NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-3905-21
DIALECTIC DISTRIBUTION LLC, and DIALECTIC PR LLC,
Plaintiffs-Appellants,
v.
CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBERS B0507CG1900631 and BG0507CG2001218,
Defendant-Respondent. _______________________________
Argued November 27, 2023 – Decided December 11, 2023
Before Judges Sabatino, Mawla, and Chase.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-6801-20.
Stephen A. Weisbrod (Weisbrod Matteis & Copley PLLC) of the District of Columbia, California, Florida, Illinois, New York, and Washington bars, admitted pro hac vice, argued the cause for appellants (Rubenstein Business Law and Stephen A. Weisbrod, attorneys; David Joshua Rubenstein, of counsel and on the briefs; Stephen A. Weisbrod, on the briefs).
John Woods (Clyde & Co US LLP) of the New York bar, admitted pro hac vice, argued the cause for respondent (Clyde & Co US LLP, attorneys; Kevin M. Haas and John Woods, of counsel and on the brief; Digisha R. Bhavsar and Spenser Swaczyk, on the brief).
PER CURIAM
Plaintiffs Dialectic Distribution LLC and Dialectic Distribution PR LLC
appeal from an August 5, 2022 order granting summary judgment to defendant
Certain Underwriters at Lloyd's London. We affirm.
I.
Plaintiffs are global distributors and resellers of consumer electronics.
However, in early 2020, when health officials were beginning to urge the public
to wear facemasks to help prevent the spread of COVID-19, plaintiffs expanded
their operations and entered the mask market. They purchased millions of KN95
facemasks from Chinese suppliers for import to and sale in the United States
and Europe. The masks were supposed to meet a ninety-five percent filtration
specification as their American-made counterparts (N95 masks). However, the
Chinese-made KN95 masks would prove inferior and less effective.
A-3905-21 2 Facts Concerning the Masks
The first shipment of masks arrived in May 2020 and were detained by
U.S. Customs and Border Protection at airports in New York, Los Angeles, and
Chicago, as well as by the Governance of Economics in Brussels, Belgium.
Most of the masks imported to the United States were subject to Food and Drug
Administration (FDA) hold notices, which prohibited plaintiffs from selling the
masks as labeled until released by the FDA.
All the 640,000 masks shipped to the United States were eventually
released between May 27 and June 5, 2020. The FDA permitted plaintiffs to
market 140,000 of the masks, which were mislabeled as KN95, but had an
average filtration efficiency of 22.33%, by relabeling them to reflect their true
efficiency.
On July 8, 2020, 750,000 masks were shipped to Chicago and detained.
Customs released 250,000 masks on September 4, 2020, but they were subject
to a hold notice because they were misbranded with a label stating: "'KN95
Protective Mask' greater than or equal to '95% Bacterial Filtration Efficiency.'"
The remaining 500,000 masks were not released by customs.
1,000,000 masks were shipped to Los Angeles and likewise detained by
customs and subject to FDA hold notices. The hold notices were never released,
A-3905-21 3 and plaintiffs mitigated their losses by returning the masks to Hong Kong
pursuant to an export bond.1
Of the 1,859,050 masks shipped to Belgium, 866,400 were detained by
authorities. Testing performed by Belgian customs revealed the masks did not
meet the European equivalent of the KN95 standard for filtration efficiency.
The Belgian authorities required plaintiffs to relabel the masks before they could
be sold. The disposition of the remaining 992,650 masks is unclear from the
record.
Facts Concerning Plaintiffs' Insurance Broker
Before plaintiffs purchased the masks, they contacted their insurance
broker in April 2020 to secure product insurance coverage. Zach Zelter,
plaintiffs' CEO; Anthony Ficano, plaintiffs' Director of Global Operations; and
Mark Hoenes, a Dialectic employee, were the points of contact for the broker.
Sophia Jack, worked for the broker, and was the contact for plaintiffs.
