Wisconsin Pharmacal Company, LLC v. Nebraska Cultures of California, Inc.

2016 WI 14SUPREME COURT OF WISCONSIN
CASE NO.: 2013AP613 & 2013AP687
COMPLETE TITLE: Wisconsin Pharmacal Company, LLC,
Plaintiff,
v.
Nebraska Cultures of California, Inc. and
Evanston Insurance Company,
Defendants,
Jeneil Biotech, Inc.,
Defendant-Appellant,
The Netherlands Insurance Company,
Defendant-Respondent-Petitioner.
------------------------------------------------
Wisconsin Pharmacal Company, LLC,
Plaintiff,
v.
Nebraska Cultures of California, Inc.,
Defendant-Appellant,
Jeneil Biotech, Inc. and The Netherlands
Insurance Company,
Defendants,
Evanston Insurance Company,
Defendant-Respondent-Petitioner.
REVIEW OF A DECISION BY THE COURT OF APPEALS
(Reported at 358 Wis. 2d 673, 856 N.W.2d 505)
(Ct. App. 2014 Published)
PDC No: 2014 WI App 111OPINION FILED: March 1, 2016
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: September 22, 2015
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Ozaukee
JUDGE: Thomas R. Wolfgram
JUSTICES:
CONCURRED:
DISSENTED: ABRAHAMSON, A.W. BRADLEY, J.J., dissent.
(Opinion Filed)
NOT PARTICIPATING: ZIELGER, R.G. BRADLEY, J.J., did not
participate.
ATTORNEYS:
For the defendant-respondent-petitioners, there were joint
briefs by Thomas R. Schrimpf and Hinshaw & Culbertson, LLP,
Milwaukee, Mark F. Wolfe and Traub Lieberman Straus &
Shrewsberry, Chicago. Oral argument by Thomas Schrimpf and Mark
F. Wolfe.
For the defendant-appellant, Jeneil Biotech, Inc., there
was a brief by Douglas M. Raines, James A. Baxter and von
Briesen & Roper, S.C., Milwaukee, and oral argument by Douglas
M. Raines.
For the defendant-appellant, Nebraska Cultures of
California, Inc., there was a brief by Patryk Silver, Borgelt,
Powell, Peterson & Frauen, S.C., Madison, and oral argument by
Patryk Silver.
There was an amicus curiae brief by James A. Friedman, Todd
G. Smith, and Godfrey & Kahn, S.C., Madison on behalf of the
Wisconsin Insurance Alliance.
2
2016 WI 14NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2013AP613 & 2013AP687
(L.C. No. 2011CV32)
STATE OF WISCONSIN : IN SUPREME COURT
Wisconsin Pharmacal Company, LLC,
Plaintiff,
v.
Nebraska Cultures of California, Inc., FILED
Defendant-Appellant,
MAR 1, 2016
Jeneil Biotech, Inc. and The Netherlands
Insurance Company, Diane M. Fremgen
Clerk of Supreme Court
Defendants,
Evanston Insurance Company,
Defendant-Respondent-Petitioner.
Wisconsin Pharmacal Company, LLC,
Plaintiff,
v.
Nebraska Cultures of California, Inc.,
Defendant-Appellant,
Jeneil Biotech, Inc. and The Netherlands
Insurance Company,
Defendants,
Evanston Insurance Company,
Nos. 2013AP613 & 2013AP687
Defendant-Respondent-Petitioner.
REVIEW of a decision of the Court of Appeals. Reversed.
¶1 PATIENCE DRAKE ROGGENSACK, C.J. We review a
published decision of the court of appeals1 reversing an order of
the Ozaukee County Circuit Court2 that granted summary judgment
to The Netherlands Insurance Company (Netherlands) and Evanston
Insurance Company (Evanston). Our review centers on a coverage
dispute between the insurers and their respective insureds,
Jeneil Biotech, Inc. (Jeneil) and Nebraska Cultures of
California, Inc. (Nebraska Cultures). The underlying claims
against the insureds arise from their supplying a defective
ingredient for incorporation into the plaintiff's, Wisconsin
Pharmacal Company (Pharmacal), probiotic supplement tablets.
¶2 The insurers argue that the insurance policies do not
provide coverage for damages that may arise out of the
underlying claims against the insureds. Specifically, the
issues before us are: (1) whether the incorporation of a
defective ingredient into the supplement tablets constitutes
"property damage" caused by an "occurrence" under the policies'
1
Wis. Pharmacal Co. v. Neb. Cultures of Cal., Inc., 2014 WI
App 111, 358 Wis. 2d 673, 856 N.W.2d 505.
