Phibro Animal Health Corporation v. National Union , 446 N.J. Super. 419 ( 2016 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5589-13T3
PHIBRO ANIMAL HEALTH
CORPORATION,
APPROVED FOR PUBLICATION
Plaintiff-Appellant, July 14, 2016
v. APPELLATE DIVISION
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA,
Defendant-Respondent.
____________________________________
Argued February 29, 2016 – Decided July 14, 2016
Before Judges Sabatino, Accurso and
O'Connor.
On appeal from the Superior Court of New
Jersey, Law Division, Bergen County, Docket
No. L-0538-12.
Steven J. Pudell argued the cause for
appellant (Anderson Kill, P.C., attorneys;
Mr. Pudell and Janine M. Stanisz, on the
briefs).
Mark D. Sheridan argued the cause for
respondent (Squire Patton Boggs (US) LLP,
attorneys; Mr. Sheridan, Jason F. King and
Sean P. Neafsey, on the brief).
The opinion of the court was delivered by
SABATINO, P.J.A.D.
This case is about insurance coverage and undersized
broiler chickens. The insured, Phibro Animal Health Corporation
("Phibro"), appeals the trial court's decision granting summary
judgment to the insurer, defendant National Union Fire Insurance
Company ("National Union"). Phibro, an animal product
manufacturer, sought a declaratory ruling that National Union
was required to provide coverage for economic losses sustained
by three of Phibro's customers. The customers raised broiler
chickens for human consumption. The growth of the chickens was
stunted because they had ingested a Phibro drug intended to
control a common intestinal disease.
The trial court found there was no covered "occurrence" or
"property damage" under the insuring clauses of the National
Union policies. The court also found the policies' "impaired
property" exclusion barred coverage, but that the contractual
liability and professional liability exclusions did not apply.
In addition, the court ruled Phibro had waived its right to
indemnification for customer claims that Phibro had settled
without National Union's consent.
For the reasons that follow, we reverse the grant of
summary judgment to National Union. Applying the controlling
principles of coverage law to the terms of National Union's
policy and the factual record, we conclude the circumstances
here qualify as both a covered occurrence and property damage.
2 A-5589-13T3
We also rule the economic loss doctrine does not bar coverage of
these claims.
The question of potential exclusion, however, must be
remanded to the trial court for further consideration. We agree
with the court's ruling that the contractual liability and
professional liability exclusions do not apply. However, the
present factual record is inadequate from the written
submissions to determine whether the affected chickens could
have been "restored to use" so as to fall within the impaired
property exclusion. If, on remand, the trial court determines
on a fuller factual record that the impaired property exclusion
does not bar coverage, it must then evaluate whether Phibro's
settlements with its three customers, which National Union
declined to indemnify, were reasonable.
I.
Phibro, a maker of animal health products, purchased a
Commercial General Liability Insurance policy (the "CGL policy")
and an Umbrella Prime Insurance policy (the "Umbrella policy")
(together, "the policies") from National Union for the policy
period of April 1, 2010 through April 1, 2011. The standard
insuring clauses for bodily injury and property damage liability
under the CGL policy provided insurance coverage for "sums that
the insured becomes legally obligated to pay . . . because of
3 A-5589-13T3
. . . 'property damage' to which this insurance applies." The
CGL policy had a limit of liability of $2,000,000 per occurrence
and $4,000,000 in the aggregate. The Umbrella policy provided
coverage of $25,000,000 for liability in excess of the CGL
policy limits. The policies specified various exclusions to
which the insurance would not apply.
In the summer or fall of 2009,1 Phibro began selling a
product known as Aviax II ("Aviax") in the United States as an
additive for chicken feed. Aviax is designed to prevent
coccidiosis, a protozoal parasitic disease.
In the spring of 2010, three Phibro customers reported that
although Aviax had successfully prevented coccidiosis, it also
stunted the growth of their chickens. The stunted growth
resulted in lower meat production, increased feed costs, and
increased processing costs. The undersized chickens were
nevertheless sold for human consumption, although not at the
sizes normally anticipated.
From August 2010 through August 2011, Phibro funded four
studies at the University of Georgia and a commercial
performance study in Mexico to determine if Aviax had
contributed to the adverse effects reported by its customers.
1
The record is inconsistent as to the actual time when Aviax was
introduced into the market.
4 A-5589-13T3
Based on those studies, Phibro concluded that Aviax had, in
fact, "caused a significant decrease in feed consumption and
poor conversion of the feed the birds consumed to meat,"
resulting in stunted growth. According to Phibro's counsel,
Phibro has not marketed Aviax in the United States since these
events, and does not intend to resume doing so until the issues
that led to the damage are resolved.
In August 2010, Phibro filed a notice of claim with
National Union's affiliate, Chartis Insurance Company,2 regarding
Phibro's potential liability for customer claims related to
Aviax and National Union's potential obligation to indemnify
Phibro. None of those claims were by any individual consumers
who had purchased chickens.
Phibro notified National Union in September 2010 that the
alleged damages relating to Aviax exceeded the $2,000,000 limit
of the CGL policy. Phibro requested authority to settle with
one of the three customers, identified anonymously in this
record as Customer A.3 National Union responded that it would
2
Although the investigation and processing of Phibro's claim was
conducted by Chartis on behalf of National Union, for simplicity
we refer at all times to National Union rather than to Chartis
as its affiliate.
3
Phibro's customers have been fictitiously designated as "A,"
"B," and "C" by the parties to protect their identities. The
(continued)
5 A-5589-13T3
not consent to the settlement. Nevertheless, Phibro proceeded
with the settlement, and issued a check to Customer A for its
claimed losses.
In October 2010, National Union responded to the notice of
claim, informing Phibro that it had "undertaken an investigation
to determine whether there may be coverage under [the
policies.]" The investigation was "subject to a full
reservation of [National Union's] rights . . . including . . .
the right to assert that [it] has no duty to defend or indemnify
Phibro."
