In Phibro Animal Health Corp., v. National Union Fire Ins. Co., a New Jersey appellate court recently considered the “impaired property exclusion” in the commercial general liability policy of a poultry food additive maker.  Phirbo, an animal health products manufacturer, sold a poultry feed additive intended to prevent a parasitic disease. Phibro customers reported that while the additive protected chickens from disease, its use ultimately lead to stunted chicken growth. The customers reported that as a result of the undersized chickens, they experienced lower meat production and increased costs. Phibro sought coverage for its customers’ claims for economic losses from its insurer, National Union, ultimately filing suit after its claim was denied.

The trial court granted National Union’s motion for summary judgment, concluding the alleged economic losses did not constitute property damage caused by an occurrence under the policy. The court further ruled that even if coverage existed, the impaired property exclusion would bar coverage.

But the Appellate Division disagreed, concluding that this was not a “faulty work” type of case and that adverse effects constituted an accidental occurrence and property damage under the CGL policy. The panel explained that the chickens that consumed the additive suffered harm to their physical condition, which met the policy’s definition of property damage. The panel also explained that the policy term “physical injury” does not require that the chickens were incapable of being sold and that this partial loss of their use independently qualifies as property damage.

The panel remanded the case to the lower court to further assess whether the policy’s impaired property exclusion precludes coverage. National Union argued that this exclusion applied because the customers’ chickens were damaged by a defect in Phibro’s product (and were thus “impaired”), but could be “restored to use” by removing the drug from their diets. The panel stated that the exclusion would apply only if the chickens reasonably and feasibly could be restored to their normal size and weight within a commercially viable time frame at a commercially reasonable cost after removal of the additive, and more time and evidence was needed to make this  factual determination.

Thanks to Chelsea Rendelman for her contribution to this post and please write to Mike Bono for more information.