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Atlantic Mutual Insurance Co. v. Hillside Bottling Co.

August 9, 2006


On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-3842-02.

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



Argued January 24, 2006

Before Judges Kestin, Hoens and Seltzer.

Plaintiff Atlantic Mutual Insurance Company ("Atlantic Mutual") appeals from the following orders issued by the Law Division judge in this declaratory judgment, insurance coverage action. In three separate orders entered on July 6, 2004, the judge denied Atlantic Mutual's motion for summary judgment and granted summary judgment in favor of defendants Hillside Bottling Co., Inc. ("Hillside"), Stewart's Beverages, Inc. ("Stewart's"), Mistic Brands, Inc. ("Mistic"), and Briar's U.S.A., Inc. ("Briar's"). In two orders entered on September 1, 2004, the judge granted the applications of Briar's, and of Hillside, Stewart's and Mistic, for counsel fees. The December 8, 2004 consent order fixed damages suffered by Hillside and by Snapple Beverage Group ("Snapple").*fn1 We reverse each of the orders that is the subject of this appeal.

The facts that gave rise to the complaint are not in dispute. Hillside operates a plant, located in Hillside, where it produces soft drinks for various companies. Included among its customers at the time were Briar's, Stewart's and Mistic (collectively, "the beverage companies"). Hillside received certain of the necessary ingredients, including flavorings and sugar, from its customers and stored those materials at the plant. In order to create each specific beverage, Hillside mixed these ingredients together with other ingredients, essentially consisting of carbon dioxide, water, preservatives and citric acid, which it provided to the customers for a cost pursuant to its contract.

Each of the customers gave Hillside its weekly order, and Hillside then created each of the particular beverages in accordance with the appropriate formulae. Hillside bottled the beverage products for shipment, using bottles that it bought from an outside vendor, and which it also supplied for a cost. Part of the process performed by Hillside involved cooling the beverages prior to bottling them by use of a "carbo cooler." That device, consisting of a series of interlocking metal plates, which are refrigerated by ammonia gas, cools the beverages and adds carbon dioxide to them to create carbonated soft drinks.

In December 2001, a quality control inspector for Stewart's noticed that a bottle of the beverage that had been produced by Hillside was discolored. When Stewart's tested the soft drink product, it was found to be contaminated with ammonia. Within days, the New Jersey Department of Health issued a notice requiring all of the soda that had been produced at the Hillside plant to be "detained and embargoed." Hillside alerted its customers that the beverages were contaminated and should not be consumed. Shortly thereafter, Briar's, Stewart's and Mistic recalled all of the beverages that had Hillside's product code. Eventually all of those beverages were destroyed and Briar's, Stewart's and Mistic gave refunds to their affected customers.

In January 2002, Stewart's and Mistic formally demanded that Hillside indemnify them for all costs, losses or damages relating to the contaminated products and the recall. In October 2002, Briar's filed a complaint in the Law Division against Hillside seeking to recover all of its costs and losses incurred as a result of the product recall. In turn, Hillside tendered both of the claims to Atlantic Mutual for indemnification and defense under a Comprehensive General Liability (CGL) insurance policy Atlantic Mutual had issued covering Hillside.

Atlantic Mutual responded by notifying Hillside that its obligation was limited to the $25,000 in coverage afforded pursuant to the Product Recall endorsement, which sum it paid. Atlantic Mutual then filed the complaint that gives rise to this appeal, seeking a declaratory judgment that it was not obligated to defend Hillside or to cover any of Hillside's costs or losses in excess of that sum. While this declaratory judgment litigation was pending, Atlantic Mutual agreed to defend the litigation against Hillside brought by Briar's and by Snapple, on behalf of Stewart's and Mistic, pursuant to a reservation of rights.

