A US insured suffered losses when the seal on a bottled beverage it was producing for another company failed quality control measures. A US court of appeals found that the losses were not covered by the “all-risks” property insurance policy because the losses were not physical loss or damage.
The insured was to produce 40 million bottles of the beverage in the first year. The bottled beverages failed the secure seal test and the bottles were not accepted. The policy covered “all risks of direct physical loss or damage to insured property at insured locations during the policy period.” The court held that whatever this language meant the loss fell within the express exclusions for “faulty workmanship, material, construction or design, from any cause.” The exclusion did not apply “if physical loss or damage not otherwise excluded by this policy to insured property at insured location results, then only such resulting physical loss or damage is covered by this policy.”
The insured said the defective bottle caps were not covered but the loss of the product inside the bottles was covered. The court said that the wording “raises some interpretive challenges.” The dispute was over what boundary the policy intended to draw between those property losses caused by faulty workmanship excluded from coverage and those “resulting losses” that were not.
The court found that this was not a case where an excluded occurrence involving initial property damage led to other property damage of a different kind. To the extent that the insured suffered property damage that loss was directly caused by and completely bound up in the increased risk resulting from the poor seals. A problem with the bottle cap liners directly rendered the entire product unsaleable and the product fell squarely within the exclusion language.