2
The Honorable Thomas R. Wolfgram of Ozaukee County
presided.
2
Nos. 2013AP613 & 2013AP687
language; and (2) if there is "property damage" caused by an
"occurrence," whether any of the policies' exclusions apply to
negate coverage.
¶3 We conclude that there is no "property damage" caused
by an "occurrence" because the incorporation of a defective
ingredient into the supplement tablets did not damage other
property and did not result in loss of use of property. We
further conclude that, even if the incorporation of a defective
ingredient were to constitute "property damage" caused by an
"occurrence," certain exclusions in both policies apply to
negate coverage. Accordingly, we reverse the decision of the
court of appeals.
I. BACKGROUND
¶4 Pharmacal supplies a Daily Probiotic Feminine
Supplement to a major retailer. This supplement is in the form
of a chewable tablet and contains various ingredients, including
a probiotic bacterial species known as Lactobacillus rhamnosus
(LRA). In July of 2008, Pharmacal contacted Nutritional
Manufacturing Services, LLC to manufacture supplement tablets
containing LRA. Nutritional Manufacturing agreed to procure LRA
and manufacture supplement tablets containing that ingredient.
In order to procure LRA for production of supplement tablets,
Nutritional Manufacturing contacted Nebraska Cultures, which
agreed to supply LRA. Nebraska Cultures then contracted with
Jeneil to supply LRA to Nebraska Cultures for subsequent sale to
Nutritional Manufacturing. Nutritional Manufacturing thereafter
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Nos. 2013AP613 & 2013AP687
obtained the ingredient from Nebraska Cultures along with a
"Certificate of Analysis," representing the ingredient as LRA.
¶5 Having supposedly acquired LRA from Nebraska Cultures,
Nutritional Manufacturing manufactured supplement tablets using
the provided ingredient, which was defective because it
constituted a different species of bacteria, Lactobacillus
acidophilus (LA), rather than LRA. This manufacturing process
required blending other ingredients that were obtained from
other vendors, with the defective probiotic ingredient supplied
by Nebraska Cultures and Jeneil. Once all of the ingredients
were blended together, they were compressed into tablet form.
Once mixed and compressed into tablet form, none of the
ingredients could be separated from one another. After
manufacturing supplement tablets, Nutritional Manufacturing
supplied them to Pharmacal, which, in turn, packaged and shipped
them to the retailer.
¶6 In April of 2009, the retailer notified Pharmacal that
the supplement did not contain LRA but, rather, it contained LA.
Pharmacal performed independent testing on supplement tablets
and confirmed that they contained LA rather than the contracted-
for LRA. Upon this confirmation, Pharmacal notified the
retailer that the supplements were mislabeled as containing LRA
when they actually contained LA. In May of 2009, the retailer
recalled the supplement. After the recall, Pharmacal destroyed
the supplement tablets containing the defective ingredient.
¶7 Nutritional Manufacturing assigned any and all of its
causes of action against Nebraska Cultures and Jeneil to
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Nos. 2013AP613 & 2013AP687
Pharmacal. On January 14, 2011, Pharmacal filed suit against
Nebraska Cultures and its general liability insurer, Evanston,
as well as Jeneil and its general liability insurer,
Netherlands. Pharmacal alleged numerous causes of action,3
including various tort and contract claims. Additionally,
Nebraska Cultures filed a cross claim against Jeneil for
negligence. In October of 2011, the circuit court dismissed
with prejudice all of Pharmacal's claims against Jeneil and
Netherlands. With respect to the claims against Nebraska
Cultures and Evanston, the circuit court dismissed with
prejudice all tort claims. Therefore, the remaining claims
include: (1) Nebraska Cultures' cross claim against Jeneil for
negligence;4 and (2) Pharmacal's various contract-based claims
against Nebraska Cultures. All of these claims allege that
Jeneil and Nebraska Cultures incorrectly supplied LA to
Nutritional Manufacturing and Pharmacal when the parties had
contracted for LRA.
¶8 Subsequently, Netherlands and Evanston moved to
bifurcate and stay the merits of the proceedings pending the
circuit court's determination of whether their respective
3
Because Nutritional Manufacturing assigned all claims to
Pharmacal, we refer to all claims as Pharmacal's claims.