In rejecting Atlantic Mutual's motion for summary judgment and in granting the cross-motions, the judge reached a number of conclusions about the CGL policy that Atlantic Mutual challenges on appeal. First, he found that, for coverage purposes, Hillside was providing a service to Briar's and Snapple rather than producing a product. Second, he interpreted the language of the CGL policy defining "your work" and "your product" within the context of the business risk exclusion so that it would be inapplicable to Hillside's claim, by reasoning that the product in question for which Hillside sought coverage was not Hillside's but was the product of Briar's and Snapple. Third, he concluded that exclusion "n", also referred to as the sistership exclusion, did not apply to Hillside's claim because the product being recalled was not Hillside's. Finally, he concluded that the Product Recall endorsement did not apply at all to Hillside's claim. Relying on Newark Ins. Co. v. Acupac Packaging, Inc., 328 N.J. Super. 385, 401 (App. Div. 2000), the judge reasoned that the beverages were the property of the beverage companies rather than of Hillside, that the beverages were not the product of Hillside and that the claims were therefore covered and not subject to the Product Recall endorsement. He found that because Briar's and Snapple lost the value of their products as a result of the contamination, Hillside had damaged the products of others, therefore resulting in a covered claim pursuant to our reasoning in Acupac. Having concluded that the CGL policy provided coverage for Hillside's claim for the damages and losses incurred by its customers, Briar's and Snapple, and that the losses did not fall within any of the exclusions, the judge denied Atlantic Mutual's motion for summary judgment and granted the cross-motions of Hillside and the beverage companies. His orders granting counsel fees and fixing damages followed thereafter.

On appeal, Atlantic Mutual asserts that the motion judge erred in his analysis of the meaning of the CGL policy and urges us to reverse. In general, Atlantic Mutual argues that the motion judge erred by considering the language of the business risk exclusion without first determining whether Hillside was entitled to coverage under the definitions and the insuring clauses at all. Atlantic Mutual argues that in doing so, the judge relieved Hillside of its burden to establish that its claim was a covered one and that he misapplied the language of the policy by narrowly focusing instead on the language of the exclusion. More specifically, Atlantic Mutual argues that the judge erred in his analysis of both the nature of the product and the nature of the claim, failing to recognize that the contaminated beverages were Hillside's product and that its own faulty work cannot give rise to coverage. Because we find merit in this argument, and because we reverse the summary judgment orders on that ground, we need not reach the other arguments Atlantic Mutual has raised on appeal relating to the orders granting counsel fees and the consent order fixing the quantum of damages.

We note that on appeal from an order granting summary judgment, we apply the same standard that governs the analysis by the motion judge. Prudential Property & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998); see Antheunisse v. Tiffany & Co., Inc., 229 N.J. Super. 399, 402 (App. Div. 1988), certif. denied, 115 N.J. 59 (1989). We therefore must first determine whether, giving the non-moving party the benefit of all reasonable inferences, the movant has demonstrated that there are no genuine issues of material fact. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). We then analyze whether the motion judge's application of the law was correct. See Prudential, supra, 307 N.J. Super. at 167.

In carrying out our review, we owe no deference to the interpretation of the motion judge on matters of law. See Manalapan Realty, L.P. v. Tp. Committee of Manalapan, 140 N.J. 366, 378 (1995). This distinction is significant in our review of the issues raised in this appeal, where the facts are not in dispute and the questions before us raise only issues of law.

We begin with a recitation of the settled principles of law that apply to the interpretation of insurance contracts. Where a policy is unambiguous, the Court "should not engage in a strained construction to support the imposition of liability." Longobardi v. Chubb Ins. Co., 121 N.J. 520, 537 (1990); see Zacarias v. Allstate Ins. Co., 168 N.J. 590, 594-95 (2001). Moreover, even where it is appropriate to afford a liberal interpretation of policy language in favor of coverage, that process does not permit the "perversion of language or the exercise of inventive powers to create ambiguities where they do not fairly exist." Powell v. Alemaz, Inc., 335 N.J. Super. 33, 44 (App. Div. 2000)(citing National Surety Co. v. Allstate Ins. Co., 115 N.J. Super. 528, 524 (Law Div. 1971)).

With these precepts in mind, we turn to the several provisions of the CGL policy that are relevant. In order to be entitled to coverage under the policy, Hillside must first demonstrate that it has suffered a loss that falls within the definition of covered losses. In particular, the CGL policy includes the following language:

Coverage A - Bodily Injury and Property Damage Liability

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply . . .

No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments - Coverages A and B.

b. This insurance applies to "bodily injury" or "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; and

(2) The "bodily injury" or "property damage" occurs during the policy period.

Of particular relevance to the issues on appeal are the following CGL policy definitions:

Section V - Definitions

17. "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; or

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 ...

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