On appeal from Superior Court of New Jersey, Law Division, Passaic County.
Dreier, Shebell and Stern. The opinion of the court was delivered by Dreier, J.A.D.
[218 NJSuper Page 463] Plaintiff appeals from a summary judgment dismissing its complaint for a judgment declaring insurance coverage for losses allegedly occasioned by plaintiff's defective product. Plaintiff produces foil-laminated paper used in the manufacture of lottery tickets. A supplier and sub-supplier were apparently responsible for defective lacquer supplied to plaintiff which caused plaintiff's product to be defective. When tickets were further processed by plaintiff's customer, Lustour Corp., the tickets' surface would not retain printing after an opaque covering was scrapped off. Thus the purchasers of the tickets
would be unable to read the symbols beneath the covering and determine whether they had won prizes. At a time when plaintiff had not realized the extent of the problem, it settled with its suppliers for the sum of $35,000.
Dittler Bros. Inc., the final recipient of the alleged defective foil-coated paper in the manufacturing chain, processed the paper before sending completed tickets to the distributor. It brought action in the United States District Court for the Western District of Michigan, Southern Division, against Lustour Corp. alleging breaches of warranty under the Uniform Commercial Code. Lustour Corp. in turn served Unifoil with a third-party complaint claiming both breaches of warranty and negligence on Unifoil's part. Unifoil, by reason of its prior settlement with and general releases issued to its own suppliers, was subject to a claim of $1,157,722.14 in the Michigan action with no ability to pass the loss to them. It, therefore, turned to defendant, its insurer, for its sole protection.
Defendant CNA Insurance Companies denied coverage under an exclusion provision of the general liability policy which stated:
This insurance does not apply:
(1) a delay in or lack of performance by or on behalf of the Named Insured of any contract or agreement, or
(2) the failure of the Named Insured's Products or work performed by or on behalf of the Named Insured to meet the level of performance, quality, fitness or durability warranted or represented by the Named Insured,
but this exclusion does not apply to loss of use of other tangible property from the sudden and accidental physical injury to or destruction of the Named Insured's Products or work performed by or on behalf of the Named Insured after such products or work have been put to use by any person or organization other than an Insured. . . .
The case was argued in the Law Division on the basis of defendant's responsibility to pay for the cost of defense and for any eventual judgment that might be rendered against plaintiff.
The trial judge determined that the exclusion was applicable and this appeal ensued. While the appeal was pending before us the Michigan action was settled with no liability imposed upon plaintiff. Apparently, the functional defects in the tickets were acknowledged to be substantially unrelated to plaintiff's processing. The sole issue remaining before us, therefore, is the responsibility of defendant to pay for plaintiff's legal costs in the Michigan action, represented at oral argument before us to be between $20,000 and $30,000. We will, therefore, confine our review to the issue of defendant's alleged obligation to defray the cost of plaintiff's defense of the Michigan claim.
The third-party complaint in the Michigan action alleged:
a) The chemical composition of the alleged defective material was ...