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Customized Distribution Services v. Zurich Insurance Co.

December 16, 2004


On appeal from the Superior Court of New Jersey, Law Division, Camden County, L-1747-01.

Before Judges Kestin, Alley and Falcone.

The opinion of the court was delivered by: Alley, J.A.D.


Argued October 19, 2004

In June 2000, Campbell Soup Company (Campbell) filed a complaint against Customized Distribution Services, Inc. (CDS) which operated a warehouse in Wharton, New Jersey. The claim arose from the warehousing of a Campbell beverage product named"Splash." According to Campbell, CDS failed to rotate and ship the Splash in a timely manner and was liable for Campbell's resultant damages, including those flowing from Campbell having to dispose of the product at reduced prices.

CDS sought insurance coverage for the claim from its insurer, defendant Zurich Insurance Company (Zurich). Zurich's denial of coverage to CDS triggered the declaratory judgment action now before us, and the focus of this appeal is on whether CDS is entitled to coverage under the policy for Campbell's damages. The trial court granted summary judgment in favor of Zurich. The action by Campbell has been settled.

The underlying facts are straightforward. On January 29, 1999, Campbell notified CDS that"Splash products [that had been stored at CDS] were shipped out of turn with expiration dates exceeding a twenty day window." Campbell informed CDS that this misrotation would result in it"be[ing] forced to sell [the affected product] to secondary markets as lower grade product and at less than 50 percent of Bulletin Price." In an apparent effort to mitigate damages, Campbell sold the misrotated product in secondary markets and donated the remaining portion to charity. Campbell claimed that because it was unable to ship the misrotated product in its usual retail supply chain, it sustained a loss of $1,384,727.00.

In February 1999, CDS notified Zurich of the potential claim based on the alleged misrotation of the Campbell Splash products. CDS had obtained insurance from Zurich that included a Comprehensive General Liability ("CGL") policy, and a Commercial Inland Marine policy containing a Warehouseman's Liability ("WL") form. The WL form provided liability coverage to the CDS warehouse located in Wharton, New Jersey where the Splash product was kept prior to shipment. On February 18, 1999, Zurich acknowledged receipt of CDS' claim, noting that it would begin its investigation and review of the claim immediately.

On February 22, CDS Vice President John Fisher provided Zurich with correspondence between CDS and Campbell regarding"the potential misrotation of Campbell'Splash' product." Fisher stated in the letter,"[o]ur discussions with Campbell, since mid-August, have been based on the fact that the'Splash' inventory we received was not selling, therefore causing us to use far more space then [sic] we anticipated. As a result, this put our entire operation in jeopardy from a rotational standpoint."

On May 6, 1999, Zurich claims manager Randy Wilburn denied coverage on the basis that Campbell's loss was due to the product not being sold and stated that no determination had yet been made regarding the impact of any misrotation on the product's impending expiration date. According to Wilburn,

We understand that on or around January 22, 1999, Campbell's Soup Company requested 50,000 square feet of space to store a product called"Splash." The product did not sell very well, and Campbell's Soup Company ended up using over 350,000 square feet of space in your warehouse. Due to the extreme volume of incoming shipments, we understand that it was almost impossible to keep track of the product, and some of the product may have been misrotated by the warehouse. However, the majority of the product went bad simply because the product did not sell. It is undetermined at this time if the possible misrotation had any effect on the product going bad.

Wilburn also cited two"exclusion" provisions in the WL policy, which read as follows:


2. We will not pay for a"loss" caused by or resulting from any of the following:

a. Delay, loss of use, loss of market, or any other consequential loss.

g. Wear and tear, any quality in the Covered Property that causes it to damage or destroy itself, hidden defect, gradual deterioration, depreciation, mechanical breakdown, insects, vermin, rodents, corrosion, rust, dampness, dryness, cold, or heat.

CDS then informed Zurich in a letter dated May 14, 1999, that it had"received new correspondence from Campbell's showing that 100 percent of the claim is due to misrotation, ...

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