National Union hired Morgan Johnson Carpenter & Company
("MJC"), a forensic accounting firm, to review the damages
claimed by the three customers. MJC issued reports in June 2011
for Customers A and B, and in July 2011 for Customer C. MJC
determined that, due to increased feed costs and smaller
chickens, Customer A sustained losses of a certain amount,
Customer B sustained losses of a higher amount, and Customer C
sustained losses of an even higher amount.
In December 2011, National Union orally informed Phibro at
a meeting that it would deny coverage for the claims and losses.
The record does not contain formal documentation from National
(continued)
record is sealed in that respect pursuant to a confidentiality
order.
6 A-5589-13T3
Union denying such coverage, although the denial is undisputed.
Thereafter, in January 2012, Phibro filed a product defect
report4 with the United States Food and Drug Administration
("FDA"). Among other things, the FDA submission reported that
"[p]erformance changes (compared to historical [levels]) were
the only adverse effects that were noted" after Aviax was
included in the customers' chicken feed. The submission also
stated that "there were no coccidiosis problems and no increases
in flock mortality."
Having been rebuffed by National Union, Phibro filed a
complaint in the Law Division in January 2012, seeking a
declaratory judgment that National Union is obligated under the
policies to provide coverage for the property damage sustained
by Customers A, B, and C. Phibro further alleged that National
Union had breached the insurance contract and the implied
covenant of good faith and fair dealing. The complaint sought
compensatory and punitive damages.
Meanwhile, in July 2012, Customer B filed a complaint
against Phibro in the court of another state, alleging that
Aviax had stunted the growth of its chickens, causing damages.
Customer B pled causes of action for negligence, breach of
4
The full title of the report is "Veterinary Adverse Drug
Reaction, Lack of Effectiveness, Product Defect Report."
7 A-5589-13T3
express and implied warranties, and strict liability. National
Union notified Phibro that it would defend the insured in that
lawsuit, but reserved its right to deny coverage under the
policies. National Union's motion to stay the New Jersey
proceedings pending the outcome of Customer B's lawsuit was
denied.
Subsequently, National Union moved for summary judgment
seeking a declaration that it has no obligation to cover Phibro
for these claims. Phibro cross-moved for summary judgment,
urging an opposite declaration finding coverage.
On June 24, 2014, the trial court issued a written decision
granting National Union's motion, and denying Phibro's cross-
motion. The court concluded that the alleged losses sustained
by Phibro's customers did not constitute "property damage"
caused by an "occurrence," as those terms are defined in the
insuring clauses of the policies. The trial court reasoned that
because the chickens "were not physically injured and were
subsequently sold for human consumption," there was no "property
damage" sustained.
Further, the trial court found that Phibro's customers
sustained purely economic losses and are thus limited to
contractual remedies under what is described in case law as the
"economic loss" doctrine. Finding the damages "were entirely
8 A-5589-13T3
foreseeable," the court concluded that tort remedies are
unavailable to Phibro's customers. Citing our Supreme Court's
opinion in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 240-41
(1979), the court ruled that "[u]nder New Jersey law, breaches
of contract, without the potential for tort liability, do not
qualify as an 'occurrence' under general liability policies."
The trial court also ruled that even if there were
potential coverage under the insuring clauses, the policies'
"impaired property" exclusion also bars Phibro's claim. The
court did, however, find the separate "contractual liability"
and "professional liability" exclusions invoked by National
Union do not apply.
Lastly, the trial court held Phibro waived its right to any
indemnification by National Union for any claims related to
Customer A by settling with that customer without National
Union's consent.
Phibro appealed. In the meantime, Phibro settled with
Customer B in July 2014, resulting in the dismissal of Customer
B's lawsuit. Phibro has also since settled with Customer C.
The amounts and details of these settlements are not disclosed
in the record, and they do not bear upon our analysis.
9 A-5589-13T3
II.
We review the issues raised on appeal by Phibro employing a
de novo standard of review. We apply that standard for two
reasons. First, the challenged rulings were made in an order
granting summary judgment, determining that National Union is
entitled to dismissal of Phibro's complaint as a matter of law.
W.J.A. v. D.A., 210 N.J. 229, 237-38 (2012) (instructing that
appellate courts review orders granting summary judgment on a de
novo basis). Second, "[b]ecause the interpretation of an
insurance contract is a question of law . . . the trial judge's
coverage determination [is reviewed] de novo." Ohio Cas. Ins.
Co. v. Island Pool & Spa, Inc., 418 N.J. Super. 162, 168 (App.
Div.), certif. denied, 206 N.J. 329 (2011).
Certain overarching tenets of coverage law guide our
analysis. "[W]ell-settled principles governing the
interpretation of contracts of insurance . . . mandate broad
reading of coverage provisions, narrow reading of exclusionary
provisions, resolution of ambiguities in the insured's favor,
and construction consistent with the insured's reasonable
expectations." Sealed Air Corp. v. Royal Indem. Co., 404 N.J.
Super. 363, 375 (App. Div.), certif. denied, 196 N.J. 601 (2008)
(quoting Search EDP, Inc. v. Am. Home Assurance Co., 267 N.J.
Super. 537, 542 (App. Div. 1993), certif. denied, 135 N.J. 466
10 A-5589-13T3
(1994)). In addition, an insurance policy "must be considered
as a whole and effect given to every part thereof." Herbert L.
Farkas Co. v. N.Y. Fire Ins. Co., 5 N.J. 604, 610 (1950).
"Generally, [the policy] should be interpreted according to its
plain and ordinary meaning." Voorhees v. Preferred Mut. Ins.
Co., 128 N.J. 165, 175 (1992).
A.