Plaintiffs inquired about the definitional limits of coverage. On April 15,
2020, Jack emailed Zelter as follows:
Regarding the confiscation by governmental agencies question, the response to this is two[]fold:
1 Plaintiffs advise they have lawsuits pending against the manufacturers in the Hong Kong and Singapore courts. A-3905-21 4 [Defendant's] policy is a policy of physical loss or damage from any external cause. Should your goods be confiscated, the inference is that the goods will be returned to you (the Insured) at a later date assuming there has been no physical loss to the goods and you (the Insured) finally does receive the goods safely then there would be no loss. However, should the goods be confiscated and then used by that governmental agency or its assigns, then this would be considered as theft which would be recoverable under the policy.
On May 14, 2020, Ficano sent the following email to Jack:
Could we include wording like something below?
In the event there is a government seizure of goods and the goods are put on hold by a government agency for any or no reason we could file a claim and the claim would be considered a total loss. We will be indemnified for the full amount value . . . of the goods being held. Can we get confirmation that this will be written into the body of the policy or added to the endorsement?
Jack forwarded the email to defendant asking whether confiscation and
expropriation wording could be added to the policy. That proposed language
was as follows:
(a) This policy is to cover loss of and/or damage to the property hereby insured directly caused by confiscation, seizure, appropriation, expropriation, requisition for title or use or willful destruction by/or under the order of the [g]overnment . . . and/or public or local authority . . . .
A-3905-21 5 On May 15, 2020, defendant responded the proposed language was
unacceptable. Zelter and Ficano claimed neither of them received a copy of
defendant's response.2
The Policy Language
Defendants issued two marine "Stock Throughput" policies to plaintiffs
with policy periods of May 17, 2019, to May 17, 2020; and May 17, 2020, to
May 17, 2021. The "Conditions" sections of both policies offered coverage
"[a]gainst all risks of physical loss or damage to the subject-matter insured from
any external cause." The policies also contained a "Customs and/or Immigration
Authority Inspection(s)" provision, which stated:
This insurance is also specially to cover (notwithstanding the War Exclusion Clause contained herein) physical loss of or damage to the subject matter insured arising out of the performance of inspection duties by the relevant Customs and/or Immigration Authorities or another duly constituted governmental agency of any State or Territory who are performing inspection duties in accordance with any governmental law, statute, mandate, rule or regulation covering the import or export of said subject-matter into or from the applicable State or Territory, or covering whilst said subject matter is passing through such State or Territory prior to coming within the jurisdiction of the State or Territory of destination.
2 Plaintiffs did not sue the broker, and there are no claims asserted against the broker as a third party. A-3905-21 6 [(emphasis added).]
The policies included a "Risks Covered" provision, which stated:
Without limitation to coverage otherwise provided for herein the following perils clause is incorporated herein;
Touching the adventures and perils which the Insurers are contented to bear and do take upon themselves in this voyage, they are of the seas and inland waters, men-of-war, fire, enemies, pirates, rovers, thieves, jettison, letters of mart and countermart, surprisals, takings at sea, arrests, restraints and detainments of all Kings, Princes and People of what nation, condition, or quality soever, barratry of master and mariners, and of all other like perils, losses or misfortunes that have or shall have come to the hurt, detriment or damage of the said goods and merchandises and ship, or any part thereof.
Plaintiff's Insurance Claims and This Litigation
When the masks were detained, plaintiffs filed a claim citing the "[a]gainst
all risk of physical loss or damage . . . from any external cause" and the "physical
loss of or damage to the subject matter insured arising out of the performance
of inspection duties" provisions in the "Customs and/or Immigration Authority
Inspections" section of the policy. Defendant declined coverage, contending the
temporary detention of the masks for inspection was not a physical loss under
the policies because the masks were returned to plaintiffs undamaged.