4
At oral argument, counsel indicated that Jeneil had
elected not to move to dismiss this claim. The merits of the
underlying claims between the various parties are not before us,
and therefore, we do not address the propriety of this remaining
cross claim for negligence.
5
Nos. 2013AP613 & 2013AP687
insurance policies provided coverage, thereby triggering the
insurers' duties to defend and indemnify. Netherlands and
Evanston moved for summary judgment, arguing that the insurance
policies did not cover any damages that may arise out of the
remaining causes of action against Jeneil and Nebraska Cultures
because there was no property damage caused by an occurrence.
¶9 In October of 2012 and January of 2013, the circuit
court held two hearings5 on the coverage issue and ultimately
granted the insurers' motions for summary judgment. The circuit
court concluded that the facts of the case did not trigger the
insurers' duties to defend. Specifically, the circuit court
concluded that the incorporation of a defective probiotic
ingredient into the tablets did not constitute property damage
caused by an occurrence because it harmed only the product
itself, which is an integrated system.
¶10 The court of appeals reversed the circuit court's
grant of summary judgment, concluding that the policies provided
coverage. Wis. Pharmacal Co. v. Neb. Cultures of Cal., Inc.,
2014 WI App 111, 358 Wis. 2d 673, 856 N.W.2d 505. The court of
appeals concluded that the integrated system rule was not
relevant to the coverage dispute and that the incorporation of a
defective ingredient constituted property damage to the product
(the probiotic supplement tablets) caused by an occurrence under
the policies' language and that no exclusion negated coverage.
5
After the first hearing, the circuit court allowed the
parties to conduct discovery on the coverage issue.
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Nos. 2013AP613 & 2013AP687
Id., ¶¶20-26. The court of appeals also held that Netherlands
breached its duty to defend6 by "reject[ing] Jeneil's initial
tender, prior to the discovery of additional facts bearing on
coverage." Id., ¶39.
¶11 We granted the insurers' joint petition for review.
II. DISCUSSION
A. Standard of Review
¶12 Reviewing a grant of summary judgment, we
independently apply the same methodology as the circuit court
and the court of appeals while benefitting from their analyses.
Preisler v. Gen. Cas. Ins. Co., 2014 WI 135, ¶16, 360 Wis. 2d
129, 857 N.W.2d 136. "The standards set forth in Wis. Stat.
§ 802.08 are our guides." Id. Summary judgment "shall be
rendered if 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 and that the moving party is entitled to a
judgment as a matter of law." Wis. Stat. § 802.08(2) (2013-14).
¶13 While the parties do not dispute the facts giving rise
to the underlying causes of action, our review requires us to
interpret the insurance policies. "The interpretation of an
insurance [policy] is a question of law that we review
6
At oral argument, counsel indicated that Netherlands
refused to provide Jeneil with any defense, while Evanston had
provided Nebraska Cultures with an initial defense.
7
Nos. 2013AP613 & 2013AP687
independently." Siebert v. Wis. Am. Mut. Ins. Co., 2011 WI 35,
¶28, 333 Wis. 2d 546, 797 N.W.2d 484.
B. Choice of Law
¶14 Initially, we note that there are two insurance
policies at issue in this case. Jeneil's coverage is governed
by the Netherlands policy, while Nebraska Cultures' coverage is
governed by the Evanston policy. The parties agree that the
Netherlands policy should be interpreted according to Wisconsin
law, while the Evanston policy should be interpreted according
to California law. We agree as well.
¶15 When parties do not specifically provide a choice of
law provision in the policy, we have "adopted the 'grouping-of-
contacts' approach for resolving conflicts questions raised as
to a disputed contract." Utica Mut. Ins. Co. v. Klein & Son,
Inc., 157 Wis. 2d 552, 556, 460 N.W.2d 763 (Ct. App. 1990).
This approach provides that insurance coverage is "determined by
the law of the [jurisdiction] with which the contract has its
most significant relationship." State Farm Mut. Auto. Ins. Co.
v. Gillette, 2002 WI 31, ¶26, 251 Wis. 2d 561, 641 N.W.2d 662(alteration in original) (internal quotation marks and citation
omitted).
¶16 We conclude, as agreed by the parties, that Wisconsin
has the most significant relationship to the Netherlands policy.
Accordingly, we interpret the Netherlands policy in accordance
with Wisconsin law. We further conclude, as agreed by the
parties, that California has the most significant relationship
8
Nos. 2013AP613 & 2013AP687
to the Evanston policy. Accordingly, we interpret the Evanston
policy in accordance with California law.