We begin with an examination of what are commonly known as
the "insuring provisions" of National Union's policies. In
particular, we consider whether the losses associated with the
growth-stunting effects of Phibro's product constitute
"occurrences" and "property damage" within the meaning of the
insuring provisions. Unlike the trial court, we conclude they
do. On a related point, we part company with the trial court's
finding that the liability claims against Phibro by its
customers are, by their inherent nature, outside of the
policies' scope of coverage under the so-called "economic loss"
doctrine.
1.
The policies afford coverage for "sums that the insured
becomes legally obligated to pay" for "'property damage' . . .
caused by an 'occurrence.'" "Occurrence" is defined by the CGL
policy as "an accident, including continuous or repeated
11 A-5589-13T3
exposure to substantially the same general harmful conditions."
The term "accident," as it is used within the concept of an
occurrence, is not defined in the policies. Hence, we turn to
case law for guidance on that latter term.
Our Supreme Court has recognized that "the accidental
nature of an occurrence is determined by analyzing whether the
alleged wrongdoer intended or expected to cause an injury."
Cumberland Mut. Fire Ins. Co. v. Murphy, 183 N.J. 344, 349
(2005) (citing Voorhees, supra, 128 N.J. at 183). A covered
"accident," under this conceptual approach, "includes the
unintended consequences of an intentional act, but not an injury
that is, itself, intended." Ibid. (citing Voorhees, supra, 128
N.J. at 182).
A pivotal question under the insuring clauses here is thus
whether the stunted growth of the chickens allegedly caused by
their consumption of Aviax was an "accident." National Union
contends the undersized chicken problem was not accidental,
because that adverse side effect could have been a foreseeable
consequence of the chickens ingesting Aviax. We reject that
argument for several reasons.
The Supreme Court has not declared that foreseeability, at
least in the broadest sense of that term, is an all-purpose
litmus test for treating harms as non-accidental for purposes of
12 A-5589-13T3
coverage analysis. For instance, a prudent individual who
purchases insurance in case some form of accident might occur in
the future does not lose that protection just because he or she
can "foresee" in the abstract a possible need for coverage. If
foreseeability were construed that broadly to disallow coverage,
then no sensible person would ever pay a premium.
We recognize that our case law in coverage disputes at
times has looked to whether an unintended consequence was
"expected" by an insured. See, e.g., Voorhees, supra, 128 N.J.
at 183; Broadwell Realty v. Fid. & Cas. Co., 218 N.J. Super.
516, 534 (App. Div. 1987). Even so, the factual record does not
demonstrate that Phibro expected, foresaw, or anticipated the
growth of its customers' chickens would be stunted if they
ingested Aviax.
To the contrary, the record suggests Phibro was caught off
guard by this adverse side effect. A manufacturer naturally
would not have wanted to market this feed additive if it knew in
advance its customers' chickens would experience such an
undesirable reaction. In this regard it is instructive that
Phibro has stopped selling Aviax in the United States despite
its effectiveness for its intended purpose.
13 A-5589-13T3
In sum, the law and the record amply support Phibro's
argument that the stunted growth of the Aviax-ingesting chickens
was a non-accidental "occurrence" under the policies.
2.
We reject National Union's contention there was no covered
"occurrence" here because the harm to the affected chickens
resulted in only economic losses. National Union, as did the
trial court, largely relies upon the Supreme Court's opinion in
Weedo, supra, 81 N.J. at 240-41, involving the construction of a
form CGL policy issued in 1973 by the Insurance Services
Organization ("ISO").5 For several reasons, National Union's
reliance on Weedo is misplaced.
In Weedo, a masonry contractor was sued for breach of
contract and faulty workmanship. Id. at 235. The damages
claimed were "the cost of correcting the work itself." Ibid.
The contractor sought defense and indemnification from its
insurer under a CGL policy that required the insurer to pay "on
behalf of the insured all sums which the insured shall become
legally obligated to pay as damages because of . . . property
damage to which this insurance applies, caused by an
5
"The [ISO] is an association of domestic property and casualty
insurers. One of the ISO's services is to develop standard
policy forms for member insurers." E.I. Du Pont de Nemours &
Co. v. Admiral Ins. Co., 711 A.2d 45, 52 n.7 (Del. Super. Ct.
1995).
14 A-5589-13T3
occurrence." Id. at 237 (emphasis omitted). The 1973 ISO
policy considered by the Court in Weedo also contained
exclusionary clauses, referred to by the Court as "business
risk" provisions, which barred coverage for "property damage to
the named insured's products arising out of such products or any
part of such products" (the so-called "insured's product"
exclusion) and "property damage to work performed by or on
behalf of the named insured arising out of the work or any
portion thereof, or out of materials, parts or equipment
furnished in connection therewith" (the so-called "work
performed" exclusion). Id. at 241.
The Court in Weedo observed that harms to a dissatisfied
customer stemming from the insured's faulty goods or work are
potentially compensable under contract law, and thus comprise a
"business expense, to be borne by the insured-contractor in
order to satisfy customers." Id. at 239. It recognized that
the "business risk" exclusions were "intended to convey this
concept," id. at 241, and that the exclusions were "a valid
limitation upon standard, readily-available liability insurance
coverage." Id. at 245.
Weedo does not control the interpretation and application
of the insuring clauses in National Union's policies here.
Importantly, the Supreme Court did not adjudicate in Weedo
15 A-5589-13T3
whether there was an "occurrence" under the policy, because the
insurer had "conceded . . . that[,] but for the exclusions in
the policy, coverage would obtain." Id. at 237-38 n.2.
Contrary to National Union's assertions, Weedo did not hold
that "the consequences of not performing well were not covered
and were to be borne by the insured," under the general insuring
clauses of the 1973 ISO Form CGL policy. Rather, Weedo more
narrowly held that the "business risk" exclusions – designed to
allocate risk to the insured for certain damages caused by its
poor performance – were not ambiguous even when read together
with another exclusion in the policy that could be interpreted
to expand coverage to those same occurrences that had been
excluded. Id. at 245-48.
