February 2004 | Commentary | Risks and Rewards

Complying with the Bioterrorism Act: What If Something Goes Wrong?

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Q: The Food and Drug Administration issued new regulations requiring the receipt of prior notice when perishable goods are imported to the United States. What specific obligations are imposed on importers and logistics providers and what are the potential consequences? Will my insurance policy cover me if something goes wrong?

A: On June 12, 2002, the United States enacted the Bioterrorism Act to protect the safety and security of the nation's food supply against illegal tampering. Entities are required to give prior notice to the Food and Drug Administration (FDA) of the importation of food products intended for human and animal consumption.

On Oct. 10, 2003, the FDA issued a regulation setting out specific procedures to comply with the Act's reporting requirement. The regulation took effect Dec. 12, 2003, but contains a comment period that will be reopened March 1, 2004. It requires any person having knowledge of the intended importation of food products to provide the FDA with sufficient information to determine whether to inspect the food for possible tampering.

Depending on the transport mode, the shipper must provide notice within as little as two hours before the shipment's arrival by overland transport, to as much as eight hours before its arrival by water. Air and rail shipments have four-hour notice requirements.

All food products that are imported, transshipped, held for future export, or intended for use in a Foreign Trade Zone are subject to the reporting requirement.

The FDA has also issued regulations requiring any facility—domestic and foreign—that is engaged in manufacturing, processing, packing, or holding of food products to register with the FDA by Dec. 12, 2003. Foreign facilities must also designate an agent to act as a communications link between themselves and the FDA.

Any facility that fails to comply with the registration requirement is subject to civil and criminal penalties. Any shipment that does not comply with the reporting requirements is subject to detention.

As a shipper or importer, you must be vigilant in providing accurate and timely information to your logistics provider. In turn, your provider must ensure that it appropriately transmits the information as prescribed by the FDA, and that the facilities it uses are properly registered in line with FDA requirements.

As far as your insurance is concerned, if you import food items into the United States, consider these points:

It is difficult to foresee the FDA recognizing any claims for delay or damage resulting from a detainment of goods during transit. You should therefore contact your all-risk cargo carrier before your shipment departs. While your cargo insurer will not cover any financial loss you might incur, you should find out whether you will be covered for any loss or damage your cargo suffers during a detainment.

Ensure that your intermediary's errors and omissions (E&O) insurance will cover losses you may incur from its failure to comply with the regulations. It is arguable that a customs broker is already under a similar obligation to report this information to U.S. Customs. But its E&O insurer might view the new requirement as an additional obligation, resulting in a material change in risk. For this reason, customs house brokers should advise their errors and omissions underwriters when they are providing this additional service.

Agents for foreign facilities also have a special responsibility: They act as the primary liaison between the FDA and the foreign facility in an emergency. Intermediaries providing this service must ensure that they have appropriate professional liability insurance should they fail to respond properly in an emergency. The economic impact of a detainment could affect all cargo in that facility, not just the cargo that is detained.

Facilities handling goods subject to the regulations must have sufficient cover for professional and products liability, and completed operations.

Make sure your insurance agent sends certificates evidencing that all proper insurance coverage is in place.

Consider your own possible exposure to other shippers if your cargo is detained. Because a detainment can impact cargo belonging to other shippers, confirm with your general liability insurer that it will respond if a claim is asserted directly against you. It is unfortunate that regulations must be promulgated to address the possibility of a biological attack on the nation's food supply. But an open working relationship with your logistics provider, your regulators, and your insurers will help minimize any adverse impact these new regulations might have on your business.

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