C. Duty to Defend
¶17 As another initial matter, we address the court of
appeals' conclusion that Netherlands breached its duty to defend
by "reject[ing] Jeneil's initial tender, prior to the discovery
of additional facts bearing on coverage." Wis. Pharmacal, 358
Wis. 2d 673, ¶39. At oral argument, Jeneil contended that a
remand is necessary to determine the consequences of
Netherlands' breach of the duty to defend.
¶18 Contrary to the court of appeals' holding, "[a]n
insurer does not breach its contractual duty to defend by
denying coverage where the issue of coverage is fairly debatable
as long as the insurer provides coverage and defense once
coverage is established." Elliott v. Donahue, 169 Wis. 2d 310,
317, 485 N.W.2d 403 (1992). An insurer may avoid breaching the
duty to defend by requesting "a bifurcated trial on the issues
of coverage and liability[] [and] mov[ing] to stay any
proceedings on liability until the issue of coverage is
resolved." Id. at 318. However, "[a]n insurer may need to
provide a defense to its insured when the separate trial on
coverage does not precede the trial on liability and damages."
Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496, 528, 385
N.W.2d 171 (1986) (emphasis added); Elliott, 169 Wis. 2d at 318.
¶19 In this case, Netherlands and Evanston jointly moved
to bifurcate and stay the proceedings pending a determination of
coverage. Although Evanston provided an initial defense, the
9
Nos. 2013AP613 & 2013AP687
circuit court ultimately concluded that the insurers' duties to
defend were not triggered because their respective policies did
not provide coverage. As this coverage determination by the
circuit court properly came prior to any proceedings regarding
the merits of the underlying claims, Netherlands did not breach
its duty to defend. We now turn to the discussion of whether
there is coverage under the policies.
D. Coverage, General Principles
¶20 We interpret insurance policies from the perspective
of a reasonable insured. Acuity v. Bagadia, 2008 WI 62, ¶13,
310 Wis. 2d 197, 750 N.W.2d 817. When the language of an
insurance contract is unambiguous, we apply its plain and
ordinary meaning. Preisler, 360 Wis. 2d 129, ¶18.
¶21 However, if terms of an insurance contract are "fairly
susceptible to more than one reasonable interpretation," the
policy is ambiguous. Id., ¶19 (quoting Hirschhorn v. Auto-
Owners Ins. Co., 2012 WI 20, ¶23, 338 Wis. 2d 761, 809 N.W.2d
529). "Policy language is not ambiguous merely because more
than one dictionary definition exists or the parties disagree
about its meaning." Id. Similarly, policy language is not
ambiguous merely because courts have come to differing
interpretations. Peace v. Nw. Nat'l Ins. Co., 228 Wis. 2d 106,
¶60, 596 N.W.2d 429 (1999). If the policy is ambiguous, the
court's construction is constrained and ambiguities are
construed against the insurer, in favor of coverage.
Hirschhorn, 338 Wis. 2d 761, ¶23.
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Nos. 2013AP613 & 2013AP687
¶22 Bearing the foregoing in mind, we determine whether
the policies provide coverage for incorporation of a defective
ingredient into supplement tablets. Our procedure for
determining whether coverage exists under an insurance policy
follows three steps. First, "we examine the facts of the
insured's claim to decide whether the policy makes an initial
grant of coverage." Preisler, 360 Wis. 2d 129, ¶22. If the
policy terms clearly do not cover the claim, generally, our
analysis ends. Id. However, "if the claim . . . triggers a
potential grant of coverage, we secondly examine whether any of
the policy's exclusions preclude coverage for that claim." Id.And third, "if an exclusion precludes coverage, we analyze
exceptions to the exclusion to determine whether any exception
reinstates coverage." Id.E. Initial Grant of Coverage
1. Netherlands policy
¶23 Netherlands' commercial general liability (CGL) policy
provides coverage for Jeneil's losses that "the insured becomes
legally obligated to pay as damages because of 'bodily injury'7
or 'property damage' . . . caused by an 'occurrence.'" The
policy defines property damage as "(a) Physical injury to
tangible property, including all resulting loss of use of that
property. . . .; or (b) Loss of use of tangible property that is
7
As the parties agree that no "bodily injury" has occurred,
we do not address that policy language.
