ABA Litigation Section, Insurance Coverage Litigation Committee
Shrunken Chickens, Neck Flanges, Pill Mills & Bacteria: New Cases Shed Light on Perennially
Difficult Issues in Products-Related Coverage
Tucson, Arizona — March 4, 2017
Recent Decisions Affecting Coverage For Product-Related
Claims
Jeff Kiburtz and Mark Herman1
Tackling long-debated issues in different factual circumstances, recent decisions from Texas,
Wisconsin, New Jersey, and the Seventh Circuit shed light on difficult issues including “property
damage,” “occurrence,” “impaired property,” “incorporation,” “rip and tear,” and “economic
loss.” The decisions are U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex.
2015); Wisconsin Pharmacal Company, LLC v. Nebraska Cultures of California, Inc., 367 Wis.
2d 221 (2016); Phibro Animal Health Corp. v. National Union Fire Insurance Co. of Pittsburgh,
PA, 446 N.J. Super 419 (2016); and Cincinnati Insurance Co. v. H.D. Smith, L.L.C., 829 F.3d
771 (7th Cir. 2016).
Summary Of Issues
These cases involve the following issues:
1

Is a physical change or alteration to tangible property required before it will qualify as the
physical injury variant of “property damage” as used in a standard commercial general
liability (“CGL”) policy insuring agreement? If so, what type of change or alteration is
required?

Does the incorporation of a defective component into a larger system constitute “property
damage” under a CGL policy? What about situations in which the component cannot be
removed without causing physical damage to other parts of the system?

Does the phrase “property damage caused by an occurrence” require a showing of
unforeseeable physical damage to property other than what the economic loss doctrine
would deem to be the insured’s product? Or, alternatively, should a court construe the
terms “occurrence,” “property damage,” and “your product” as defined in the policy and
under the applicable rules of contract interpretation?

What connection is required between the damages sought by the underlying plaintiff and
bodily injury or property damage that triggers coverage, i.e., what nexus is implied by
Jeff Kiburtz is special counsel in the Los Angeles, California office of Covington & Burling
LLP. Mark Herman is an associate in the Washington, D.C. office of Covington & Burling LLP.
They exclusively represent policyholders in insurance coverage matters. Any opinions stated in
this paper are their own and should not be attributed either to the co-panelists or to the law firm
or its clients.
“because of” in language that provides coverage for “amounts the insured becomes
legally obligated to pay as damages because of bodily injury or property damage”?
The Relevant Policy Language
Insuring agreements in modern CGL policies that offer products-related coverage typically
provide as follows:
We will pay those sums that the insured becomes legally obligated to pay as
damages because of “bodily injury” or “property damage”2 [included within the
“products-completed operations hazard”] to which this insurance applies. . . . .
This insurance applies to “bodily injury” and “property damage” only if: (1) The
“bodily injury” or “property damage” is caused by an “occurrence”3 that takes
place in the “coverage territory” . . . .
Potentially relevant limitations exclude coverage for:
a. Expected Or Intended Injury
“Bodily injury” or “property damage” expected or intended from the standpoint of
the insured. . . . .
b. Contractual Liability
“Bodily injury” or “property damage” for which the insured is obligated to pay
damages by reason of the assumption of liability in a contract or agreement.
k. Damage To Your Product
“Property damage” to “your product” arising out of it or any part of it.
m. Damage To Impaired Property Or Property Not Physically Injured
“Property damage” to “impaired property”4 or property that has not been
physically injured, arising out of: (1) A defect, deficiency, inadequacy, or
“Property damage” is often defined as including both “physical injury to tangible property,
including all resulting use of that property” and “loss of use of tangible property that is not
physically injured.”
2
“Occurrence” is often defined as “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.”
3
“Impaired property” is generally defined to mean “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
4
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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.
n. Recall Of Products, Work Or Impaired Property
Damages claimed for any loss, cost, or expense incurred by you or others for the
loss of use, withdrawal, recall, inspection, repair, replacement, adjustment,
removal or disposal of: (1) “Your product”; (2) “Your work”; or “impaired
property”; if such product, work, or property is withdrawn or recalled from the
market or from use by any person or organization because of a known or
suspected defect, deficiency, inadequacy or dangerous condition in it.
