Phibro Animal Health Corporation v. National Union

NOT FOR PUBLICATION WITHOUT THE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