The Court observed that the "business risk" exclusions
themselves were clear and that exclusionary provisions are
generally "meant to be read . . . independently of every other
exclusion." Id. at 248. The Court then reasoned that the
language at issue could not be combined with language from
another exclusion to create an "artificial ambiguity" that would
lead to an exclusionary provision granting additional coverage
beyond what a reasonable insured could have expected, rather
than subtracting from it. Id. at 245-48. Hence, the "business
risk" exclusions barred coverage for repairing the insured's
16 A-5589-13T3
faulty work. Ibid.
Significantly here, the 1973 ISO version of the CGL policy
involved in Weedo differs from the 2007 ISO Form used for the
CGL policy National Union issued to Phibro and the 2009 ISO Form
used for the Umbrella policy. The 1973 ISO Form defined the
term "occurrence," in relevant part, as "an accident . . . which
results in . . . property damage neither expected nor intended
from the standpoint of the insured."
By contrast, the 2007 and 2009 ISO Forms that are at issue
here instead define an occurrence, in part, as "an accident,
including continuous or repeated exposure to substantially the
same general harmful conditions."6 Hence, Weedo's construction
of the 1973 ISO Form does not control this case, which involves
newer ISO forms containing different definitional language.
After Weedo, in Aetna Casualty & Surety Co. v. Ply Gem
Industries, Inc., 343 N.J. Super. 430, 444-50 (App. Div.),
certif. denied, 170 N.J. 390 (2001) ("Ply Gem"), we addressed
whether claims for economic losses could qualify as an
6
Although neither use the "expected or intended" language within
any of its definitions, both the 2007 and 2009 ISO Forms do
contain separate exclusions for bodily injury and property
damage "expected or intended from the standpoint of the
insured." This does not alter our conclusion that the Court's
interpretation of the 1973 ISO Form in Weedo does not apply to
the general insuring clauses of the 2007 and 2009 forms at issue
here. Moreover, as we discussed supra, we do not find that
Phibro expected or intended the adverse side effects of Aviax.
17 A-5589-13T3
"occurrence" covered by a CGL policy. The insurer in Ply Gem
contended there was no coverage under a CGL policy for claims
against an insured manufacturer of defective fire retardant
plywood ("FRTP"). Id. at 433. The insurer argued that, because
the trial court had dismissed "strict liability and negligence
claims against [the insured] on the grounds that these were
economic losses recoverable under [the Uniform Commercial Code]
and breach of contract theories," those claims therefore were
not covered "occurrences" under the policy. Id. at 444.
The trial court and this court rejected the insurer's
arguments in Ply Gem. We observed that, in an insurance context
as opposed to the context of a harmed plaintiff's own lawsuit,
"the issue was not whether the FRTP plaintiffs could recover in
tort, or whether they were relegated to [contract] remedies
available under the UCC." Id. at 445. We noted in Ply Gem the
pivotal question was whether, "regardless of the nature of the
cause of action against [the insured], the damages [the FRTP]
plaintiffs suffered and for which [the insured] was deemed
liable fell within the coverage offered by [the insurer's]
policies." Ibid. (emphasis added). We further noted in Ply Gem
the Supreme Court in Weedo "made it clear that the theory upon
which the plaintiff proceeded [against the insured] was
irrelevant to a determination of whether there was a covered
18 A-5589-13T3
'occurrence' under the CGL." Id. at 447.
We held in Ply Gem that the insurer had a duty to defend
the claims against the insured for damages to property other
than the FRTP itself. Id. at 450. Likewise here, as we discuss
in more depth, infra, the damage caused by Aviax was not to
Phibro's product itself. Instead the damage was to the
customers' chickens that ingested the food additive.
This more limited interpretation of Weedo is consistent
with our recent opinion in Cypress Point Condominium Assoc.,
Inc. v. Adria Toners, LLC, 441 N.J. Super. 369 (App. Div.),
certif. granted, 223 N.J. 355 (2015).7 In Cypress Point, the
issue was whether a developer's CGL policy covered claims
brought by a condominium association for consequential damages
resulting from the defective work of subcontractors. The
subcontractors failed to properly install the roof, flashing,
gutters, brick façade, windows, doors, and sealants. Id. at
373. The plaintiff condominium association did not argue the
replacement costs of these particular items were covered by the
policy. Id. at 374. Instead, the association sought recovery
for damages the faulty workmanship caused to sheetrock,
insulation, floors, wall finishes, and other such portions of
7
The Supreme Court recently heard oral argument in Cypress
Point. No opinion has been issued as of this date.
19 A-5589-13T3
the individual units as well as in the common areas. Ibid. The
question before us was whether these consequential damages
constituted "property damage" and an "occurrence" under the
policy.
We concluded in Cypress Point that the consequential
damages were "property damage" because they "clearly constitute
'physical injury to tangible property.'" Id. at 377. Further,
the damages resulted from an "occurrence" because the
subcontractors did not expect or intend for their faulty
workmanship to cause property damage and because the damages
"amount[ed] to an unexpected and unintended 'continuous or
repeated exposure to substantially the same general harmful
conditions.'" Ibid.
We distinguished Weedo in Cypress Point, noting the Supreme
Court did not consider in Weedo whether faulty work performed by
the insured defendant contractor was "property damage" or an
"occurrence," because the insurer had conceded that "but for the
exclusions in the policy, coverage would obtain." Cypress
Point, supra, 441 N.J. Super. at 377-78. Further, the damages
at issue in Weedo were the cost of replacing the defective work
itself, not the cost of repairing or replacing other property
damaged by the defective work, that is consequential damages.
20 A-5589-13T3
Id. at 378.8
The Cypress Point panel concluded that the damages to the
common areas and individual units fell within the definitions of
property damage and occurrence. Id. at 377. The point we made
in Cypress Point, which we reiterate here, is that the business
risk doctrine relates only to the exclusions to coverage
contained in a CGL policy and should not be read into the
general insuring clauses of those policies. Thus, we conclude
that the damage to the chickens is an occurrence covered by the
policies.