11
Nos. 2013AP613 & 2013AP687
not physically injured." We first discuss whether there is
property damage under either definition.
a. property damage (physical injury)
¶24 With respect to the standard CGL definition of
property damage, we previously have concluded that,
The risk intended to be insured [in a CGL policy] is
the possibility that the goods, products or work of
the insured, once relinquished or completed, will
cause bodily injury or damage to property other than
to the product or completed work itself, and for which
the insured may be found liable.
Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI
26, ¶27, 233 Wis. 2d 314, 607 N.W.2d 276 (alteration in
original) (emphasis added) (internal quotation marks and
citation omitted). Stated otherwise, the insured risk (i.e.,
physical injury to tangible property) applies to physical injury
to tangible property other than, but which is caused by, a
defect in the product or work the insured supplied. Vogel v.
Russo, 2000 WI 85, ¶17, 236 Wis. 2d 504, 613 N.W.2d 177)
abrogated, in part, on other grounds by Ins. Co. of N. Am. v.
Cease Elec. Inc., 2004 WI 139, ¶25 n.6, 276 Wis. 2d 361, 688
N.W.2d 462.
¶25 In Vogel, where the CGL policy defined property damage
using the same terms as does the Netherlands' policy, we
carefully explained the risk to which CGL policies apply. We
again said that,
[t]he risk intended to be insured [in a CGL policy] is
the possibility that the goods, products or work of
the insured, once relinquished or completed, will
cause bodily injury or damage to property other than
12
Nos. 2013AP613 & 2013AP687
to the product or completed work itself, and for which
the insured may be found liable.
Id. (emphasis and alteration in original) (quoting Bulen v. W.
Bend Mut. Ins. Co., 125 Wis. 2d 259, 264-65, 371 N.W.2d 392 (Ct.
App. 1985).
¶26 We emphasized the nature of coverage afforded by a CGL
policy: "A CGL policy's sole purpose is to cover the risk that
the insured's goods, products, or work will cause bodily injury
or damage to property other than the product or the completed
work of the insured." Id. at 513 (emphasis in original). "A
CGL policy, therefore, is not a performance bond."8 Id. (further
citations omitted). Therefore, we must determine whether the
incorporation of LA, the defective component Jeneil provided,
into the supplement tablets constitutes physical injury to
tangible property other than the LA itself.
¶27 To answer the question of what constitutes other
property that has suffered physical injury, we analyze whether a
supplement tablet is an integrated system because if it is,
damage to the system has been defined as damage to the product
itself, not damage to other property. See Wausau Tile, Inc. v.
Cnty. Concrete Corp., 226 Wis. 2d 235, 249, 593 N.W.2d 4458
A performance bond ensures successful completion of a
contractual obligation. As Couch on Insurance explains,
performance bonds protect the person to whom a contractual
obligation is owed from the risk of loss directly arising from
another's failure to perform according to the terms of a
contract. Steven Plitt, Daniel Maldonado & Joshua D. Rogers, 1
Couch on Insurance § 1:15 (3d ed. 2009).
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Nos. 2013AP613 & 2013AP687
(1999). We have explained how an integrated system affects the
determination of what property is "other property" as follows:
What constitutes harm to other property rather than
harm to the product itself may be difficult to
determine. A product that nondangerously fails to
function due to a product defect has clearly caused
harm only to itself. A product that fails to function
and causes harm to surrounding property has clearly
caused harm to other property. However, when a
component part of a machine or a system destroys the
rest of the machine or system, the characterization
process becomes more difficult. When the product or
system is deemed to be an integrated whole, courts
treat such damage as harm to the product itself.
Id. at 249-50 (emphasis in original) (quoting Restatement
(Third) of Torts § 21 cmt. e (1997)).9 In short, "[d]amage by a
defective component of an integrated system to either the system
as a whole or other system components is not damage to 'other
property' . . . " Id. at 249 (citing East River S.S. Corp. v.
Transamerica Delaval, Inc., 476 U.S. 858, 867-68 (1986)).
¶28 An integrated system analysis is necessary when
evaluating coverage under a CGL policy because we must decide
whether the product is to be treated as a unified whole or
whether a defective component can be separated out such that the
claimed damage constitutes damage to property other than the
defective component itself. Id. at 250-52.
¶29 For example, in Wausau Tile, the manufacturer sold and
distributed concrete paving blocks, which were "made of cement,
9
We note there is no allegation that tablets containing LA
were dangerous.
