Food Fraud and Safety

Food safety is a sizeable issue. Every year, 1 in 9 Americans – approximately 48 million people - get sick from eating contaminated food or beverages. Foodborne illnesses are a common, yet preventable, public health problem. From the initial harvesting to handling, manufacturing, distributing, storing, and preparing food, the risks of the quality or safety of food being compromised are high. Food fraud has been defined as the intentional substitution, addition, tampering or misrepresentation of food, ingredients, or packaging, and includes false statements made about a product in the pursuit of economic gain. Both food safety and food fraud fall under the umbrella of “food protection.” While insurance may be available, most commonly in the form of product recall insurance, not even that protection guarantees that a company can survive a food fraud or safety incident. This issue will continue to evolve as the food market becomes more globalized.

Background

Food safety describes the handling, preparation, and storage of food in ways that prevent foodborne illnesses, such as those caused by Listeria or Salmonella. Food can transmit disease to consumers and can serve as a growth medium for the microorganisms that cause food poisoning. Food safety emphasizes best practices related to labeling, hygiene, additives and pesticide residues; as well as policies and guidelines regarding biotechnology and ingredient quality control.

Food fraud (or ‘Economically Motivated Adulteration’) is the practice of an entity intentionally substituting or adding ingredients to a product for economic gain. Food fraud often occurs when ingredients are diluted or substituted for lower-quality, potentially-unsafe ingredients. For example, food producers may substitute expected or expensive ingredients with allergens such as nuts or eggs, leading to severe allergic reactions in susceptible individuals. The majority of food fraud cases are undetected because they do not result in serious illness, or because consumers do not notice a substantial quality reduction. Food fraud is a safety concern as well as a quality concern for the industry.

Injuries and Damages

Over the past ten years, the globalization of the food industry has made the injuries and damages caused by inattention to food safety unpredictable and enormous. Currently, the U.S. imports 15% of its food supply, with the remaining 85% primarily being produced through domestic supply. While globalization has positive economic gains, it also poses many risks in terms of food safety and fraud. Decisions made by manufacturers overseas can quickly affect brand reputation and revenue of retailers around the world, and can cause health concerns for consumers. Food fraud is estimated to cost the global food industry $10-15 billion a year, or about 1% of the global food industry, according to the U.S. Food and Drug Administration.

Food fraud and safety is also a regional issue. In 2013, beef in England, Ireland, France, Greece, and other E.U. countries was found to contain undeclared or improperly declared horse meat, in some cases making up as much as 80%-100% of the meat content. A smaller number of products also contained other undeclared meats, such as pork. While the presence of these meats was not a human health issue, the scandal revealed a breakdown in the traceability and transparency of the food supply chain, as well as the risk that toxic ingredients could have been included. It was reported that the suppliers were aware that their products contained horse meat, but saw an opportunity to reduce production costs. Several of the meat wholesalers were arrested. In the months following the exposure of the fraud, sales of frozen hamburgers fell by 43% and frozen ready-meals fell by 13%. Despite this incident, horse meat continues to be discovered in other meats that lack proper labeling.

Causes of action can include false or misleading statements (such as “all natural” or “no sugar added”) as well as deceptive sales products. Other injuries include overpaying for a product, as well as illness and death.

Legislation and Regulation

Food fraud is broadly regulated by various federal agencies, including the U.S. Food and Drug Administration (FDA), the U.S. Department of Agriculture (USDA), the Department of Justice, the National Oceanic and Atmosphere Administration, and the Alcohol and Tobacco Tax and Trade Bureau.

Corporations, farmer’s markets, and food distributors acting as intermediaries between manufacturers, importers, and consumers must comply with food safety standards and regulations. Producers that violate food safety provisions are subject to criminal penalties, civil penalties and product seizures. In 2019, state legislatures enacted 132 bills that covered food safety measures. Popular bills addressed the regulation of plant based meat and limiting state oversight of food safety regulation. Despite these federal and state regulations, not all cases of food fraud are detected due to a lack of resources and personnel.

FDA Food Safety Modernization Act (FSMA, 2011)

In 2011, President Obama signed the FDA Food Safety Modernization Act (FSMA) into law. At the time, FSMA was the largest food safety reform law in more than 70 years. The FSMA aims to ensure the U.S. food supply is safe by establishing mandates for preventative controls of food supply, new tools for inspection and compliance, response mechanisms for the FDA, standards for imports, and enhanced partnerships with domestic and foreign government agencies. Each year, the FDA posts updated guidance for industries regulated by the FSMA.