The Relevant Jargon
Missing from the language quoted above, and general liability policies as a whole, are three
terms referenced at the outset: “incorporation,”5 “rip and tear,” and “economic loss.” These
terms are jargon that refer to particular—but not necessarily precise—arguments, as described
below:
Incorporation: This typically refers to the argument that coverage under a CGL policy is
triggered by the mere installation or incorporation of a defective component into a larger system.
See, e.g., Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 91-92
(1996)(“Once installed, the [asbestos containing building material], . . . is physically linked with
or physically incorporated into the building and therefore physically affects tangible property”
and triggers coverage); but see U.S. Metals, 490 S.W.3d at 24 (even though “[a] thing whose use
or function is diminished by the incorporation of a faulty component can fairly be said to be
injured, even if the injury is intangible, latent, or inchoate[,]” it does not follow that the injury
will be considered physical injury for the purpose of general liability coverage.)
Rip & Tear: This refers to the argument that coverage is triggered by physical injury caused to
other portions of a system when a defective component is removed. See, e.g., U.S. Metals, 490
S.W.3d at 28 (“property damage” coverage triggered when, “[b]ecause the flanges were welded
to pipes rather than being screwed on, the faulty flanges had to be cut out, pipe edges resurfaced,
and new flanges welded in”)
use by: a. The repair, replacement, adjustment or removal of ‘your product’ or ‘your work’; or b.
Your fulfilling the terms of the contract or agreement.”
The “impaired property” exclusion does use the word “incorporate,” but that is distinct from the
“incorporation” argument for coverage.
5
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Economic Loss: This term is often used in arguments that there are no covered damages flowing
from “property damage” or “bodily injury” when the underlying plaintiff only seeks allegedly
uncovered “economic loss.” See, e.g., Chatton v. National Union Fire Ins. Co., 10 Cal. App. 4th
846, 858-59 (1992) (“strictly economic losses like lost profits, loss of goodwill, loss of the
anticipated benefit of a bargain, and loss of an investment, do not constitute damage or injury to
tangible property covered by a comprehensive general liability policy”) (citations and emphasis
omitted). However, it can also refer to coverage arguments derived from the “economic loss
doctrine,” a liability doctrine, which—as relevant here—precludes a product manufacturer from
being held liable in tort for damage to the “product itself.” See, e.g., Saratoga Fishing Co. v.
J.M. Martinac & Co., 520 U.S. 875, 884-85 (1997) (boat manufacturer cannot be liable in tort
for damage to “product itself” (a boat that sunk), but can be liable in tort for damage to “other
property” added to the boat by the purchaser); see also Ellen S. Pryor, The Economic Loss Rule
and Liability Insurance, 48 Ariz. L. Rev. 905, 917 (2006). Fairly describing coverage arguments
derived from the “economic loss doctrine” in summary form is difficult, not least because the
economic loss doctrine is itself difficult to pinpoint. See Wisconsin Pharmacal, 367 Wis. 2d at
263 (Abrahamson, S. dissenting) (“Like the ever-expanding, all-consuming alien life form
portrayed in the 1958 B-movie classic The Blob, the economic loss doctrine [continues] to be a
swelling globule on the legal landscape of this state.”) (brackets in original; citations omitted).
These arguments are addressed in more detail in the discussions of Pharmacal and Phibro
below.
General Judicial Approaches To Addressing These Issues
The basic rules concerning interpretation of insurance policies are largely uniform across the
country. In California, for example, “the mutual intention of the parties at the time the contract
is formed governs interpretation,” but “[s]uch intent is to be inferred, if possible, solely from the
written provisions of the contract.” MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 647 (2003)
(citations omitted). “The ‘clear and explicit’ meaning of these provisions, interpreted in their
‘ordinary and popular sense’ . . . controls judicial interpretation.” Id. at 647-48 (citations
omitted).