14
Nos. 2013AP613 & 2013AP687
aggregate, water, and other materials, for use mainly in
exterior walkways." Id. at 241. The manufacturer contracted
with another company to supply the cement and yet another
company to supply the aggregate for incorporation into the
paving blocks. Id. After incorporation, the paving blocks
"suffered excessive expansion, deflecting, curling, cracking
and/or buckling." Id. at 242 (internal quotation marks and
citation omitted). These problems with the paving blocks
resulted from defects in both cement and aggregate. Id.
¶30 We employed an integrated system analysis to determine
whether paving blocks were integrated systems comprised of
cement, aggregate, and other components because if they were,
damage by a defective component of an integrated system to other
system components is not property damage to other property. Id.
at 251-52. We concluded that because all components were
combined to form paving blocks and the components could not be
separated from the finished product, all components were part of
an integrated system. Id. at 251. As such, we rejected the
manufacturer's "contention that the [paving blocks]
15
Nos. 2013AP613 & 2013AP687
constitute[d] property other than the defective cement" itself.10
Id. at 251-52.
¶31 While in Wausau Tile we employed the economic loss
doctrine to preclude tort claims for breaches of contract and/or
warranty, id. at 246, more importantly, we explained that it is
through an integrated system analysis that we determine what
constitutes "other property." Id. at 250-51. Deciding whether
the complained of injury is to other property is important
because it is only damage to other property that is covered
under a CGL policy. Vogel, 236 Wis. 2d 504, ¶17; Wis. Label,
233 Wis. 2d 314, ¶27.
¶32 The court of appeals correctly discerned that the
economic loss doctrine does not control a coverage dispute and,
therefore is not at issue here. However, the court of appeals
overlooked significant portions of our decision in Wausau Tile,
where we also discussed whether there was insurance policy
coverage for the claimed damage. Wausau Tile, 226 Wis. 2d at
266-69. Simply stated, the court of appeals did not perceive
the importance of an integrated system analysis when deciding
10
The Supreme Court also has discussed integrated systems.
In East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S.
858 (1986), the Court considered whether there was damage to
other property where defective component parts were incorporated
into a turbine. As a result of the defective parts, the turbine
failed and was damaged. Id. at 867-68. Although recognizing
that the integrated system had been negligently manufactured,
the Court held that the turbine must be regarded as a single
unit. Id. at 867. Therefore, any resulting damage to it or its
component parts constituted only damage to the property itself.
Id.16
Nos. 2013AP613 & 2013AP687
whether claimed damage arose from physical injury to tangible
property other than to the LA. See Wis. Pharmacal, 358 Wis. 2d
673, ¶19. Instead, the court of appeals applied law from other
jurisdictions to reason that a product may be "physically
injured by the incorporation of a defective, faulty, or
inadequate part." Id., ¶20. Thereafter, the court of appeals
incorrectly concluded that incorporation of a defective
ingredient into the supplement tablets caused property damage by
physically injuring other ingredients in the tablets. Id.
¶33 The policy language at issue in Wausau Tile is
substantively identical to Netherlands' policy language. Wausau
Tile, 226 Wis. 2d at 267 n.18. There, we concluded that the
manufacturer's claims did not allege property damage because, as
set forth above, damage by a defective component of an
integrated system to either the system as a whole or other
system components is not separable as damage to other property
for which coverage is provided by a CGL policy. See id. at 250-
52, 267-68.
¶34 Similarly, applying an integrated system analysis to
the instant case, we conclude that combining a defective
ingredient with other ingredients and incorporating them into
supplement tablets, formed an integrated system. Pharmacal
could not separate out the LA from the other ingredients or the
other ingredients from each other. No damage resulted to
property other than ingredients of the integrated system and the
completed product, the tablets. Stated otherwise, upon blending
17
Nos. 2013AP613 & 2013AP687
LA, rather than LRA, with other ingredients, all of the
ingredients were integrated into one product, the tablets.
¶35 Therefore, similar to the effect of cement being
incorporated with other components into the paving blocks in
Wausau Tile, the effect of LA being incorporated with the other
ingredients into tablets cannot be said to constitute damage to
other property. Accordingly, we conclude that the complained of
injury was sustained by the integrated system itself, i.e. the
tablets, such that no other property was injured.
¶36 Furthermore, there was no physical injury to tangible
property caused by LA. To constitute "physical injury,"
property other than LA must have been physically altered by the
LA. Vogel, 236 Wis. 2d 504, ¶17; Wis. Label, 233 Wis. 2d 314,
¶31; Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481, 496
(Ill. 2001). Additionally, there must be an element of
causation. Wis. Label, 233 Wis. 2d 314, ¶32; Smith v. Katz, 226
Wis. 2d 798, 822, 595 N.W.2d 345 (1999).
