Latest Beef Recall Highlights Growing Magnitude of Foodborne Illnesses

News, Claims JournalOctober 2018

Insurance

The impact of Arizona beef distributor JBS Tolleson’s recent recall of nearly 7 million pounds of ground beef sold nationwide has yet to be determined. Simon Oddy spoke with Claims Journal about the potential impact.

As appeared in Claims Journal, October 18, 2018.

By: Denise Johnson

The impact of Arizona beef distributor JBS Tolleson’s recent recall of nearly 7 million pounds of ground beef sold nationwide has yet to be determined. The recall, prompted by 57 cases of salmonella across 16 states, will likely lead to a loss in profits, supply chain losses and potential reputational damage.

“This recall highlights some major challenges for food businesses and their insurers,” said Jason McNerlin, legal director at Clyde & Co., a global law firm to the insurance industry. “Foodborne pathogens including salmonella species are widespread in nature, so it’s not necessarily a surprise to find them in food. This is particularly true for foods of animal origin, but also fruit, vegetables, eggs and other foodstuffs.”

The raw beef items, including ground beef, were packaged between July 26-Sept. 7, 2018 and are part of a Class 1 recall, considered the most serious of the three U.S. Department of Agriculture (USDA) recall classifications. A Class 1 recall is considered “a health hazard situation where there is a reasonable probability that the use of the product will cause serious, adverse health consequences or death.”

According to the USDA’s Food Safety and Inspection Service, consumption of food contaminated with salmonella can cause salmonellosis, a common bacterial foodborne illness. Symptoms of salmonellosis include diarrhea, abdominal cramps, and fever within 12 to 72 hours after eating the contaminated product. The illness usually lasts four to 7 days. Most people recover without treatment, though children, the elderly and those with weakened immune systems could develop a severe illness.

Simon Oddy a New York-based partner at RGL Forensics, said that a recall of this magnitude, encompassing multiple states isn’t typically considered by food suppliers.

“While there appears to be an increase in the number of food suppliers buying some type of recall insurance, in many instances this is driven by a customer contract mandating that recall cover has been purchased,” Oddy explained. “It’s a cost of doing business with certain large retailers. However, the limits requirements may or may not be specified. This may mean some cover is taken, but it could be insufficient and perhaps limited due to internal insurance program budgets and a company’s other insurance purchases.”

He added that food processors believe in their abilities to keep a clean, sanitized production process to minimize the risk of large recalls.

McNerlin said that consumers have an expectation that ready to eat food is free of foodborne pathogens.

“The consumer can expect ready-to-eat food to be free of salmonella, and this depends on food businesses adequately applying control measures during production,” said McNerlin. “For other food, such as raw meat and poultry, risk control depends on a number of factors, including adequate instructions, thorough cooking and sound hygiene.”

He explained that, “Any one case of salmonellosis suggests a possible breakdown at one or more points in this chain. When the number of cases grows, the spotlight starts to focus more and more on identifying the responsible food and its producer. Technology is helping to identify where multiple sickness cases actually involve a single outbreak, and better science is also helping to identify the source of an outbreak.”

McNerlin said that a record of inspection issues could lead to a recall being more likely.

“For non-ready-to-eat foods, the presence of salmonella per se may not necessarily mean that the food is adulterated and must be recalled, but the existence of insanitary conditions during manufacturing can lead to such a determination and a recall,” he added.

For foodborne sickness outbreaks caused by bacteria, McNerlin said another aggravating factor may exist when antibiotic-resistant bacteria is present.

An expert in product recall claims, Oddy said that though he’s seen increasing limits purchased over the past five years, his firm continues to be involved in cases where limits are inadequate for a large loss.

He explained how JBS can minimize the sales and reputational damage of a recall of this size and what that will cost, especially given the fact that it has documented problems in the past.

“Repeat problems certainly lead to reputational issues. Customers will vote with their feet in response to brands affected by a recall,” said Oddy. “The result is that retailers, looking to sell certain volumes of branded product, may switch their loyalty to a different brand within the supply chain. But this may only be possible where the volumes of product they need are readily available elsewhere. There are a lot of supply and demand economics in play within the supply chain, and the players affected in this case are so large – this one has JBS and Walmart involved, both industry powerhouses.”

JBS will need to proactively respond, said Oddy, creating the right message to its customers where it acknowledges the situation, identifies all the affected product and shows it has worked with regulators and retailers to remove the product from harm’s way. This is all done at their cost, he added.

McNerlin said the event has already given rise to at least one lawsuit and offered his take on potential losses related to the recall.

“In addition to products liability exposure, there is a wide range of potential losses,” said McNerlin. One obvious category of loss is the product itself. There have been major salmonella losses in the past – as recently as April 2018, one incident involved around 200 million eggs. In addition to loss of product, and the expenses that accompany its recall, such as transport, storage and disposal, there is great potential for loss of business, and third-party claims by downstream supply chain parties for their loss of business as well.”

Retailers, too, will share the burden of proving to customers they’ve appropriately handled the recall of the affected brands.

“Their response may include in-store messaging or in-store promotions, the costs of which they will likely anticipate passing back to the supplier. The respective leverage of the supply chain relationship and the terms of the supply agreements will play a large part in who has to pay for the brand rehabilitation, which is sometimes included with the insurance program or can be purchased as a separate endorsement and can be extremely useful,” said Oddy.

Oddy noted that JBS’ share prices reflected an initial drop after the recall was announced but appears to have rebounded rather quickly.

“Interestingly, as a side note, a look at JBS’s share price, which might reflect the market’s view of the impact of this event, shows a drop immediately after the event was announced on October 4, but is now back to $4.78 by October 8, which is actually above the pre-loss level,” said Oddy. “Granted, there are many things affecting the share price of a global company such as JBS, but this is an interesting situation, given there has been a lot of discussion recently in the insurance market about whether share price is a good indicator of loss of reputation.”

Since the beef recall, a Louisiana company that sells ready-to-eat chicken and pork has recalled 15 tons of packaged products in two states that wasn’t federally inspected and another food maker has recalled ready-to-eat salads from convenience stores in Texas due to salmonella and listeria concerns.

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