Language in the insuring clauses which grant coverage (including terms such as “occurrence”
and “property damage”) is “interpreted broadly so as to afford the greatest possible protection to
the insured.” Id. at 648. By contrast, “exclusionary clauses are interpreted narrowly against the
insurer.” Id. Further, “any exception to the performance of the basic underlying obligation must
be so stated as clearly to apprise the insured of its effect.” Id. Thus, the burden is squarely on
the insurer to “phrase exceptions and exclusions in clear and unmistakable language.” Id.
The insurer also bears the burden of showing that a particular claim falls within the narrowest
reasonable confines of an exclusion drafted in “conspicuous, plain and clear” language. Id.
Thus, the insurer must “establish that the claim is specifically excluded.” Id. The heavy burden
placed on insurers seeking to avoid coverage is plainly asymmetrical, but “[a]ny seeming
disparity in the respective burdens merely reflects the substantive law.” Montrose v. Superior
Court, 6 Cal. 4th 287, 300 (1993).
If an insurance policy provision can be reasonably interpreted in more than one way, a court
must not “select one ‘correct’ interpretation from the variety of suggested readings.”
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MacKinnon, 31 Cal. 4th at 655 (citations omitted). Instead, it must find “coverage so long as
there is any . . . reasonable interpretation under which recovery would be permitted.” Id. Where
the scope of an insurance contract provision is in dispute, the policyholder’s interpretation
favoring coverage will prevail as long as it is “reasonable,” but an insurer’s coverage-limiting
interpretation will not prevail unless it is “the only reasonable one.” Id. (emphasis in original).
While the foregoing principles are more or less uniform, how strictly they are applied is not. It is
not uncommon for courts to consider sources other than the contract language—most frequently
other court decisions. Indeed, some decisions reflect little express consideration of either the
contract language or the applicable interpretative principles and instead appear to rely on how
other courts construed presumably similar contract language. See, e.g., Erie Ins. Exch. v. Abbott
Furnace Co., 972 A. 2d 1232 (Pa. Super. Ct. 2009); Specialty Surfaces Int’l, Inc. v. Continental
Cas. Co., 609 F3d 223 (3d Cir. 2010).
Courts also cite historical perspectives, general intent, and customs and practices in the insurance
market with some frequency. For example, in Kvaerner Metals Division of Kvaerner U.S., Inc.
v. Commercial Union Insurance Co., the Pennsylvania Supreme Court referred to generalized
notions of intent when it ruled that permitting coverage under the facts there “would convert
CGL policies into performance bonds, which guarantee the work, rather than like an insurance
policy, which is intended to insure against accidents.” 908 A.2d 888, 899 (Pa. 2006) (citing L-J,
Inc. v. Bituminous Fire & Marine Ins. Co., 621 S.E. 2d 33, 36-37 (S.C. 2005)). The Kvaerner
court also cited a “seminal law review” article from 1971 for the proposition that the “risk
intended to be insured is the possibility that the goods, products or work of the insured, once
relinquished and completed, will cause bodily injury or damage to property other than to the
completed work itself and for which the insured by be found liable.” Id. n.10. While it seems
the court cited those sources as buttressing, rather than providing the basis for, the court’s
interpretation of the contract language, considering those sources as interpretive aids for
construing language the court found clear and unambiguous arguably could be viewed as
contrary to the Pennsylvania rules of interpretation—particularly when the result was to find no
coverage.6
The foregoing is not a criticism of the approaches used by those courts, but rather is intended to
provide context for the decisions discussed below. As will be seen, a court’s willingness to
consider sources other than the actual contract language as interpreted under established rules
can determine the outcome.
“Insurance policies are contracts, and . . . in interpreting a contract, the court must ascertain the
intent of the parties.” Swarner v. Mut. Ben. Grp., 72 A.3d 641, 644 (Pa. Super. Ct. 2013),
reargument denied (Sept. 16, 2013), appeal denied, 85 A.3d 484 (Pa. 2014). “Such intent is to
be inferred from the written provisions of the contract.” Id. “When analyzing a policy, words of
common usage are to be construed in their natural, plain, and ordinary sense.” Continental Cas.