A-3905-21 7 In November 2020, plaintiffs filed a complaint in the Law Division against
defendant alleging breach of contract, bad faith, and breach of the implied
covenant of good faith and fair dealing. The complaint sought compensatory,
punitive, direct, incidental, and of consequential damages, along with attorney's
fees. An expert calculated the damages based on lost profits and opined there
were millions of dollars 3 in losses due to the detainments by comparing the pre-
detention sales price of KN95 masks sold as ordinary face coverings to the post-
detention sales price.
Plaintiffs moved for partial summary judgment, declaring their losses
resulted from the detainment of the masks by government entities were covered
"physical losses" under the policies. The motion judge denied the motion and
concluded plaintiffs did not suffer "a physical loss from [the] lawful detainment
of the masks for inspection." The plain terms of the policies provided coverage
for "damage [or] physical change to the product" but did "not cover diminution
in value from lawful inspection."
Separately, defendant cross-moved for summary judgment arguing
plaintiffs neither alleged nor demonstrated physical loss or damage to the masks
3 More specific estimates are set forth in plaintiffs' confidential appendix, which we need not detail here. A-3905-21 8 required for coverage under the policies. The motion judge granted defendant's
motion and dismissed plaintiffs' complaint.
The judge framed the issue as "whether the lawful government detainment
for inspection of masks, imported from China, for a period of months resulting
in a diminution in value, qualifies under the insurance policies as a physical
loss." She noted the "condition of coverage under the policies [was] for the risk
of physical loss or damage to [the masks from] an 'external cause.'"
The judge concluded plaintiffs did not suffer "a 'physical loss' from an
'external force' by the lawful detainment of the masks by [c]ustoms for
government regulated inspections." The "plain terms of the policies [did] not
provide . . . plaintiffs coverage for diminution in value from lawful detention for
inspection." Likewise, the policies' customs and immigration authority
inspection provision provided coverage "for physical loss and damage arising
out of the performance of inspection duties[,] . . . not diminution in value from
[c]ustoms' detainment."
There was no physical loss because "[t]he masks were not damaged,
altered, or harmed" by the customs process, and no government acts "changed
the utility, . . . composition, or . . . perception of the product's character."
Plaintiffs had not been "permanently denied complete and total 'access to
A-3905-21 9 property' confiscated for government use," there was no "damage from an
incident at the building or structure site," or a claim "the masks were lost at sea."
The judge noted the evidence suggested plaintiffs were aware of customs
risks and could have purchased additional coverage for the type of detainments
at issue but did not. She cited text messages between Zelter and the
manufacturers in China, in which he sought assurances regarding the efficacy of
the masks, and the emails between plaintiffs and the broker regarding the
language of the policies. The judge concluded plaintiffs "were clearly aware of
[the] detention and regulations issues and inquired as to insurance coverage. . . .
Greater insurance coverage for losses was offered at an extra cost but declined
by plaintiffs."
The judge noted the case law, including Mac Property Group LLC v.
Selective Fire and Casualty Insurance Company, 473 N.J. Super. 1 (App. Div.
2022), stated a "physical loss occurs when the insured property suffers a
detrimental physical alteration." Plaintiffs had to prove a "physical injury,"
"physical damage," or "harm to the product" to constitute a physical loss. She
concluded the "[f]ailure to immediately pass through [c]ustom[s] inspections
pursuant to government safety regulations, and oversight as to the quality of the
masks, is not a physical loss." The policies did not cover "diminution in value
A-3905-21 10 from [c]ustoms' detainment" because plaintiffs were not "permanently denied
complete and total 'access to property' confiscated for government use, or
damage from an incident at the building or structure site . . . ." Indeed, the masks
were eventually released by authorities, and plaintiffs "relabeled a portion, sent
back a portion to China, and destroyed a portion to mitigate storage costs when
defendant declined coverage."
II.
