Third Circuit Finds Coverage for Faulty Workmanship Claim

In its recent decision in Travelers Prop. Cas. Co. of Am. v. USA Container Co., 2017 U.S. App. LEXIS 6602 (3rd Cir. Apr. 18, 2017), the United States Court of Appeals for the Third Circuit, applying New Jersey law, had occasion to consider the scope of coverage afforded under a general liability policy for property damage resulting from faulty workmanship.

Travelers’ insured, USA Container, was hired by Meelunie B.V./Amsterdam, a corn syrup distributor, to arrange for the transfer of corn syrup from rail cars to drums, so that the product could be shipped overseas.  USA Container subcontracted out a portion of the work requiring heating of the syrup so that it could be transferred from the rail cars.  The subcontractor accidentally overheated the product, thereby damaging it.  As a result, Meelunie’s overseas customers rejected the product.  Meelunie eventually sold the product at a reduced rate and then asserted a claim against USA Container for lost revenue. Travelers, denied coverage for the claim on the basis that it did not fall within the policy’s insuring agreement and on the additional grounds that various business risk exclusions applied.

Travelers argued that the damage to the corn syrup was not the result of an “occurrence,” citing to the seminal New Jersey Supreme Court decision Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (N.J. 1979), in which the Court held that an insured’s defective work does not qualify as an occurrence under a general liability policy.  The Third Circuit observed, however, that the New Jersey Supreme Court’s more recent decision in Cypress Point Condominium Ass’n v. Adria Towers, L.L.C., 143 A.3d 273 (N.J. 2016) limited the scope of Weedo and ultimately concluded that faulty workmanship causing damage to otherwise non-defective work can constitute an occurrence under a general liability policy.  The Third Circuit, therefore, rejected Travelers argument that the damage to the corn syrup caused by USA Container’s subcontractor was not an occurrence.

Travelers further argued that its policy’s business risk exclusions applied to bar coverage; in particular, exclusion j(6) applicable to “that part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it” and exclusion n, applicable to product recalls.  With respect to exclusion j(6), the Third Circuit concluded that the syrup was not “restored, repaired, or replaced,” but instead sold at a discount, causing loss to Meelunie.  The court further found that the product recall exclusion had no application since Meelunie was able to sell it, albeit at a discounted price.  As such, the court held that neither of the exclusions applied and that Travelers was responsible for insuring any damages ultimately paid by USA Container to Meelunie.