3.
The next disputed question under the insuring clauses is
whether the diminished size and weight of the chickens
represents a form of covered "property damage." The policies
define property damage as "[p]hysical injury to tangible
property, including all resulting loss of use of that property"
or, alternatively, "[l]oss of use of tangible property that is
not physically injured."
8
In Cypress Point, we also distinguished another case on which
National Union relies, Firemen's Insurance Co. of Newark v.
National Union Fire Insurance Co., 387 N.J. Super. 434 (App.
Div. 2006). We held in Firemen's there was no covered "property
damage" because the damages claimed in that case were to replace
defective work, i.e., sub-standard firewalls, and did not
involve consequential damages. Cypress Point, supra, 441 N.J.
Super. at 378.
21 A-5589-13T3
Phibro argues that Aviax caused "physical injury" to its
customers' property by stunting the growth of the chickens and
causing them to produce less meat. Phibro contends the fact
that the undersized chickens could still be sold does not mean
that no physical injury to them was sustained. Although the
chickens would grow after Aviax was removed from their feed,
Phibro maintains that the damages from stunted growth were
"locked-in" because of production constraints and deadlines.
Stunted growth caused a loss of meat production and lost
profits, which Phibro maintains also constitute a "loss of use
of tangible property." Phibro also contends that it reasonably
expected that third-party property damage of its customers would
be covered by the policies.
National Union argues in opposition that stunted growth is
not a "physical injury." It points out that once Aviax was
removed from the chickens' diets, their appetites returned, and
they grew and gained weight. National Union also stresses that
the affected chickens were sold for human consumption.
Although National Union agrees that "[i]t is beyond dispute
that the chickens grew at a slower rate while consuming chicken
feed that included . . . Aviax," National Union contends that
"'stunted growth' and 'weight suppression' without permanent
injury to the chickens does not constitute 'physical injury'
22 A-5589-13T3
where there is no evidence of a physiological change." Relying
on an unpublished Minnesota case, National Union argues that
there can be no physical injury without physiological damage and
necropsies performed by Phibro on the affected chickens failed
to show any physiological harm. National Union further argues
that there was "no complete loss of use of the chickens," and
"'lower meat production' is not a 'loss of use.'"
We agree with Phibro that the situation here qualifies as
property damage within the meaning of the policies' insuring
clauses. Several reasons support that conclusion.
With respect to the "physical injury" prong of the property
damage definition, in a decision interpreting the analogous
phrase "direct physical loss" under a Warehouseman's Liability
policy, we adopted a broad notion of the term "physical." We
noted that "[s]ince 'physical' can mean more than material
alteration or damage, it was incumbent on the insurer to clearly
and specifically rule out coverage in the circumstances where it
was not to be provided." Customized Distrib. Servs. v. Zurich
Ins. Co., 373 N.J. Super. 480, 491 (2004), certif. denied, 183
N.J. 214 (2005). We recognized that "any ambiguity on the point
should be resolved in favor of coverage." Ibid.
Several courts in other jurisdictions have found the
appropriate meaning of the phrase "physical injury" in this
23 A-5589-13T3
context is "an alteration in appearance, shape, color or in
other material dimension." Nat'l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Terra Indus., Inc., 216 F. Supp. 2d 899, 917
(N.D. Iowa 2002) (emphasis added), aff’d, 346 F.3d 1160 (8th
Cir. 2003), cert. denied, 541 U.S. 939, 124 S. Ct. 1697, 158 L.
Ed. 2d 360 (2004); see also Fid. & Deposit Co. of Md. v.
Hartford Cas. Ins. Co., 215 F. Supp. 2d 1171, 1183 (D. Kan.
2002); F&H Constr. v. ITT Hartford Ins. Co. of Midwest, 12 Cal.
Rptr. 3d 896, 905 (Ct. App. 2004); Capstone Bldg. Corp. v. Am.
Motorists Co., 67 A.3d 961, 982 (Conn. 2013); Traveler's Ins.
Co. v. Eljer Mfg., Inc., 757 N.E.2d 481, 496 (Ill. 2001); Summit
Custom Homes, Inc. v. Great Am. Lloyds Ins. Co., 202 S.W.3d 823,
828 (Tex. Ct. App. 2006). Although the notion of an
"alteration" is not synonymous with "injury," the courts in
these cases were plainly referring to detrimental alterations.
Physical injury has also been defined as "damage or harm to the
physical condition of a thing." Farm Bureau Mut. Ins. Co. of
Am. v. Earthsoils, Inc., 812 N.W.2d 873, 876 (Minn. Ct. App.),
review denied, No. A11-0693 (Minn. 2012) ("Earthsoils").
Guided by these various authorities that shed light on the
plain meaning of the policy term "physical injury," we conclude
the chickens' stunted growth here qualifies as such.
Undoubtedly, the undisputed smaller sizes of the broiler
24 A-5589-13T3
chickens could be considered an alteration of "other material
dimension," even if stunted growth is not within the meaning of
the terms "appearance" or "shape." Simply stated, stunted
growth represents harm to the physical condition of the
chickens.
There is no support in the language of the policies for
National Union's assertion that there must be physiological
damage to meet the physical injury requirement.9 Moreover, it is
not self-evident that stunted growth is not a form of
physiological damage. The term "physiological" has been defined
to be "characteristic of or appropriate to an organism's healthy
or normal functioning." Merriam-Webster's Collegiate Dictionary
935 (11th ed. 2014). Stunted growth surely is not normal
functioning.
The fact that the chickens here were sold for human
consumption is not dispositive of whether there was property
damage. The term "physical injury" under the policies does not
require that the property that is damaged be unsalable. Neither
the trial court nor National Union have cited any authority that
supports the argument that the chickens could not be physically
9
National Union has cited one unpublished case holding
physiological damage is required to meet the "physical injury
requirement." Pursuant to Rule 1:36-3, we decline to discuss
the unpublished case, which does not persuade us in any event.