Co. v. Pro Mach., 916 A.2d 1111, 1118 (Pa. Super. Ct. 2007). When a term is “reasonably
susceptible of more than one meaning,” the term “must be construed in the light most favorable
to the insured.” Butterfield v. Giuntoli, 670 A.2d 646, 652 (1995) (quoting Ryan Homes, Inc. v.
Home Indem. Co., 647 A.2d 939, 941 (1994)).
6
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The Decisions
In U.S. Metals, Inc. v. Liberty Mutual Group, Inc., the Texas Supreme Court considered
incorporation, rip and tear, and the scope of the “impaired property” exclusion. 490 S.W.3d 20
(Tex. 2015). The insured, U.S. Metals, sold ExxonMobil 350 weld-neck flanges for use in
constructing diesel units at certain refineries. The flanges were welded to pipes. Postinstallation testing revealed that the flanges did not meet industry standards, leaked, and gave
rise to risk of fire and explosion. ExxonMobil decided to remove the flanges, a process which
involved cutting the pipe, removing gaskets and insulation (which were destroyed in the
process), grinding the pipe surfaces, and installing new flanges. The replacement process
delayed operation of the diesel units for several weeks.
The court began its analysis by citing the “convoluted provisions of the standard-form CGL
policy.” Id. at 22. It then cited the basic principles of contract interpretation under Texas law.
Turning first to the insuring agreement, the court addressed U.S. Metals’ argument that
ExxonMobil’s property “was physically injured by . . . the mere installation of the faulty
flanges.” Id. at 23. (The decision does not reflect whether U.S. Metals argued that the mere
installation of the flanges qualified as “property damage” under the “loss of use” portion of that
definition.) The court reasoned as follows:
the installation of the leaky flanges . . . can certainly be said to have injured—
harmed or damaged—the diesel units by increasing the risk of danger from their
operation and thus reducing their value. But if that increased risk amounted to
physical injury within the meaning of the CGL policy, then it is difficult to
imagine a non-physical injury. Any lessening of property by adding a component
would be not only injury but physical injury. The policy’s limitation of coverage
to damages from physical injury necessarily implies that there can be nonphysical, noncovered injuries. Otherwise, the requirement that injury be
“physical” would be superfluous. To give “physical” its plain meaning, a covered
injury must be one that is tangible.
Id. at 24-25. While the court went on to discuss other decisions it regarded as consistent with
that determination, the court’s holding appears to have been based primarily on the contract
language. Notably, unlike other decisions discussed here, there is no reference in the opinion to
generalized notions of intent or the drafting history. It seems at least possible that consideration
of, or providing greater weight to, those issues could have altered the outcome, as the court was
presented with “drafting history evidence demonstrat[ing] that the insurance industry intended
that coverage would . . . be provided for property damage arising out of the mere incorporation
of a defective product even when, as [t]here, the policy language was revised to include ‘physical
injury’ in the definition of ‘property damage.’” See Brief of Amicus Curiae United
Policyholders In Support Of Appellant at 26.
Although the court ruled that “mere incorporation” did not constitute the physical injury variant
of property damage, it went on to rule that the “units were physically injured in the process of
replacing the faulty flanges.” U.S. Metals, 490 S.W.3d at 28. Accordingly, “the repair costs and
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damages for the downtime were ‘property damages’ covered by the policy unless [the impaired
property exclusion] applies.” Id.7
Turning to the impaired property exclusion, the court disagreed with U.S. Metals’ argument that
none of ExxonMobil’s affected property (diesel units as a whole, plus the pipe, gaskets, and
insulation) qualified as “impaired property”8 merely because the replacement or removal
required cutting, grinding, and welding, i.e., as opposed to, for example, simply unscrewing the
old flanges and screwing on new ones. According to the court, the “definition of ‘impaired
property’ does not restrict how the defective product is to be replaced.” Id. at 28 (emphasis in
original). The court found further that limiting the scope of the exclusion to apply only when the
defective product could be replaced or removed without damaging other components would
necessitate reading into the definition a limitation that “cannot be fairly inferred from the text
itself, nor would it make sense to do so.” Id. However, the court was presented with evidence
(in the form of insurance industry trade bulletins), and opinions from other states, reflecting that
“courts and commentators confirm[] that the ‘impaired property’ exclusion does not apply where
the insured’s defective product is irreversibly attached or incorporated to another’s property and
such property cannot be restored to use without replacing the insured’s defective product.” See
Brief of Amicus Curiae United Policyholders In Support Of Appellant at 30-31.
