Cyber Risk in Food and Agriculture
John Farley, CIPP/U.S.
Managing Director, Cyber Liability Practice
212.763.3424
https://www.linkedin.com/in/farleyjohn/
The expansion of technology has forced the majority of industries to embrace and evolve with technology, and the food and agriculture sector is no exception. As the internet of things (IOT) weaves its way into the farming process and the machinery that is critical to its success, it’s imperative that stakeholders throughout the supply chain are aware of increasing cyber risk. In fact, it may even be growing faster than the very crops that sustain them.
According to a recent U.S. Department of Homeland Security report, Threats to Precision Agriculture, emerging technologies known as precision agriculture have become a source of concern. Precision agriculture is a collection of IOT devices that make up an ecosystem of global positioning systems, remote sensors and vast communication networks that are now considered critical to the success of the food and agriculture sector. However, these new technologies rely on a secure internet to perform properly, and any disruption to even one device could cause a domino effect, leading to a significant negative impact to the bottom line. In today’s world of hacking, system glitches and insider threats, it’s no surprise that this industry is starting to understand the need to take cyber risk management and cyber risk transfer to an enhanced safety level.
Farmers, producers of livestock and the suppliers that rely on them are all subject to significant business disruption costs if their critical systems go down. In fact, cyber risk could pose an even greater threat than this industry’s traditional threats, such as natural disasters, ever have in the past. It’s time to follow cybersecurity best practices to prevent network security issues, and to take proactive steps to mitigate damage and transfer risk if cyber risk comes to bear.
Contact John or your Gallagher advisor for more information. You can also register for Gallagher’s Cyber Risk Webinar Series below.
Join us for our Cyber Risk Webinar Series as we dive into topics from regulatory risk to cyberattacks, and as we explore strategies to protect your business so you are better prepared to defend against them. Register here: https://www.ajg.com/us/cyber-webinars/.
Boards of Directors, Beware: Liability for Mission-Critical Food Safety Concerns
Steve Kluting, Esq.
National Director— Product Recall
616.224.1301
https://www.linkedin.com/in/steve-kluting-5313426/
If you’re a member of a board of directors of a company where food safety is a mission-critical function, then your position just got personally riskier. In midsummer 2019, the highest state court in Delaware (the home of corporate law) changed the risk landscape for these sorts of board members. In Marchand v. Barnhill (June 2019), the plaintiff-shareholder sued the board members of a large ice cream manufacturer that was the source of a deadly listeria outbreak in 2015, for breach of their fiduciary duties by failing to oversee and monitor the company’s food safety efforts. The listeria outbreak killed three consumers and sickened many more, resulting in a total recall of all products, significant negative media attention, the closing of company facilities and large-scale layoffs and, ultimately, a cash crunch that led to an equity-diluting capital infusion by an outside investor.
The Delaware Supreme Court, which overturned the lower court’s decision, ultimately held that the plaintiff had met the very high burden required of these shareholder derivative lawsuits— in finding that the board itself had taken no action to assure a monitoring and reporting system for board oversight of food safety efforts. The court, which noted that food safety is essential for large companies, pointed to the following as illustrative:
- No board committee existed that addressed food safety issues
- No protocols existed that required management to update the board on food safety compliance practices or risks
- No schedule for the board to consider on a regular basis the impact of food safety risks
- No reporting from management (until the company had become mired in the recall) about red flags regarding food safety, including complaints from regulators
- No regular discussion of food safety issues at the board
The Marchand decision will represent a pivot point for boards of directors of food manufacturers and restaurant chain operators, for whom food safety is essential and mission-critical. We provide our clients with comprehensive advice on the risks associated with food safety and product recalls, including consulting and risk advisory programs that will best position you and your board to avoid these sorts of Marchand claims in the fi st place. If you have questions about or want to discuss in more detail the implications of the Marchand case, or if you are interested in a comprehensive evaluation of your food safety and product recall risk, please contact us.
Contact Steve or your Gallagher consultant for more information. You can also register for Gallagher’s Product Recall Webinar Series below.