25 A-5589-13T3
injured if they were sold for human consumption, irrespective of
their size and weight.
We are cognizant that the chickens might have recovered
their lost weight if given sufficient time after removing Aviax
from their diet. But that possibility does not establish that
there was no property damage. The point is refuted by an
affidavit10 from Dr. Hector Cervantes, Senior Manager for Poultry
Technical Services at Phibro. Dr. Cervantes explained that:
The lifecycle for the Customers'
Broiler Chickens is generally forty-two (42)
days from the day of chick placement at the
farm to slaughter. . . .
Uniformity of size is critically
important to the Customers, in part because
it represents the quality of their bird
product and because automated processing
plant equipment cannot be properly adjusted
when variations in size exceed the "normal"
range.
In addition, Dr. Cervantes addressed the commercial significance
of such delayed growth:
Allowing the birds to grow longer than
their normal slaughter date would not have
solved the problem because as they grow
older, their mortality rate rises and the
lack of uniformity in size would have
persisted. Moreover, modern poultry
10
Although the affidavit is presented within a confidential
appendix, we are free to discuss it because counsel at oral
argument on appeal advised that they are only interested in
preserving the confidentiality of the Customers' identities and
the amounts of their respective claims and settlements.
26 A-5589-13T3
operations such as those conducted by the
Customers are highly mechanized, and highly
scheduled, operations that depend on uniform
and consistent processing of birds from
hatching to the pre-determined slaughter
age, with distinct groups of birds moving
through the system one right after the other
using the available facilities and feed and
other resources dedicated to each stage of
growth. In addition to the increased time
and cost of taking longer to feed the birds
until they reach the targeted slaughter
weight, there would not have been space
available to house those birds as the
younger birds work their way through the
system. Thus, once the scheduled slaughter
date arrived for the Customers' chickens
affected by Aviax, the Customers' losses
were locked-in.
Because the facts are to be viewed on summary judgment in
the light most favorable to Phibro, see Rule 4:46-2, we must
accept for purposes of National Union's dispositive motion that
it was commercially infeasible to delay the slaughter of the
chickens that consumed Aviax. Thus, even though the chickens
might have recovered given enough time, accepting as true the
facts as alleged by Phibro, the damage occurred at the pre-
determined slaughter date if it were economically infeasible to
delay slaughter.11
11
We discuss, infra, at Point III(A)(3) whether coverage for the
property damage is nullified under the "impaired property"
exclusion if National Union persuades a fact-finder that the
chickens feasibly could be "restored to use."
27 A-5589-13T3
In sum, the stunted growth of the chickens qualified as a
"physical injury," subject to the caveat of potential
restoration we discuss later in this opinion.
4.
Although we have found "physical injury" exists here, for
sake of completeness, we address the second alternate prong of
the "property damage" definition, that is, whether there was a
"[l]oss of use of tangible property that is not physically
injured." Citing Heldor Industries, Inc. v. Atlantic Mutual
Insurance Co., 229 N.J. Super. 290, 397-98 (App. Div. 1988),
National Union argues that "a claim for property value loss and
lost business profits only qualifies as 'property damage' if
there is underlying physical property damage to a third party."
However, in Heldor, we were not addressing the "loss of use"
provision in the definition of property damage, but instead were
considering whether alleged diminished property values resulting
from faulty pool construction constituted property damage to a
third party that would not be subject to the "business risk"
exclusions. Ibid.
National Union also relies on Great American Insurance Co.
v. Lerman Motors, Inc., 200 N.J. Super. 319 (App. Div. 1984),
but that decision does not control the present case. In Great
American, we considered whether, once "property damage" was
28 A-5589-13T3
established by physical injury to tangible property, the insurer
was obligated to cover consequential damages such as lost
profits in addition to claims for damages to tangible property.
Id. at 323-24. Although we found "[t]he obligation to pay all
damages for the loss of use of property resulting from its
injury or destruction is inclusive of consequential damages,
including loss of profits or business, flowing from the loss[,]"
id. at 326, we were addressing the "loss of use" provision in
the "property damage" definition because the case involved a
claim for consequential losses flowing from fire damage to the
premises of a car dealership. Id. at 322-23. Because the
dealership property had been obviously damaged, we did not
address in Great American whether the claim could qualify as
"loss of use of tangible property which has not been physically
injured or destroyed." Id. at 323.
Notably, in considering the Heldor decision in the context
of the "loss of use" prong of the property damage definition,
the federal district court in New Jersey has observed that if
Heldor's restriction of coverage for consequential damages to
those flowing from physical damage to tangible property "applied
to all cases involving property damage and consequential
damages, it would render the loss of use provision meaningless."
Elizabethtown Water Co. v. Hartford Cas. Ins. Co., 998 F. Supp.
29 A-5589-13T3
447, 454 (D.N.J. 1998). In Elizabethtown Water Co., the insured
water company failed to adequately supply water to a new
development. Id. at 449-50. There was no physical injury to
the property but the court recognized that the "developers could
not use their property for its intended use because no person
would purchase a lot or house that did not have an adequate
water supply." Id. at 454. Finding that "Heldor's limitation
does not . . . comport with the second prong of the definition
of property damage," the district court held that real estate
developers suffered a coverable "loss of use" of their property
subject to an exclusion not relevant here. Ibid.
National Union also relies on Earthsoils, supra, 812 N.W.2d
at 873. However, the court in that Minnesota case was not
addressing the "loss of use" definition of property damage, id.
at 876 n.2, but rather was considering whether the failure to
achieve an anticipated crop yield was "physical injury to
tangible property." Id. at 876-78. The court found that the
"failure to achieve anticipated crop yield is not itself
physical injury to tangible property" noting that "a crop that
never existed is not tangible property." Id. at 878.