¶37 Pharmacal argues that there was physical injury due to
blending other ingredients with LA into tablets. However, there
was no factual foundation presented from which one could
conclude that creating tablets using LA physically altered other
ingredients in a way that would not have occurred if LRA had
been used in the same tableting process. Stated otherwise, any
changes to other ingredients were not a result of the defective
ingredient; rather, any changes were a result of the tableting
process that would have occurred regardless of which probiotic
ingredient was supplied. Yet, property damage under the first
18
Nos. 2013AP613 & 2013AP687
definition in the Netherlands policy requires physical injury to
tangible property that is caused by the insured. Accordingly,
we conclude that there was no "physical injury to tangible
property.
¶38 Finally, Jeneil asserts that the cartons, shippers,
inserts, tooling and dies associated with the supplement tablets
suffered physical injury, thereby constituting property damage
to tangible property. However, the materials associated with
shipping the supplement tablets did not undergo any physical
alterations due to LA. The presence of the defective ingredient
in the tablets did not cause any alterations to these materials
that would not have otherwise occurred. For example, the
defective ingredient did not cause the tablets to explode or
corrode through the shipping materials such that they underwent
some physical alteration that would not have occurred if the
tablets had contained the contracted-for LRA. Therefore, we
conclude that there is no physical injury to the cartons,
shippers, inserts, tooling and dies caused by the defective
ingredient.
¶39 We next consider whether the incorporation of a
defective ingredient constitutes property damage due to "loss of
use of tangible property that is not physically injured" under
the Netherlands policy.
b. property damage (loss of use)
¶40 As set forth above, Pharmacal's underlying claims
allege that Jeneil incorrectly supplied LA to Nutritional
Manufacturing and Pharmacal when the parties agreed upon, and
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Nos. 2013AP613 & 2013AP687
paid for, LRA. According to Jeneil, the incorporation of a
defective ingredient rendered the other ingredients and the
supplement tablets totally useless to Pharmacal, thereby
constituting property damage due to "loss of use of tangible
property that is not physically injured."
¶41 However, we previously have stated that "[d]iminution
in value——even to the point of worthlessness——is not the same as
'loss of use' under the insurance policy, which by its plain
language contemplates some sort of loss of use in fact, not a
reduction in value." Vogel, 236 Wis. 2d 504, ¶26.
¶42 In Vogel, the plaintiffs hired a contractor to build
their home. Id., ¶3. The contractor, in turn, hired a
subcontractor to perform the foundational work, concrete work
and brick work. Id. Upon completion of the home, a number of
deficiencies in the workmanship were discovered. Id., ¶¶4-7.
Among other things, the plaintiffs could not use their
fireplaces, the brickwork was incomplete, and the walls were
shoddily constructed. Id., ¶¶6-7. After trial, the circuit
court found that the home was "essentially a 'tear-down'" and
that the entire home was worthless as constructed. Id., ¶¶12-
13. The plaintiffs were awarded various damages, including cost
of repair and replacement damages for the defective masonry
work. Id., ¶12. The subcontractor sought coverage under its
CGL policy. See id. We held that, although the home was
essentially worthless in value due to the defective workmanship
and needed to be reconstructed, such damages for diminution in
value did not constitute "property damage" caused by "loss of
20
Nos. 2013AP613 & 2013AP687
use." Id., ¶26. The homeowners lost the entire value of their
home; they did not simply lose its use for some period of time.
Id.
¶43 Here, Jeneil similarly failed to perform in the manner
in which it had contractually agreed to perform. Jeneil
erroneously supplied LA, which was incorporated into the
supplement tablets. Once Pharmacal and the retailer realized
that the tablets contained LA rather than LRA, the tablets were
recalled. The recalled tablets were worthless due to the
inclusion of LA rather than LRA and were subsequently discarded.
As with the homeowners in Vogel who lost the entire value of
their home, Pharmacal did not lose the use of the tablets;
rather, it permanently lost the entire value of the tablets.
¶44 Furthermore, although Wisconsin appellate courts have
held that property damage caused by loss of use may occur with
temporary loss, they never have concluded that loss of use may
occur when the loss of the property is permanent.