Join us for our two-part Product Recall Webinar Series, designed to help businesses understand the changing risk landscape of product recall, assess current exposures and minimize your liability. Register here for part one of the series, Contamination Coverage: Are You Prepared for a Recall?
Trade Credit Insurance Facilitates Revenue Growth for Agricultural Commodities Exchange
Marc D. Wagman
Managing Director— Credit & Political Risk
973.921.8491
https://www.linkedin.com/in/marcwagmanaequustc/
Accounts receivable are typically the largest uninsured asset on a company’s balance sheet and, as one very significant component of a company’s working capital, receivables are its lifeblood. Consequently, large, unexpected credit losses can cramp an enterprise’s cash fl w and its ability to operate. Trade credit insurance is the most cost- effective means of mitigating the credit risk inherent in a business’s customer base. Beyond the risk transfer aspect of this type of cover, four other key benefits include the following.
Enabling More Aggressive Sales-and-Marketing Efforts
In situations where credit quality is uncertain or internal appetite is constrained, credit insurance often bridges the gap between a conservative corporate credit department and an aggressive sales- and-marketing department. When this scenario is applicable, increased revenues can be achieved, frequently resulting in a policy premium that is easily self-funded.
Enhancing Working Capital Availability Under an Asset-Based Line of Credit
Receivables previously categorized as ineligible borrowing collateral due to a) a large customer concentration, b) longer terms of sale or
c) customers’ foreign locations often become eligible when credit insured. In instances where your company needs the additional borrowing capability, this can become a self-funding value proposition as well.
Facilitating Earnings Smoothing
Transferring the credit risk of a particular customer or portfolio of customers to a strong investment-grade insurer ensures minimal impact to your business’s profitability and/or share price if a large default occurs.
More Efficient Allocation of Bad Debt Reserve With Much Greater Leverage
Perhaps your company’s auditors feel that the existing bad debt reserve is either too conservative (large) or too aggressive (small). With credit insurance in place, much of the uncertainty is dispelled regarding how much of a reserve should be allocated. Consider the comparison of a bad debt reserve vs. credit insurance in these terms:
- With a reserve allocation:
- $1 of bad debt reserve buys exactly $1 of insurance to the default event
- There is no tax benefi as bad debt reserves are not tax-deductible
- With trade credit insurance:
- $1 of credit insurance premium often buys more than 40 times that amount of protection in the event of a default
- Credit insurance premiums are tax-deductible
With these benefits in mind, Gallagher recently brokered a credit insurance policy for a farmer-oriented, fintech enterprise that is designed to improve grower profitability, environmental sustainability and consumer health through the use of natural microbiology and digital technologies. The business placed by Gallagher was underwritten specifically for this enterprise’s brand- new electronic exchange, which enables small and large farm cooperatives alike to sell their crops, regardless of whether they are standard commodity or from specially engineered seeds, to buyers anywhere in the country. Buyers could range from food processors large and small to agricultural commodity traders.
Without the credit insurance coverage, the exchange wouldn’t work because the sellers (i.e., the farmers and agriculture cooperatives) wouldn’t be willing to take the credit risks created by electronic transactions such as these. The policy has the potential to greatly transform how agriculture products are bought and sold on a B2B basis, not just in the U.S., but also in other markets around the world. This is just one example of a fintech solution effectively creating a new capital market for agriculture commodities to compete directly alongside any of the major well-known agriculture commodities exchanges.
Gallagher’s Credit & Political Risk team, led by Practice Leader Marc Wagman, was established in 2004 and has since expanded to a global team comprising some 60 people spread across the U.S., UK, Stockholm, Dubai, Perth, Sydney and Singapore. The team represents a widely diverse clientele ranging from financial institutions and commodity traders to manufacturers and wholesale corporate customers across the world. Coverages are structured to mitigate the risks of short-and medium-term credit defaults as well as political risks for cross-border transactions in emerging market countries.
Contact Marc or your local Gallagher advisor for more information.