On appeal, plaintiffs argue the motion judge erred in finding no physical
loss due to the government's seizure of the masks. They repeat that defendant's
policies covered against "all risks of physical loss or damage . . . from any
external cause" and did not exclude governmental seizure.
Plaintiffs dispute the judge's conclusion the masks were not damaged and
argue she ignored the damages evidence in the record. They claim the judge
focused on the fact the goods were lawfully detained, yet the policies ma de no
distinction between lawful and unlawful seizures. Moreover, the policies here
were different than Mac Property because the policy in that case covered "direct
physical loss or damage"—language that is more circumscribed than the broader
policy language employed here, which covered losses due to customs
inspections and risks in customs. The policies here also offered coverage in the
A-3905-21 11 event of detriment, hurt, or damage, which the judge failed to consider. They
also assert the judge ignored evidence the masks could still be sold as face
coverings but for the seizure, and that the detention resulting in a diminution in
value constituted a loss.
Plaintiffs argue the judge erred by considering extrinsic evidence to
conclude they were aware during the policy procurement period that customs
could seize the masks due to their lack of efficacy. They assert what they knew
and their intent were material disputed facts the court could not resolve on
summary judgment.
We review a decision granting or denying summary judgment de novo,
applying the same legal standard under Rule 4:46-2 as the trial court. Schwartz
v. Menas, 251 N.J. 556, 570 (2022). That standard requires us to "determine
whether 'the pleadings, depositions, answers to interrogatories and admissions
on file, together with the affidavits, if any, show that there is no genuine issue
as to any material fact challenged and that the moving party is entitled to a
judgment or order as a matter of law.'" Branch v. Cream-O-Land Dairy, 244
N.J. 567, 582 (2021) (quoting R. 4:46-2(c)). "To decide whether a genuine issue
of material fact exists, [we] must 'draw[] all legitimate inferences from the facts
in favor of the non-moving party.'" Friedman v. Martinez, 242 N.J. 449, 472
A-3905-21 12 (2020) (second alteration in original) (quoting Globe Motor Co. v. Igdalev, 225
N.J. 469, 480 (2016)).
"An insurance policy is a contract." Villa v. Short, 195 N.J. 15, 23 (2008).
A trial court's interpretation of an insurance contract is a question of law, which
we also review de novo. Polarome Int'l, Inc. v. Greenwich Ins. Co., 404 N.J.
Super. 241, 260 (App. Div. 2008). When "interpreting insurance contracts, we
first examine the plain language of the policy and, if the terms are clear, they
'are to be given their plain, ordinary meaning.'" Pizzullo v. N.J. Mfrs. Ins. Co.,
196 N.J. 251, 270 (2008) (quoting Zacarias v. Allstate Ins. Co., 168 N.J. 590,
595 (2001)). The policy must "be enforced as written when its terms are clear"
so the "expectations of the parties will be fulfilled." Flomerfelt v. Cardiello,
202 N.J. 432, 441 (2010).
If an insurance policy is ambiguous, we will construe the terms "in favor
of the insured." Mac Prop., 473 N.J. Super. at 18 (quoting Oxford Realty Grp.
Cedar v. Travelers Excess & Surplus Lines Co., 229 N.J. 196, 208 (2017)).
However, this doctrine only applies if there is a genuine ambiguity in the
contract, and "the phrasing of the policy is so confusing that the average
policyholder cannot make out the boundaries of coverage . . . ." Templo Fuente
De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189, 200
A-3905-21 13 (2016) (quoting Progressive Cas. Ins. Co. v. Hurley, 166 N.J. 260, 274 (2001)).
"When the terms of an insurance contract are clear, it is the function of a court
to enforce it as written and not to make a better contract for either of the parties."
Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960).
At the outset, and contrary to plaintiffs' assertions, the judge's decision
did not turn on whether the government action was "lawful." There is no
evidence in the record customs authorities acted unlawfully, and the judge's
characterization of the government's action as lawful was merely a word choice
that is not dispositive of the issue before us.
