(Article from Insurance Law Alert, July/August 2016)
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A New Jersey appellate court ruled that stunted chicken growth caused by the ingestion of a drug intended to control a common intestinal disease is a covered occurrence and constituted property damage under general liability policies. Phibro Animal Health Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2016 WL 3747538 (N.J. App. Div. July 14, 2016).
Phibro, a manufacturer of animal health products, sold Aviax, a chicken feed additive designed to prevent certain parasitic diseases. It was later discovered that Aviax stunted the growth of chickens, which resulted in lower meat production and increased feed costs. When customers sued Phibro, it sought coverage under liability and umbrella policies issued by National Union, which the insurer denied. In ensuing coverage litigation, a New Jersey trial court ruled that the alleged losses sustained by Phibro’s customers did not constitute property damage caused by an occurrence within the meaning of the policies. The trial court reasoned that the chickens were not physically injured and were subsequently sold for human consumption. The appellate court reversed.
The appellate court ruled that the stunted growth is an “accident” insured by the policies because the record established that Phibro did not expect or anticipate that side effect. In so ruling, the court analogized the scenario to faulty workmanship, explaining that there was unexpected damage to something other than the insured’s product (here, the chickens). The court further held that the diminished size and weight of the chickens constituted property damage, reasoning that the detrimental alteration in the chickens’ size and shape represented “harm to the physical condition of the chickens.” The court noted that the fact that the chickens were ultimately sold for consumption was not dispositive of the property damage question, explaining that the term “physical injury” was not defined to require that property be unsalable. Alternatively, the court held that even if physical injury was lacking, the record established a “loss of use of tangible property that is not physically injured.” The court explained that Phibro’s inability to realize the chickens’ full potential for sale due to diminished size constituted a partial “loss of use” of the chickens.
The court remanded the matter for a factual determination of whether an “impaired property” exclusion barred coverage. The appellate court explained that application of the exclusion turns primarily on whether the damaged property can be “restored to use.” National Union argued that the chickens could have reached their full expected weight had they been given more time to grow, whereas Phibro contended that they could not be “restored to use” in that manner because of the chickens’ pre-determined lifespans, which are based on commercial and economic considerations. The court concluded that “the most sensible reading of the phrase ‘restored to use’ . . . takes into account the cost and commercial feasibility of restoration.” Therefore, the appellate court remanded the case so that the trial court could evaluate the cost of delaying slaughter to achieve expected weight as compared to damages incurred by adhering to the scheduled lifespan.