Despite the court’s disagreement with U.S. Metals on the foregoing point, the court did agree
that the ExxonMobil property that was actually damaged and replaced, i.e., the gaskets and the
insulation, fell outside the scope of the “impaired property” exclusion.
In Wisconsin Pharmacal Company, LLC v. Nebraska Cultures of California, Inc., five
members of the Wisconsin Supreme Court considered “property damage” and “occurrence,” as
well as the incorporation doctrine and the scope of the “impaired property” exclusion. 367 Wis.
2d 221 (2016). The underlying plaintiff, Pharmacal, is the supplier of a chewable tablet
containing various ingredients, including a probiotic bacterial species. The defendants were a
sub-distributor (Nebraska Cultures), the manufacturer of the bacteria (Jeneil), and their
respective insurance companies. Upon discovering that the bacterial species provided was
different than specified, the underlying plaintiff destroyed all of the tablets, then filed suit.
The underlying plaintiff (Pharmacal) initially asserted claims based on tort and contract theories.
The court in the underlying action dismissed all of Pharmacal’s claims against Jeneil (the
manufacturer). The court also dismissed all of Pharmacal’s tort claims against Nebraska
Cultures (the sub-distributor). Accordingly, by the time the coverage issues were presented to
the court, Pharmacal’s only remaining claims were contract-based claims. Wis. Pharmacal, 367
Wis. 2d at 233.
The court noted that exclusion K (“your product”) would bar coverage for damage to the
flanges themselves, but that U.S. Metals did not seek such coverage. U.S. Metals, 490 S.W.3d at
22.
7
In this context, “impaired property” would be property that “cannot be used or is less useful
because . . . [it] incorporates [the flanges]. . . [, but only when] such property can be restored to
use by . . . replacement . . . or removal of [the flanges].”
8
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Before addressing the substance of the arguments, the court recited general provisions of
Wisconsin law governing contract interpretation.9 Turning first to the physical injury variant of
“property damage” under Wisconsin law, the court began with a discussion of generalized
notions of intent, citing an earlier case for the proposition that “[t]he risk intended to be insured
[in a CGL policy] is the possibility that the goods, products or work of the insured, once
relinquished or completed, will cause bodily injury or damage to property other than to the
product or completed work itself. . . .” Id. at 239 (quoting Wis. Label Corp. v. Northbrook Prop.
& Cas. Ins. Co., 233 Wis. 2d 314, 329 (2000)).10 As though to emphasize the point, the
Wisconsin Supreme Court again quoted the same language, this time from a different decision.
Id. at 240 (quoting Vogel v. Russo, 236 Wis. 2d 504, 512 (2000)).11 It made the same point a
third time, stating that “[a] CGL policy’s sole purpose is to cover the risk . . . [of] damage to
property other than the product . . . of the insured.” Id. at 240.
After referring to prior decisions to determine that the parties’ intent was to cover damage to
property other than the product itself, the court addressed what constituted the product at issue,
i.e., whether the “product” was the bacteria Nebraska Cultures supplied to Pharmacal, or the
tablets that Pharmacal made that incorporated that bacteria. But rather than look to the policy’s
definition of “your product,” the court turned to an earlier case in which it had determined—in
the context of a liability claim—that an “integrated system analysis” employed under the
economic loss doctrine barred a manufacturer (a cement block manufacturer) from suing in tort
downstream suppliers of defective cement and aggregate on the theory that the concrete blocks
were “other property.” Id. at 240-244 (citing Wausau Tile, Inc. v. Cnty. Concrete Corp., 226
Wis. 2d 235 (1999)).12
Under the “integrated system” analysis, when a “product or system is deemed to be an integrated
whole, courts treat such damage as harm to the product itself” for purposes of determining
whether the economic loss doctrine precludes liability in tort. Wisconsin Pharmacal, 367 Wis.