National Union argues that, like the unrealized crop yield
in Earthsoils, "[c]hicken meat/weight that never existed in the
first instance cannot be considered to be tangible property."
30 A-5589-13T3
However, the chickens themselves surely did exist. Assuming it
was commercially infeasible to delay the slaughter of the
chickens, then Phibro's customers were unable to realize the
chickens' full potential for sale, because of the adverse side
effects of Aviax. This shortfall qualifies, at the very least,
as a partial "loss of use" of the chickens, even if we were to
accept the premise that they were not physically injured.
In sum, the stunted growth caused by the chickens ingesting
Aviax qualifies under National Union's policies as "property
damage" because the chickens were physically injured.
Alternatively, even if we were to consider the chickens not
physically injured, their stunted growth nonetheless resulted in
a partial loss of their use, which independently qualifies as
"property damage."
III.
Having concluded that Phibro's claims for coverage fall
within the insuring provisions of the policies, we now consider
whether any of the policy exclusions invoked by National Union
negate coverage.
The burden of proof is on an insurer to prove that
exclusions apply. Generally, "insurance policy exclusions must
be narrowly construed; the burden is on the insurer to bring the
case within the exclusion." Flomerfelt v. Cardiello, 202 N.J.
31 A-5589-13T3
432, 442 (2010) (quoting Am. Motorists Ins. Co. v. L-C-A Sales
Co., 155 N.J. 29, 41 (1998)); see also Aviation Charters v.
Avemco Ins. Co., 335 N.J. Super. 591, 594 (App. Div. 2000)
("Where an exclusionary clause is involved, such clauses are
narrowly construed; indeed it is the insurer's burden to
establish the exclusion."), aff'd, 170 N.J. 76 (2001).
A.
We first address the impaired property exclusion.
"Impaired property" is defined as
tangible property, other than "your product"
or "your work", that cannot be used or is
less useful because:
a. It incorporates "your product" or "your
work" that is known or thought to be
defective, deficient, inadequate or
dangerous; or
b. You have failed to fulfill the terms of a
contract or agreement;
if such property can be restored to use by
the repair, replacement, adjustment or
removal of "your product" or "your work" or
your fulfilling the terms of the contract or
agreement.
[(Emphasis added).]
The policy language states that coverage for property
damage liability does not apply to
"[p]roperty damage" to "impaired property"
or property that has not been physically
injured, arising out of:
32 A-5589-13T3
(1) A defect, deficiency, inadequacy or
dangerous condition in "your product" or
"your work"; or
(2) A delay or failure by you or anyone
acting on your behalf to perform a contract
or agreement in accordance with its terms.
This exclusion does not apply to the loss of
use of other property arising out of sudden
and accidental physical injury to "your
product" or "your work" after it has been
put to its intended use.
[(Emphasis added).]
National Union argues that this exclusion applies because
the customers' chickens were damaged by a defect in Phibro's
product (and were thus "impaired"), but could be "restored to
use" by removing Aviax from their diets.
Phibro counters that this exclusion does not pertain
because (1) it does not apply to chickens that were physically
injured, (2) the clause applies only to claims for damages to
the insured's own product or work and not to damages to third
parties, and (3) the affected chickens do not meet the
definition of impaired property because Aviax was not
"incorporated" into the chickens, there was no "defect,
deficiency, or dangerous condition in Aviax," and the chickens
could not be "restored to use." We consider these arguments in
turn.
33 A-5589-13T3
1.
In Newark Insurance Co. v. Acupac Packaging, Inc., 328 N.J.
Super. 385, 391-92 (App. Div. 2000), we addressed whether the
impaired property exclusion barred coverage under a CGL policy.
Like the policies at issue here, the policy in Acupac defined
"property damage" as "[p]hysical injury to tangible property" or
"[l]oss of use of tangible property that is not physically
injured." Id. at 391. The property in question in Acupac
consisted of defective foil packages provided by the insured to
customers who attached them to advertisement cards to be
inserted into magazines. The packages leaked skin cream into
the advertisement cards, causing them to be withdrawn from use.
Id. at 388-90.
We noted in Acupac that the impaired property exclusion
would bar coverage under the "loss of use" provision in the
insured's policy "since the damage would be to property not
physically injured or impaired arising out of a defect or
deficiency in [the insured's] work." Id. at 393. We then
considered whether the cards that had not yet been inserted into
the magazines, and thus had not yet been subjected to the
leaking lotion, were physically injured. Id. at 399-400. In
that regard, we determined that there were factual issues that
needed to be resolved on remand. Id. at 400. We held that if
34 A-5589-13T3
the fact-finder concluded that the cards were damaged, the
exclusion would not apply unless the fact-finder determined that
the cards were only "impaired." Ibid. We recognized that if
the cards could not be restored to use, "they were effectively
damaged and not merely 'impaired' within the meaning of [the
impaired property] exclusion." Id. at 400-01.
Like the policy in Acupac, the definition of "impaired
property" in Phibro's CGL policy does not exclude all property
that has been physically damaged. The definition only specifies
property that cannot be used, or is less useful and can be
restored to use. The definition of "property damage" itself
includes "[p]hysical injury to tangible property, including all
resulting loss of use of that property," (emphasis added), which
implicitly recognizes that there can be "loss of use" when
property is physically injured. Accordingly, we reject Phibro's
argument that the "impaired property" exclusion cannot ever
apply when there is proof of physical injury. As we shall
discuss, infra, in Part III(A)(3), this exclusion's
applicability here instead turns on the factual question of
whether that physical harm to the property can feasibly be
restored.
35 A-5589-13T3
2.
We are likewise unpersuaded by Phibro's argument that the
"impaired property" exclusion cannot apply where there is damage
to third-party property. The definition of "impaired property"
itself, which is "tangible property, other than 'your product'
or 'your work,'" defeats that argument. Only third-party
property qualifies as "impaired property" under that definition.
