New Jersey District Court Finds Products and Workmanship Exclusions Ambiguous

The United States District Court for the District of New Jersey closed out 2016 with a declaration that the Products and Workmanship exclusions found in a manufacturer’s Building and Personal Property policy is ambiguous. In National Manufacturing Company v. Citizens Insurance Company of America, et al., 2016 U.S. Dist. LEXIS 180145 (D.N.J. Dec. 30, 2016), a manufacturer of stainless steel battery casings sought coverage for losses to its stock after an anti-corrosive chemical applied during the manufacturing process caused pits to develop in the casings. The chemical pitting rendered the casings unfit for their intended use in medical pacemaker batteries.

The policy contained a “Products Exclusion” that negated coverage for product losses “caused by or resulting from error or omission by any person or entity . . . in any stage of the development, production, or use of the product[.]” The policy also contained a “Workmanship Exclusion” for losses caused by “faulty, inadequate or defective . . . materials.” Both exclusions were subject to an exception when the excluded loss “results in a ‘Covered Cause of Loss’.” Covered Cause of Loss, in turn, was defined as “Risks of Direct Physical Loss unless the loss is Excluded.”

The court held that the loss fell within the broadest scope of the Products and Workmanship exclusions, but the “Covered Cause of Loss” exceptions “at best render the exclusions ambiguous and at worse incomprehensible.” Both the insurer and the insured had argued that the exceptions were intended to invoke the ensuing loss doctrine, but the court rejected these arguments because the policy did not use the term “ensuing loss.” Instead, the court reasoned that the policy language was circular because loss was covered unless it was excluded and excluded unless it was covered. The court construed the exclusionary language against the insurer and concluded that
the loss was covered.