2d at 241 (citations and emphasis omitted). Although the court recognized “that the economic
loss doctrine does not control a coverage dispute and, therefore is not at issue here[,]” the court
nevertheless went on to explain that it was reversing because “the court of appeals did not
9
The court in Wisconsin Pharmacal also considered California law in connection with the policy
issued to Nebraska Cultures. A discussion of that aspect of the decision exceeds the scope of this
article.
10
The Wisconsin Label court, in turn, quoted an earlier Wisconsin case, which in turn had quoted
the New Jersey Supreme Court’s decision in Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 791
(1979). However, as discussed below in connection with Phibro, the Weedo decision addressed
the exclusions in a CGL policy, and is therefore not controlling on whether there is “‘property
damage’ caused by an ‘occurrence.’” Other factors also distinguish Weedo.
11
This decision likewise indirectly quotes Weedo.
12
While the Wausau Tile case also had an insurance component to it, the coverage decision
necessarily derived from the court’s decision on liability in the same opinion. After finding that
the underlying plaintiff could not as a matter of law assert claims for property damage, the court
ruled that any remaining liability necessarily must be for something other than property damage,
i.e., economic loss.
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perceive the importance of an integrated system analysis when deciding whether claimed damage
arose from physical injury to tangible property other than to the [incorrect bacteria].” Id. at 243.
Applying that analysis, the court concluded that “upon blending [the incorrect bacteria], rather
than [the correct bacteria], with other ingredients, all of the ingredients were integrated into one
product, the tablets.” Id. at 244. Therefore, according to the court, the tablets that neither
Nebraska Cultures nor Jeneil manufactured, sold, handled or disposed of were deemed to be their
“product” for purposes of coverage, resulting in it finding no damage to property other than the
product of the insured.13
After finding there was no property damage (and therefore no coverage),14 the court provided its
views on whether there had been an “occurrence.” The court began its analysis by noting that
“the parties do not dispute that Jeneil’s provision of a defective ingredient was accidental.” Id. at
250. However, the court found that there was no “occurrence” because, in the court’s view, no
“property damage” resulted from that accidental conduct. Id. at 250-51.
Despite finding that the coverage had not been triggered, the court proceeded to the “impaired
property” exclusion, finding that it would apply even if coverage had been triggered. The court
began by characterizing the exclusion as negating “coverage where property damage results from
‘the failure of the insured’s products to meet the level of performance which the insured
warranted or represented’” and “when the insured fails to perform a contract according to its
terms.” Id. at 259-60. The court noted, further, that “the only exception to this exclusion occurs
when the damage to other property arises from ‘sudden and accidental physical injury’ to the
insured’s product.” Id. at 260. (The court’s opinion does not reflect consideration of whether
the tablets could be “restored to use” by the “repair, replacement, adjustment or removal” of the
incorrect bacteria, as required for property to qualify as “impaired property.”) Based on the
court’s determination that there was no physical injury, loss of use or damage to “other
property,” and seemingly without considering whether the tablets qualify as “impaired property,”
the court found that the (1) the exception to the exclusion did not apply; and (2) the exclusion
barred coverage. See id. at 260 (“[W]e have already concluded that no loss of use of other
property occurred. Stated otherwise, any loss of use was due to the incorporation of Jeneil’s
defective probiotic[, which is specifically excluded].”)
Joined by Justice Walsh Bradley, Justice Abrahamson issued a strongly worded dissent
criticizing the three-justice majority opinion. She argued that the “majority opinion’s analysis all
but ignores [the] principle [that coverage depends upon the policy language], beginning not by
Although the court in Wisconsin Pharmacal did not cite the definition of “your product” in the
policies there, it is typically defined as “[a]ny goods or products . . . manufactured, sold, handled,
distributed or disposed of by [the named insured].” Under this definition, it seems that Nebraska
Cultures’ and Jeneil’s “product” would be limited to the incorrect bacteria, as neither company
“manufactured, sold, handled, distributed, or disposed of” the tablets.
