Before Judges Stern, Kestin and Steinberg.
The opinion of the court was delivered by: Steinberg, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from the Superior Court of New Jersey, Law Division, Bergen County.
In this insurance coverage declaratory judgment action defendant, Acupac Packaging, Inc. (Acupac), appeals from the grant of summary judgment to plaintiff, Newark Insurance Company (Newark), declaring that no coverage exists for the claims presented to Newark by Acupac. In granting summary judgment to Newark, the motion judge held, as a matter of law, that Acupac had not caused physical damage or injury to the property of others. Rather, he concluded that the claim presented was for loss due to a failure of Acupac's "'work' or 'product' to meet the level of performance, quality, fitness or durability warranted or represented" by Acupac. He, therefore, concluded that exclusion "m." of the policy barred recovery. In addition, he concluded that exclusion "n." also defeated Acupac's claim since Acupac's product was withdrawn or recalled and replaced because of a known or suspected defect. We disagree with both of those conclusions, and reverse and remand. *fn1
According to the certification of Kenneth A. Beck, Vice- President of Acupac, filed in opposition to the motion for summary judgment, Acupac specializes in contract packaging, supplying the cosmetic, pharmaceutical and household good industries with flexible, disposable products. Among the packaging products produced by Acupac are foil laminated pacquettes.
In February 1996, Acupac was contacted by Tarlow Advertising Inc., (Tarlow), an advertising firm for Revlon, and asked to supply 2.2 million pacquettes to be filled with Revlon Almay skin cream lotion. *fn2 Revlon supplied the lotion in April 1996, and Acupac began the process of manufacturing the pacquettes and filling them with lotion. Acupac understood that each pacquette was to be attached to an advertising card that was part of a Revlon promotion. The cards with the pacquettes attached to them were to be bound in the August 1996 edition of Glamour magazine. Accordingly, the cards had to be assembled with the pacquettes and delivered to Glamour's bindery by June 24, 1996.
Acupac manufactured the pacquettes, filled them with the skin cream lotion, and forwarded them to Color Prelude which was to attach the pacquettes to the advertising cards. The advertising cards, with the pacquettes attached, were then to be sent to the bindery.
On June 28, 1996, Ann Jeremiah, the production manager for Tarlow, telephoned Acupac and advised that the pacquettes were leaking after being bound in the Glamour magazines. Acupac asked that samples be returned to it in order to have its quality department determine if the pacquettes were defective and, if so, in what fashion. During the first week in July 1996, Acupac's quality department determined that the pacquettes were defective, as they could not withstand the pressure applied to them in the binding process. Because the advertising cards were part of a summer promotion of Almay skin cream, Tarlow had new cards inserted in the August edition of Glamour without the pacquettes. Acupac and Tarlow met to discuss what to do with the 2.2 million advertising cards. Michael Macri, Senior Vice-President of print production for Tarlow, indicated that if the advertising cards and pacquettes could be salvaged, he would discuss with Revlon the possibility of inserting them in the September edition of Glamour magazine. However, Macri indicated that in order to be inserted in the September edition, the condition of the pacquettes had to be remedied by July 24, 1996, a period of two weeks. Macri also said that since this was a summer promotion designed to encourage the purchase of Almay skin cream lotion as a shield against the summer sun, coupled with the fact that the advertising card had a manufacturer's coupon with an expiration date of October 31, 1996, unless the cards and pacquettes could be salvaged in time for insertion in the September edition of the magazine, they would be rendered useless.
Since there was an eight-week lead time to obtain the printed raw material and it would have taken an additional six weeks to assemble and fill 2.2 million new pacquettes, Beck realized it would be impossible to meet the July 24, 1996 deadline. Although Acupac considered removing the defective pacquettes from the advertising cards and attempting to reinforce them, since the pacquettes were attached to the advertising cards with glue and the glue was positioned close to the seal area of the pacquettes, Acupac also determined that the glue would have to be removed before the pacquettes could be detached. Acupac decided that the cost of removing the pacquettes from the cards and then removing the glue from the pacquettes was prohibitive. It also concluded that reinforcing the pacquettes while they were still attached to the cards was not feasible. Accordingly, Acupac decided that from its perspective the only feasible use of the 2.2 million advertising cards was through an alternative means of distribution which did not involve binding the cards into a magazine. However, Tarlow rejected that option since it would not serve Revlon's purposes because the demographics of the readers of Glamour magazine was the target for the promotion. Accordingly, Macri advised Acupac that it had no use for the advertising cards.
Revlon and Tarlow asserted a claim against Acupac in the total amount of $152,980.56. The claim is broken down as follows: (a) lost advertising cards, $27,782.71; (b) the cost of affixing the pacquettes to the advertising cards, $89,221.67; (c) the cost of the bulk skin lotion, $32,609.87; and (d) collateral shipping expenses totaling $3,064.27. *fn3 Acupac submitted Revlon and Tarlow's claim to Newark requesting coverage. With the exception of the claim for the physical injury to the cards onto which the lotion actually leaked, Newark denied the claim. Shortly thereafter, Newark filed this declaratory judgment action seeking a determination that it had no duty to defend or indemnify Acupac for the claims asserted against Acupac by Revlon and Tarlow for damages related to the pacquettes of lotion. Relying upon exclusions "m" and "n" of the policy, the motion judge granted Newark's motion for summary judgment, resulting in this appeal.
We first consider Acupac's contention that since claims of damage to property owned by Revlon or Tarlow were asserted, the motion judge erred in determining that exclusion "m" applied and that there was no coverage as a matter of law. Under the policy, in the coverage section, Newark agreed to pay ... "those sums that the insured becomes legally obligated to pay as damages because of ... 'property damage' to which this insurance applies".
In Section V, the definition section of the policy, property damage is specifically defined as follows:
15. "Property damage" means:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it;
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.
There is a critical distinction between insurance coverage for tort liability for physical damages to other persons or property, and protection from contractual liability of the insured for economic loss caused by improper workmanship. Ordinarily, the coverage is for tort liability for physical damage to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained. Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 240-41 (1979), citing Henderson, Insurance Protection for Products Liability and Completed Operations What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441 (1971); Heldor Industries, Inc. v. Atlantic Mutual Insurance Co., 229 N.J. Super. 390, 395-96 (App. Div. 1998). Typically, therefore, comprehensive general liability insurance polices contain exclusions which are known as ...