American White Cross Laboratories, Inc. v. Continental Ins. Co.

• Decision Date: 03 July 1985
• Citation: 495 A.2d 152,202 N.J.Super. 372
• Parties: AMERICAN WHITE CROSS LABORATORIES, INC., a Corporation, and the North River Insurance Company, a Corporation, Plaintiffs-Respondents, v. The CONTINENTAL INSURANCE COMPANY, Defendant-Appellant.
• Court: New Jersey Superior Court — Appellate Division

Page 372

202 N.J.Super. 372

495 A.2d 152

AMERICAN WHITE CROSS LABORATORIES, INC., a Corporation, and the North River Insurance Company, a Corporation Plaintiffs-Respondents, v. The CONTINENTAL INSURANCE COMPANY, Defendant-Appellant.

Superior Court of New Jersey Appellate Division.

Submitted Feb. 25, 1985.

Decided July 3, 1985.

Tompkins, McGuire & Wachenfeld, Newark, for defendant-appellant (William L'E. Wertheimer, Newark, of counsel; James T. O'Halloran, Trenton, on brief).

Conway & Reiseman, Roseland, for plaintiffs-respondents (Gerald W. Conway, Roseland, of counsel and on brief).

Before Judges McELROY, DREIER and SHEBELL.

The opinion of the court was delivered by

McELROY, P.J.A.D.

The question posed by this appeal is whether plaintiffs-respondents, American White Cross Laboratories (American) and its products liability insurer and subrogee, The North River Insurance Company (North River), are entitled to defense costs, counsel fees and indemnification from defendant-appellant, The Continental Insurance Company (Continental), insurer of Absorbent Cotton Company (Absorbent), under a vendor's endorsement added to the general liability and products liability policy Continental issued to Absorbent.

The vendor's endorsement made American an additional insured of Continental but, in pertinent part, limited the additional vendor's coverage as follows:

It is agreed that the 'Persons Insured' provision is amended to include any person or organization (herein referred to as 'vendor'), as an insured, but only with respect to the distribution or sale in the regular course of the vendor's business of the named insured's products subject to the following additional provisions:

1. The insurance with respect to the vendor does not apply to:

(a) any express warranty, or any distribution or sale for a purpose, unauthorized by the named insured;

(b) bodily injury or property damage arising out of

(i) any act of the vendor which changes the condition of the products,

(ii) any failure to maintain the product in merchantable condition,

(iii) any failure to make such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the distribution or sale of the products, or

(iv) products which after distribution or sale by the named insured have been labeled or relabeled or used as a container, part or ingredient of any other thing or substance by or for the vendor;

(c) bodily injury or property damage occurring within the vendor's premises. ¹

The operative facts of this case are not complex nor is there a material dispute as to any of them.

Absorbent sells a number of products to American including absorbent cotton which it first processes for absorbency and bleaches. The cotton is then carded and sold to American in the form of "header rolls," obviously a sale in bulk, contained in cases which are marked as to the number of rolls, size and weight of each roll and the weight of the entire case. American, under an agreement with its customer Shop Rite/Wakefern, a supermarket firm, then sterilizes the cotton, cuts it into smaller units, weighs them, wraps each unit and separately places it in a box, the design and the labelling of which is developed by American and its customer for sale in supermarkets. The foregoing facts are confirmed by the deposition of an employee of American who testified that Absorbent sends American cotton in a "semi-raw material state" without "any labelling whatsoever" and the small packages produced by American and eventually intended to be sold to consumers bear labels as to which Absorbent had no input as to either design or content.

On August 16, 1978, Denise Baran purchased a number of these cotton packages in a Shop-Rite supermarket and from them contrived a "costume" by wrapping cotton around all of her body except her head. While in this unusual attire, apparently at some social affair, the cotton was ignited by a match or cigarette and Baran sustained severe burns. In some manner, her husband was also burned. They sued Absorbent, American and another company, which had manufactured the paper wrapping for the cotton, on strict liability and negligence grounds. An excerpt from the deposition of an expert intended to be used at trial by the Barans reveals that he viewed the cotton product purchased by Baran as highly flammable "and for that reason ... defective unless the user of that cotton is instructed on how to use, how not to use." He opined that the product defect was a "[p]ackaging and labeling defect." The deposition of American's president, taken in the Baran suit, is of interest; he admitted that the flammability of cotton is a matter of common knowledge and that American needed no warnings from Absorbent on that subject. He also conceded that Absorbent had nothing to do with the packaging of the product sold to the Barans.

