence of these laws.

“If a supervisor is told by one of his or her employees, ‘Sorry I’m not coming in today … I’ve been called to volunteer firefighter duty for the [nearby region] fire,’” she said, you want to be sure that the supervisor knows not to take action against the employee, and to contact HR for guidance.

“Training supervisors to be aware of this kind of absence is really important.”

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An employer that does terminate a protected volunteer for responding to an emergency may be ordered to pay back wages and reinstate the employee. In some cases, the employee may also be able to sue for wrongful termination.

And of course, “you don’t want to be the company in the headlines that is getting sued because you fired the volunteer firefighter,” she added.

If an employer bars a volunteer from responding, the worst-case scenario may be a third-party claim. Failure to comply with the law could give rise to a claim along the lines of “‘If you had complied with your statutory obligation to give Jane Doe time to respond, my loved one would not have died,’” explained Philadelphia-based Jonathan Segal, partner at law firm Duane Morris and managing principal of the Duane Morris Institute.

“That’s the claim I think is the largest in terms of legal risk.”

Even if no one dies or is seriously injured, he added, “there could still be significant reputational risk if an individual were to go to the media and say, ‘Look, I got called by the fire department and I wasn’t allowed to go.’”

The Right Thing to Do

What employers should be thinking about, Segal said, is that whether or not you have a legal obligation to provide job-protected leave for volunteer responders, “there’s still the question of what are the consequences if you don’t?”

Employee morale should be factored in, he said. The last thing any company wants is for employees to perceive it as insensitive to their interests or the interests of the community at large.

“Sometimes employers need to go beyond the law, and this is one of those times,” — Jonathan Segal, partner, Duane Morris; managing principal, Duane Morris Institute

“How is this going to resonate with my employees, with my workforce, how are people going to see this? These are all relevant factors to consider,” he said.

There’s an argument to be made for employers to look at the bigger picture when it comes to any volunteer responders on their payroll, said Segal.

“Sometimes employers need to go beyond the law, and this is one of those times,” he said. “Think about the case where’s there’s not a specific state law [for emergency responders] and you say to a volunteer, ‘No, you can’t leave to deal with this fire’ and then people die. You as an employer have potentially played a role, indirectly, because you didn’t allow the first responder or responders to go,” he said.

The bottom line is that “it’s the right thing to do, even if it’s not required by law,” agreed Cardi.

“I feel that companies should have a policy that they’re not going to discipline or discharge someone for absences due to this kind of civic service, subject to verification of course.”

Clear Policy

While most employers do strive to be good corporate citizens, it goes without question that employers need to guard their own interests. It’s not especially likely that volunteer responders will try to take advantage of the unpaid leave allowed them, but of course, it could happen.

That’s why it’s important to have policies that are aligned with state laws. Those policies could include:

  • Notifying the company of any volunteer affiliations either upon hire or as soon they are activated as volunteers.
  • Requiring that employees notify a supervisor as soon as possible if called to an emergency (state requirements vary).
  • Requiring documentation after the event from the head of the entity supervising the volunteer’s activities.

If at some point it becomes excessive – someone has responded to emergencies five times in nine weeks, then it’s time to examine the specifics of the law and have a discussion with the employee about what’s reasonable, said Segal. It may also be time to ask specifics about whether the person is volunteering each time, or are they being called.

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In some cases, the discussion may need to be about finding a middle ground, especially if an employee has taken on an excessively demanding volunteer role.

“We encourage volunteers to pick the style that best fits their schedule,” said Greta Gustafson, a representative of the American Red Cross. “Disaster volunteers can elect to respond to disasters locally, nationally, or even virtually, and each assignment varies in length — from responding overnight to a home fire in your community to deploying across the country for several weeks following a hurricane.

“The Red Cross encourages all volunteers to talk with their employers to determine their availability and to communicate this with their local Red Cross chapter.”

Segal suggests approaching it as an interactive dialogue — borrowing from the ADA. “Employers may need to open a discussion along the lines of ‘I need you here this week because this week we have a deliverable on Friday and you’re critical to that client deliverable,’” he said, but also identify when the employee’s absence would be less critical.

No doubt there will be tough calls. An employer may have its hands full just trying to meet basic customer needs and need all hands on deck.

“That may be a situation where you say, ‘First let me check the law,’” said Segal. If there’s a leave law that applies, “then I’m going to need to comply with it. If there’s not, then you may need to balance competing interests and say, ‘We need you here.’” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]