The Appeals Court of Massachusetts held that a first-party property policy’s ensuing loss provision did not restore coverage for the non-defective contents of a bottle rendered unsaleable by defective bottle caps. Since the product contained in the bottle could not be separated from the defective bottle cap, the whole product was defective and excluded from coverage.
In 2008, a manufacturer entered into an agreement with a company to manufacture a milk-based shelf-stable protein drink designed to require refrigeration only after the bottles are opened. To make that a viable proposition, the design and operation of the bottle caps to immediately seal and stay completely sealed before opened by the consumer was key. The manufacturer ran tests on the bottle caps and found that there was a 9 percent failure rate of the caps, meaning an unacceptable portion of the sealed products could unexpectedly become shelf “unstable.” It later confirmed that the bottle caps did not perform sufficiently because of problems with the caps themselves. Ultimately, the buyer rejected the two million bottles from the first production run and all of the bottles were destroyed.
The manufacturer submitted the claim to its property insurer. Its insurer denied the claim, based in part on the defective work exclusions. The manufacturer claimed the policy’s “ensuing loss” exception, which restored coverage for non-excluded property damage resulting from otherwise excluded losses, applied. It argued that since only the bottle caps were bad, the loss of the product itself, which was not defective, ensued from the defective bottle caps and was not excluded.
In the lawsuit that followed, the court held the faulty workmanship exclusions applied to the whole bottle and all of its contents, and the ensuing loss provision did not apply.
The Appeals Court of Massachusetts affirmed, noting that in order for the ensuing loss exception to apply, “damage that falls under the exclusion and the ensuing damage [that is covered] must be separable events in that the damage and the ensuing loss must be different in kind, not just degree.” The Court of Appeals held the loss of the product itself could not be separated from the defective caps and the faulty workmanship exclusions applied to the entire product: “a problem with the bottle caps directly rendered the entire product unusable.”
H.P. Hood LLC v. Allianz Global Risks US Insurance Company, No. 14-P-1605, 88 Mass. App. Ct. 613, 2015 Mass. App. LEXIS 175 (Nov. 2, 2015)