One of the most significant and talked about provisions of the Food Safety Modernization Act (FSMA) lies in section 206, “Mandatory recall authority,” which grants to the FDA for the first time the ability to mandate recalls. The FDA’s enhanced authority under FSMA, however, does not stop with recall authority. Under section 207, titled “Administrative detention of food,” the FDA may order the detention of “any article of food that is found during an inspection” if the FDA inspector “has reason to believe that such article is adulterated or mis-branded.”
The administrative detention provision resides in the Federal Food, Drug and Cosmetic Act (FFDCA). The FSMA amended the provision to loosen the standards pursuant to which FDA may order detention. Under the FFDCA, food subject to an FDA detention order must remain at its location until the FDA releases the product or the detention order expires. The order is valid for up to 30 days to allow FDA to take appropriate action, such as filing a complaint for a court order to seize the goods. For the relevant statutory language, click here.
Last fall, the FDA began to act under this new authority. On September 30, 2011, U.S. Marshals seized food products held at a Dominquez Foods processing facility in Zillah, Washington. The FDA issued a detention order on September 2 after observing rodent and insect infestation during an inspection. The United States filed a complaint in U.S. District Court on September 29, and the court issued a warrant of arrest on the same day, empowering the Marshals to seize and condemn the products. The second seizure took place on October 17, 2011, as Marshals seized peanuts, flour and rice from an Illinois warehouse owned by food distributor Chetak Chicago. Again, the FDA found extensive evidence of unsanitary conditions due to rodent infestation. More recently, in January 2012, Mill Stream Corp., a food processing company in Maine, destroyed its cold smoked salmon product in response to a detention order issued by the FDA in December prompted by the discovery of listeria monocytogenes during an inspection.
THE GOVERNMENTAL ACTION EXCLUSION
A court-ordered seizure of food products is certainly the exception to the rule, as many food processors and distributors, so we hope, prioritize health and safety and cooperate with the FDA to remedy unsafe conditions. Nevertheless, bad actors are out there, and insurers cannot ignore the fact that an insured may face a government seizure and subsequently present a claim under a property policy for the value of the seized goods.
However, property policies traditionally include a “governmental action” exclusion which excludes from coverage loss or damage caused directly or indirectly by seizure or destruction of property by order of governmental authority. Some courts take a literal approach to the exclusion and require that the governmental body specifically order the seizure or destruction of property, so an insured’s voluntary recall or destruction of product in response to an FDA warning or recommendation may not trigger the exclusion. However, for those companies that fail to take corrective action and results in government seizure, the exclusion would apply to bar coverage. The FDA’s vigilance in weeding out the truly bad actors will take time and additional resources, but this remains an issue that insurers should pay close attention to as the industry changes sparked by FMSA continue to take hold.