13
The court also addressed the “loss of use” variant of “property damage.” Because the
incorporation of the incorrect bacteria into the tablets caused a complete loss of their commercial
value, the court ruled that there was only a loss in value of the tablets, but not a “loss of use.”
Although the opinion suggests that loss in value and loss of use are mutually exclusive concepts,
there is no discussion of why the complete destruction of property necessarily means that there
cannot be a loss of use of the destroyed property until such time as it is replaced.
14
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analyzing the language of the insurance policies . . . but by analyzing whether any such ‘property
damage’ was damage to ‘other property.’” Id. at 267. However, the “focus on damage to ‘other
property’ . . . is derived not from the language of the insurance policies (which do not refer to
‘other property’), but rather from tort cases applying the economic loss doctrine.” Id. This
approach “ignores the language of the insurance policies, our accepted rules of interpreting
insurance policies, and Wisconsin precedent.” Id. at 271. The dissent attributed the majority’s
decisions on the other issues as resting “on its erroneous conclusion (based on its application of
the integrated system rule derived from the tort economic loss doctrine) that there was no
physical injury to tangible property in the instant case.” Id. at 276.
In Phibro Animal Health Corp. v. National Union Fire Insurance Co. of Pittsburgh, PA, the
Superior Court of New Jersey, Appellate Division, considered “property damage,” “occurrence,”
economic loss and the “impaired property” exclusion. 446 N.J. Super 419 (2016). The insured,
Phibro, sold a product known as Aviax II, a chicken feed additive designed to prevent disease.
Less than a year after beginning to sell the product, it received reports that the product stunted
the growth of chickens, resulting in lower meat production, increased feed costs, and increased
processing costs.
After being sued by several customers, Phibro sought coverage from its insurer. After coverage
litigation was initiated, the trial court granted summary judgment in favor of National Union,
finding that “Phibro’s customers sustained purely economic losses and are thus limited to
contractual remedies under . . . the ‘economic loss’ doctrine.” Id. at 427. Finding that the
underlying tort plaintiffs’ damages “were entirely foreseeable,” the court concluded that “tort
remedies are unavailable to Phibro’s customers.” Id. Citing Weedo, the trial court found 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.” Id.
On appeal, the court first discussed the general rules of contract interpretation applicable in New
Jersey. The court then addressed the meaning of “occurrence,” turning to case law for guidance
on the undefined term “accident.” Under New Jersey law, the existence of an “occurrence” turns
on whether the insured “intended or expected to cause an injury.” Id. at 429. Accordingly, while
a “covered accident . . . includes the unintended consequences of an intentional act,” it does not
include “an injury that is, itself, intended.” Id. quoting Voorhees v. Preferred Mut. Ins. Co., 128
N.J. 165, 175, 607 A.2d 1255 (1992). Responding to the insurer’s argument that there could be
no “occurrence” because the stunted growth “could have been a foreseeable consequence of the
chickens ingesting Aviax,” the court noted that “no sensible person would ever pay a premium”
if foreseeability were determinative of whether a covered “occurrence” took place. Id. at 430.
Finding that there was no indication that Phibro “expected, foresaw, or anticipated” the stunting
effect of the Aviax, the court held that “the stunted growth of the Aviax-ingesting chickens was a
non-accidental ‘occurrence’ under the policies.” Id. at 430-31. Further, given its focus on
whether the injury was intended, the court readily rejected National Union’s “contention there
was no covered ‘occurrence’ . . . because the harm to the affected chickens resulted in only
economic losses.” Id. at 431. The court also rejected the insurer’s argument that the New Jersey
Supreme Court ruled in Weedo that “the consequences of not performing well were not covered
and were to be borne by the insured.” Id. at 432. Rather, the court in Weedo merely held that
“the ‘business risk’ exclusions barred coverage for repairing the insured’s faulty work,” id. at
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433, and therefore “does not control the interpretation and application of the insuring clauses,”
id. at 432.
After holding that there was an “occurrence,” the court considered whether “the diminished size
and weight of the chickens represents a form of covered ‘property damage.’” Id. at 436.
