Court Opinion

ID: 9908636
Source: CourtListenerOpinion
Date Created: 2023-12-11 15:05:44.260273+00
Date Added: 2024-06-11T12:49:22.477680
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE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