The central issue is whether the detention of the masks by customs
authorities constituted a "physical loss or damage" to the masks. Our review of
the plain language of the policy does not convince us it was ambiguous. We are
not persuaded that the terms "physical loss or damage" included the detention
of the masks for inspection by customs authorities or the fact that they were
determined not to meet N95 standards. The reduced efficiency of the masks was
discovered by customs' testing but was not created by the detention. The
manufacturers are potentially to blame for the diminished utility of the masks;
an issue that is not before us and being litigated elsewhere. And the detention
itself did not constitute a physical loss or damage because the masks were
A-3905-21 14 temporarily unavailable during their inspections, which neither constituted a
loss, nor damage.
Construing the policies in the manner argued by plaintiffs would lead to
an absurd result, such as obligating coverage for a delay of any time-period
plaintiffs were without the masks. A plain reading of the policies convinces us
the masks had to be damaged, lost, or altered in some way to constitute a
physical loss or damage covered by the policy.
Plaintiffs rely upon Customized Distribution Services v. Zurich Insurance
Company, 373 N.J. Super. 480 (App. Div. 2004) and Wakefern Food
Corporation v. Liberty Mutual Fire Insurance Company, 406 N.J. Super. 524
(App. Div. 2009) to support their conception of "physical loss." The claim in
Customized Distribution arose from the improper rotation of a beverage on
behalf of Campbell Soup Company, which caused shipments of the beverage to
occur too close to their expiration date, forcing Campbell to dispose of the
mishandled beverages at reduced prices. 373 N.J. Super. at 483-84. Although
there was no change in the material composition of the beverage, we concluded
the mishandling of its rotation was
the functional equivalent of damage of a material nature or an alteration in physical composition. By reason of this change, and of the ensuing new perception of the covered property and its nature, the product lost value
A-3905-21 15 as much from the outdating as if it had turned sour or gone bad in some more tangible or material way.
[Id. at 490.]
Customized Distribution is clearly distinguishable because the masks did
not have an expiration date that could be tied to their value to the insured.
Moreover, nothing happened to the masks during customs inspections to reduce
their value. The masks did not meet their intended purpose before they were
shipped.
Wakefern is likewise inapposite. There, the plaintiffs operated a group of
supermarkets, which lost food due to spoilage during a four-day electrical
blackout. 406 N.J. Super. at 528. The Wakefern policies covered
"consequential loss or damage resulting from an interruption of electrical power
to plaintiffs' supermarkets" if that interruption follows "'physical damage" to
specified electrical equipment. Id. at 530. The insurer, however, denied
coverage, contending that although the power grid was incapable of supplying
power for four days, the electrical equipment suffered no "physical damage."
Id. at 529.
We held the term "physical damage," in the context of the insurance policy
at issue, was ambiguous because it was susceptible to two interpretations. Id. at
540-41. Therefore, plaintiffs were entitled to their lost revenue because "due to
A-3905-21 16 a physical incident or series of incidents" elsewhere, the entire grid had become
"physically incapable of performing [its] essential function . . . ." Id. at 540.
The "loss of functionality" rather than harm to the property's structure equated
with a "physical loss of or damage to" the insured property. Id. at 543. Notably,
we added that we would have "reach[ed] a different result if, for example, a
governmental agency had ordered that the power [to the supermarket] be shut
off to conserve electricity." Id. at 540 n.7.
Again, the policy here was not ambiguous. More importantly, the
detention of the masks by customs did not cause them to lose functionality given
the improper manufacture of the masks from the onset. The detention did not
physically alter the masks' condition like the way in which the loss of power
caused the food to spoil in Wakefern.