Therefore, even if the ingested Aviax supplement, i.e., the
insured's product, has been dissipated, the resulting harm to
the chickens owned by Phibro's customers qualifies as damage
that has impaired third-party property. The question then
becomes whether the nature and permanency of that impairment
falls within the terms of this policy exclusion.
Phibro admits that Aviax caused unintended physical injury
to its customers' chickens, yet asks us to find that Aviax was
not "defective, deficient, inadequate or dangerous" because
Aviax was effective in preventing coccidiosis. The term
"defective" has been defined as "imperfect in form or function"
and "deficient" has been defined as "lacking in some necessary
quality or element" or "not up to a normal standard or
complement." Merriam-Webster's Collegiate Dictionary 326 (11th
ed. 2014). We conclude that Aviax was indeed defective or
deficient, as it clearly was imperfect in function and "not up
36 A-5589-13T3
to a normal standard."
As to the question of whether Aviax was "incorporated" into
the chickens, neither party cites to us any case law regarding
when "your product" or "your work" can be considered under
coverage law to be incorporated into a third party's product.
The plain meaning of the term "incorporate" is "to unite or work
into something already existing so as to form an
indistinguishable whole" or "to blend or combine thoroughly."
Merriam Webster's Collegiate Dictionary 631 (11th ed. 2014).
Certainly, the chickens were already existing. Aviax, when
ingested, became combined with and indistinguishable from the
chickens. We agree with National Union that the affected
chickens "incorporated" the defective Aviax.
3.
Nonetheless, the affected chickens would be "impaired
property" if they could "be restored to use by the repair,
replacement, adjustment or removal" of the Aviax. Phibro argues
that because of the chickens' pre-determined lifecycle and
slaughter dates, they could not be "restored to use."
Conversely, National Union contends the impaired property
exclusion "contains no time limitation[,]" and that if the
chickens had been given more time to grow, they would have
reached their expected weight.
37 A-5589-13T3
To support its premise that the chickens would have reached
their expected weight if given more time, National Union argues
that the MJC reports and Phibro's notice of claim indicate this.
We have found nothing, however, in the MJC reports that supports
National Union's contention. Further, Phibro's notice of claim
stated that chickens that consumed Aviax "appear to have (1)
consumed substantially less feed than chickens not consuming
Aviax, (2) had substantially lower feed conversion rates than
chickens not consuming Aviax . . . and (3) consumed
substantially lower quantities of drinking water than chickens
not consuming Aviax."
The result is that it has taken far longer
to raise the chickens to slaughter size,
with associated increased cost to the
producer, and when ultimately slaughtered,
because of the irregular growth of the
chickens, the cost of processing the
chickens has been increased. When Aviax has
been removed from the feed rations, these
impacts have reportedly been reversed.
These statements in the claim notice on their face are
insufficient to establish conclusively that the chickens would
have grown to their expected weight, if given more time. In
fact, Dr. Cervantes stated in his affidavit that "[a]llowing the
birds to grow longer than their normal slaughter date would not
have solved the problem because as they grow older, their
mortality rate rises and the lack of uniformity in size would
38 A-5589-13T3
have persisted."
Viewing the record, as we must, in the light most favorable
to Phibro, there is a genuine question of fact as to whether
removing the Aviax and allowing more time before slaughtering
the chickens would have restored the chickens to use. Hence,
summary judgment should not have been granted to National Union
on the basis of the "impaired property" exclusion.
There also remains an open issue as to whether the phrase
"restored to use" within the definition of impaired property
means, on the one hand, restored to use, no matter what the
cost, or, alternatively, conveys a qualified concept that
considers commercial or economic feasibility.
Phibro argues that it was commercially infeasible to delay
the slaughter of the chickens and they could not be restored by
the pre-determined slaughter date. National Union conversely
argues that the relevant inquiry is only "whether [the chickens]
could have been restored," without considering the pre-
determined slaughter date.
We conclude the most sensible reading of the phrase
"restored to use" within the impaired property exclusion takes
into account the cost and commercial feasibility of restoration.
We decline to construe the phrase more expansively to encompass
situations in which it would be exorbitant or commercially
39 A-5589-13T3
unrealistic to attempt to return the damaged items to their
former or normal condition. In this respect, we agree with an
Indiana district court case involving a similar policy
provision, finding it illogical to assume that parties to an
insurance contract would intend such an exclusion to apply no
matter what the cost of restoration might be. Am. Ins. Co. v.
Crown Packaging, 813 F. Supp. 2d 1027, 1050 (N.D. Ind. 2011).
Here, in this factual setting, the more reasonable approach
to assess whether the chickens could be restored to use is to
evaluate whether the cost of delaying their slaughter until they
achieved the expected weight was less than the damages incurred
by adhering to the scheduled slaughter date. That assessment
would presume, of course, that the chickens could ultimately
achieve their normal expected weight. The pertinent facts on
this subject along with the costs of delay and the damages
incurred would need to be developed at a trial or plenary
hearing.
We therefore conclude that the impaired property exclusion
might apply here, but only if the chickens reasonably and
feasibly could be restored to their normal size and weight
within a commercially-viable time frame and at commercially
reasonable cost. Because that assessment turns on material
disputed facts, summary judgment on this issue was unwarranted.
40 A-5589-13T3
The restoration issue therefore must be remanded for factual
findings, after a trial or plenary hearing.
[At the direction of the court, the
published version of this opinion omits Part
III(B) and (C) concerning the
inapplicability of the contractual liability
and professional liability exclusions, and
Part IV concerning the settlement of the
customers' claims without the insurer's
consent. R. 1:36-2(a).]
V.
The remaining arguments respectively raised by the parties
lack sufficient merit to warrant discussion. R. 2:11-
3(e)(1)(E).
Affirmed in part, reversed in part, and remanded for
further proceedings consistent with this opinion. We do not
retain jurisdiction.
41 A-5589-13T3