Liability and Insurance

While class-action lawsuits involving food are widely reported, recalls of food products are the most familiar food protection event to consumers because information has to be widely publicized to make the recall effective. In 2019, there were a total of 337 food recalls in the U.S.; a number of these were the result of undeclared allergens in food products, salmonella, and Escherichia coli (E. coli) found in romaine. Undeclared allergens pose a deadly threat for the 32 million Americans who suffer from some type of food allergy. The presence of E. coli, or Salmonella in food products can be deadly for young children, the elderly and people with weakened immune systems. Foodborne illness poses a $15 billion cost on the US annually.

Insurance is available for companies seeking to protect against food safety claims. Food processing and food manufacturing policies, as well as “property in transit” policies, can mitigate risk for food companies that are in business with global supply chains or large-scale distribution. Product liability and product recall policies reimburse insureds for some of the financial losses associated with a product lawsuit or product recall and can help with the costs of reconfiguring a company’s brand. Product contamination insurance policies can provide for accidental contamination and intentional contamination covering profit loss, recall costs and rebuilding expenses. However, recently some contamination claims have been denied under product contamination policies.

Litigation

Along with costly lawsuits for alleged injury from unsafe or fraudulently handled food, food product recalls are surprisingly common despite the considerable number and scope of safety and fraud regulations that apply across the food supply chain. A food recall occurs when there is reason to believe that a food may cause consumer illness. Food recalls may be initiated by the food manufacturer or by the distributor themselves, or it may be requested by government agencies such as the FDA or USDA. Food may be recalled for a variety of reasons, including the discovery of an organism in a product which may make consumers sick, the inclusion of a potential allergen in a product, or mislabeling.

Food-related companies also face the risk of class action litigation on a number of grounds, including some that were not foreseen by the companies. The huge size of a potential plaintiffs’ class makes the financial risk of a lawsuit severe and any resulting reputational damage especially costly. New legal theories are constantly being developed by food activists, federal and state agencies, and plaintiffs’ attorneys to hold companies liable in U.S. courts. For example, Hebrew National has been accused of falsely representing the Kosher state of its deli meats, supplement manufacturer Nature Made allegedly failed to identify certain animal products in its pills, and Chipotle was accused of not disclosing that its pinto beans contained pork.

Food fraud lawsuits can be brought against food companies whether or not the product in question presents a health threat to consumers. In 2016, two cheese companies and a corporate officer admitted in a federal court action to selling cheese labeled as “real parmesan and romano cheese,” but which contained cellulose and other fillers. The counts brought by the federal agencies against the companies included - but were not limited to - conspiracy with respect to adulterated cheese products and money laundering. Each company paid a significant fine.

Feeding our Future Scandal

In 2020, Naomi Ahmed of Minneapolis, Minnesota, pleaded guilty in connection with a food fraud scandal that shook the state. She and her husband operated a grocery store that falsely enrolled as a food distribution center in the Federal Child Nutrition Program, fabricating claims for approximately 1.4 million meals allegedly served to children. This program provided children meals nationwide by partnering with food groups and restaurants. Feeding Our Future, a Minnesota-based organization that sponsored the program, issued over $4.2 million in payments to the site. The funds obtained through this scheme were used for purchases involving foreign textile companies, resulting in significant losses to the Federal Child Nutrition Program. Eventually, the couple was convicted by a federal jury for wire fraud, federal programs bribery, and money laundering.

Climate-Smart Mislabeling

In September 2024, the Environmental Working Group (EWG) and Tyson Foods reached a settlement over alleged false claims by Tyson regarding the distribution of “climate-smart beef” and its commitment to reaching “net-zero by 2050.” In an effort to promote greater accountability and transparency to the American public, EWG sought to ensure that such marketing claims would not distract from growing concerns about the harmful environmental effects of industrial beef production by major producers.

Future Outlook

Food safety and fraud are emerging and ever-evolving risks for companies. Insurers are advised to monitor the risks posed by unsafe or fraudulently presented food and adjust their policies and pricing accordingly. Globalization increases the complexity of global supply chains, presents constant exposure in regard to food quality and safety, and increases the considerable risks inherent in domestic food production. Consumers are interested in increased visibility and reliability from food producers, and producers desire increased support from their insurers. Future federal and state policies are expected to focus on food fraud prevention strategies.