National Union argued that “stunted growth and weight suppression without permanent injury to
the chickens does not constitute ‘physical injury’ where there is no evidence of physiological
change.” Id. at 437 (quotation marks omitted). Noting an earlier holding in which it found that
“‘physical’ can mean more than material alteration or damage,” the court cited with approval
decisions from other jurisdictions in which “physical injury” was held to include any “alteration
in appearance, shape, color or in other material dimension.” Id. Based on this reasoning, the
court held that the “the undisputed smaller sizes of the broiler chickens could be considered an
alteration of ‘other material dimension’” and, hence, physical injury to tangible property. Id. at
438.15
Finding that the claim came within the scope of the insuring agreement, the last portion of the
court’s published opinion deals with the “impaired property” exclusion. The court first
considered Phibro’s argument that the exclusion can only apply to “loss of use” property
damage, not “physical injury” property damage. The court disagreed, holding that the exclusion
applies to “property damage” as defined, which necessarily includes both variants. The court
likewise decided against Phibro on its argument that the exclusion has no effect when there is
damage to property other than the insured’s product, pointing out that “impaired property” was
defined as only including property other than the insured’s product or work. The court further
sided with National Union on whether the Aviax had been “incorporated” into the chickens,
finding that 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.’”
Id. at 446. The court nevertheless held that there was a genuine question of fact as to whether
the chickens could be “restored to use” (and hence qualify as “impaired property”), requiring
National Union to prove that “the chickens reasonably and feasibly could be restored to their
normal size and weight within a commercially-viable time frame and at a commercially
reasonable cost.” Id. at 448.
Cincinnati Insurance Co. v. H.D. Smith, L.L.C., arose out of the alleged epidemic of
prescription drug abuse in West Virginia. 829 F. 3d 771 (7th Cir. 2016). West Virginia sued
pharmaceutical distributors, including H.D. Smith, alleging that they supplied quantities of
hydrocodone, oxycodone, codeine, and other prescription drugs in such high quantities that they
should have known they would be used illegally, see id. at 773, and sought to recover as
damages costs paid by the state to care for citizens with drug addiction, see id. at 773-74.
H.D. Smith’s insurer, Cincinnati Insurance Company, asserted that it was not obligated to defend
the suit because “West Virginia seeks its own damages, not damages on behalf of its citizens.”
Id. at 774. Asking “so what?,” the Seventh Circuit rejected this argument as “untethered to any
language in the policy.” Id. The court instead focused on the nexus implied by “because of
bodily injury,” holding that the state’s damages, consisting of “excessive costs related to
The court also found that the stunted growth qualified as “loss of use” property damage. Id. at
442.
15
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diagnosis, treatment and cure of addition” and “necessary medical care, facilities and services for
treatment of citizens,” were damages that H.D. Smith could be legally obligated to pay as
damages “because of bodily injury.” Id. at 775.
The court disagreed with the insurer that the particular legal theories pleaded in West Virginia’s
complaint or the particular remedies sought rendered the claim ineligible for coverage. Rather,
considering the established rules governing the duty to defend, the court held that the state’s
lawsuit gave rise to a potential for coverage. See id. at 775 (“To be sure, West Virginia asserts
numerous legal theories and seeks a variety of remedies, but the duty to defend arises even if
only one of several theories is within the potential coverage of the policy.”) (citations and
quotation marks omitted).
Conclusion
U.S. Metals, Wisconsin Pharmacal, Phibro, and H.D. Smith illustrate some difficult questions
that arise in product-related claims under standard-form CGL policies, including whether there is
“bodily injury” or “property damage” or an “occurrence,” and whether the “impaired property”
exclusion applies. In different factual contexts, policyholders might be expected to argue that the
insuring agreements in CGL policies should be read broadly to provide coverage, and exclusions
should be read narrowly to exclude coverage only when clearly and expressly required. Insurers,
on the other hand, might be expected to rely on prior decisions finding that no coverage exists
under the economic loss doctrine or notions of what CGL policies are supposed to cover.
However, there could be circumstances in which either side might opt for a different approach to
a particular claim.
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