When sued by the Barans, American demanded a defense and eventual indemnification from Continental under the vendor's endorsement. Continental disclaimed coverage on the ground of the endorsement's exclusions 1(b)(1), "change in the condition of the product," and 1(b)(iv), "labeled or relabeled ... by ... the vendor," but undertook defense of Absorbent, its named insured. American through its carrier, North American, investigated, defended and eventually settled the Baran suit which was then dismissed as to the other defendants. The present suit was then instituted against Continental. Cross motions for summary judgment were decided adversely to Continental's coverage position and in a later hearing before the same judge it was determined that the amount paid by North River in behalf of American to the Barans was reasonable as was the amount of defense costs claimed. Accordingly, a judgment of $620,809 in favor of American and North River was entered. This appeal followed.

No reported New Jersey case has interpreted the vendor's endorsement here considered and it has received scant attention elsewhere. The trial judge noted that there were only two decisions construing a similar endorsement, Mattocks v. Daylin, Inc., 452 F.Supp. 512 (W.D.Pa.1978), aff'd mem., 614 F.2d 770 (3rd Cir.1979) and Sears, Roebuck and Co. v. Reliance Ins. Co., 654 F.2d 494 (7th Cir.1981). Unlike the case at hand, neither of those cases involved a claim that the product defect was a failure to warn. As we shall later explain, we accept the reasoning applied in those cases but when applied to the facts of this case, that reasoning requires a finding that American was not covered by this vendor's endorsement.

The question here presented requires analysis of the intended purposes of a vendor's endorsement, viewing realistically its nature and its place not only in the commercial marketplace but within the world of insurance from which it springs. Although the question here involved is one of intended coverage, in such analysis the law of strict liability in tort as it affects the product chain from manufacturer to distributor to retailer and eventually to the ultimate consumer cannot be ignored because it illustrates the underlying reasons for the existence of the vendor's endorsement.

When a manufacturer produces a product which contains a defect in design or one caused by faulty workmanship and it is sold to a distributor who in turn sells it to a retailer, the latter two links in the chain to the ultimate consumer ordinarily are merely conduits in the stream of commerce which ends at the ultimate consumer. The manufacturing or design defect, as to which they had no creative role, was in existence when each of them received the product and each is merely a nonculpable accessory in the eventual sale. Nevertheless, each, in that role, is strictly liable to the injured ultimate user. Milchalko v. Cooke Color & Chem. Corp., 91 N.J. 386, 394, 451 A.2d 179 (1982); 2 Restatement, Torts 2d, § 402A, comment f, at 350 (1965). This is so even where the product is one which is pre-packaged and is merely passed along to the consumer. Newmark v. Gimbel's Inc., 54 N.J. 585, 600-601, 258 A.2d 697 (1969). The nonculpable distributor or retailer is not, however, without remedy and has "an action over against the manufacturer who should bear the primary responsibility for putting the defective products in the stream of trade." Newmark, 54 N.J. at 600, 258 A.2d 697. It is in this complex of the facts of merchandising life and the imposition of strict liability at law that the vendor's endorsement has its natural role and serves specific purpose. Since, in the ordinary case, the liability trail eventually leads back to the manufacturer, and consequently to his insurer, it is a matter of common sense and fair dealing that the coverage of the manufacturer should be extended to the distributor and the insurance of the distributor in turn cover the retailer.

Thus, in the ordinary circumstances we have depicted, the risk of defense or indemnity loss being underwritten by extension of coverage to the vendor would appear to be not much greater than that already incurred by the existence of the basic coverage already available in the policy issued to the named insured. Although there is here no proof of the cost of premium for such extended coverage, it is a fair inference that that cost probably does not approach the premium charged for the basic products liability policy initially issued.

Moreover, it is obvious that the vendor's endorsement here considered is not a grant of the same kind of coverage Continental gave to its named insured. The vendor receives a more limited form of coverage which does not protect it against its own acts proximately related to the consumer's injury. In that respect the trial judge's conclusion that when American "bought Absorbent's cotton it was also buying Absorbent's coverage," is without realistic basis. American had its own product liability coverage...