Recently, in Mac Property we held that business losses due to government
closure orders barring or curtailing plaintiffs' operations during the COVID -19
pandemic did not meet the policy's definition of a "direct physical loss of or
damage to" their insured property. 473 N.J. Super. at 10. The Mac Property
policy was not ambiguous and was "not so confusing that average policyholders
like plaintiffs could not understand that coverage extended only to instances
where the insured property has suffered a detrimental physical alteration of some
A-3905-21 17 kind, or there was a physical loss of the insured property." Id. at 21-22. We
reasoned that when "'physical' is paired with another word, such as in 'physical
injury,' we have found that the resulting term means a 'detrimental alteration[],'
or 'damage or harm to the physical condition of a thing.'" Id. at 20 (alteration in
original) (quoting Phibro Animal Health Corp. v. Nat'l Union Fire Ins. Co. of
Pittsburgh, 446 N.J. Super. 419, 437 (App. Div. 2016)).
In Phibro, we addressed an argument similar to the one plaintiffs raise
here regarding the diminution value of the property to the insured. 446 N.J.
Super. 419 (App. Div. 2016). Phibro sold an additive for chicken feed designed
to prevent a parasitic disease. Id. at 424. Although the additive successfully
prevented disease in the chickens, Phibro's customers reported it "stunted the
growth of their chickens . . . result[ing] in lower meat production, increased feed
costs, and increased processing costs." Id. at 424-25. Although the chickens
were salable, they were "not at the sizes normally anticipated." Id. at 425.
The Phibro policies provided coverage for "property damage" and defined
it "as '[p]hysical injury to tangible property, including all resulting loss of use
of that property' or, alternatively, '[l]oss of use of tangible property that is not
physically injured.'" Id. at 436 (alterations in original). Phibro filed a notice of
claim with its carrier regarding its "potential liability for customer claims . . . ."
A-3905-21 18 Id. at 425. The insurers denied coverage. Id. at 425-26. Phibro sued for a
declaratory judgment that its primary insurer was obligated to provide coverage.
Id. at 426. Following competing motions for summary judgment from Phibro
and the insurer, the trial court denied Phibro's motion and granted the insurer
summary judgment. Id. at 427. The trial court reasoned the property damage
provision of the policy did not apply because the chickens were not physically
damaged and were sold for human consumption. Ibid.
We reversed in Phibro, concluding the chickens' stunted growth qualified
as a physical injury. Id. at 438. We stated: "Undoubtedly, the undisputed
smaller sizes of the broiler chickens could be considered an alteration . . . .
Simply stated, stunted growth represents harm to the physical condition of the
chickens." Id. at 438. The fact the chickens were salable was "not dispositive
of whether there was property damage . . . [because] the policies [did] not require
that the property that is damaged be unsalable." Id. at 439. We also held the
chickens' stunted growth "resulted in a partial loss of their use, which
independently qualifie[d] as 'property damage.'" Id. at 442.
Again, Phibro is distinguishable because the chickens were physically
altered and here, the masks were not. The fact the masks lost value as face
coverings during their detention in customs is not analogous to the chickens' loss
A-3905-21 19 of value because the loss in value was not based in the physical damage,
alteration, or modification of the masks, whereas the physically stunted growth
of the chickens caused their loss in value. Here, the plain language of the policy
insured physical loss and damage to the masks; in other words, an adverse effect
on the corporeal and tangible nature of the masks, which simply did not occur.
For these reasons, the motion judge properly granted defendant summary
judgment.
Finally, although we part ways with defendant's assertion on appeal that
the judge's ruling was not predicated on findings regarding plaintiffs' awareness
of the risk the masks could be seized during the policy procurement period , and
extrinsic evidence, including the texts with the manufacturer and emails with
the broker, this does not warrant a reversal. This is because the motion judge's
opinion makes clear summary judgment in defendants' favor also rested on the
independent grounds of interpreting the policy. Our de novo review of the
record confirms summary judgment was properly granted based on the
interpretation of the policy language alone. Therefore, we do not reach these
additional arguments by defendants as they are not dispositive.
Affirmed.
A-3905-21 20