¶45 For example, the court of appeals held that there was
loss of use when a farmer temporarily could not use his field
for an entire growing season. W. Cas. & Sur. Co. v. Budrus, 112
Wis. 2d 348, 352, 332 N.W.2d 837 (Ct. App. 1983). In Budrus,
the farmer purchased 400 pounds of seed labeled "Birdsfoot,"
which is feed for cows. Id. at 350. However, after planting
the seed on his 40-acre field, he discovered that the seed had
been mislabeled and that it was actually "Rape" seed, which is
feed for pigs and was useless to him. Id. The farmer sued the
seed supplier for damages resulting from crop loss and loss of
21
Nos. 2013AP613 & 2013AP687
production, as it was too late into the season to replant. Id.;
Wis. Label, 233 Wis. 2d 314, ¶54. The supplier sought coverage
under his insurance policy, and the court of appeals concluded
that there was property damage due to loss of use of the
farmer's 40-acre field. Budrus, 112 Wis. 2d at 352.
¶46 As the farmer was temporarily unable to use his
property until the next growing season, such damages constituted
loss of use under the insurance policy. See id. However, in
contrast to Pharmacal's tablets, the farmer's property was not
rendered permanently worthless such that he lost the entire
value of the field without the possibility of restoration.
¶47 Similarly, we have held that loss of use includes
damages arising from the removal and repair of a manufacturer's
defective transformer. Sola Basic Indus., Inc. v. U.S. Fid. &
Guar. Co., 90 Wis. 2d 641, 654, 280 N.W.2d 211 (1979). In Sola
Basic, the manufacturer used a transformer to operate its
electric furnace, which, in turn powered the manufacturer's
plant. Id. at 647. When a defective transformer had to be
removed and repaired, the electric furnace was rendered
unusable, causing the manufacturer to sustain additional costs
in order to operate its plant. Id. We concluded that these
damages, resulting from the inability to use the electric
furnace while the transformer was being repaired, constituted
loss of use under the insurance policy's language. Id. at 654.
¶48 It is also significant that the temporary inability to
use the electric furnace during repair of the transformer in
Sola Basic was a loss of use of property other than the
22
Nos. 2013AP613 & 2013AP687
defective product (the transformer), just as the loss of use of
the farmer's field in Budrus was a temporary inability to use
property other than the defective product (the seed). By
contrast, in the case before us, the claim for loss of use is a
permanent loss of use of the defective product itself, the
tablets.
¶49 While Jeneil argues that the incorporation of a
defective ingredient rendered the tablets and other ingredients
useless, thereby constituting loss of use, Pharmacal did not
actually lose use of the tablets. Instead, Pharmacal
permanently lost the entire value of the tablets. Accordingly,
we conclude that the Netherlands policy does not provide
coverage because there is no property damage due to "loss of use
of tangible property that has not been physically injured."11
¶50 As we have concluded that incorporation of LA, the
defective ingredient, into the tablets does not constitute
property damage under either definition of the Netherlands
policy, there is no initial grant of coverage. However, in the
interest of completeness, we proceed to consider whether there
has been an "occurrence."
c. occurrence
¶51 The policy defines "occurrence" as "an accident,
including continuous or repeated exposure to substantially the
11
For these same reasons, we further conclude that the
policy does not provide coverage for the permanent loss of use
of the cartons, shippers, inserts, tooling and dies associated
with the supplement tablets.
23
Nos. 2013AP613 & 2013AP687
same general harmful conditions." While Jeneil intentionally
provided a probiotic ingredient, the parties do not dispute that
Jeneil's provision of a defective ingredient was accidental.
However, we are not persuaded, simply because Jeneil accidently
supplied a defective ingredient, that this constitutes an
"occurrence" for purposes of coverage under the policy.
¶52 To the contrary, we note that, while faulty
workmanship "can give rise to property damage caused by an
'occurrence,'" it does not follow that faulty workmanship itself
constitutes an occurrence. Glendenning's Limestone & Ready-Mix
Co. v. Reimer, 2006 WI App 161, ¶30, 295 Wis. 2d 556, 721 N.W.2d
704 (quoting Am. Fam. Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI
2, ¶48, 268 Wis. 2d 16, 673 N.W.2d 65).
¶53 For example, in American Girl, a soil engineer
negligently gave faulty advice regarding the ability of the soil
to support a building. Am. Girl, 268 Wis. 2d 16, ¶¶12-13.
After the building was constructed pursuant to that advice, the
soil began to settle, which caused the building to sink and
sustain damage. Id., ¶¶13-14. We held that soil settlement,
which lead to sinking and cracking of the building, constituted
an "occurrence" under the policy. Id., ¶5; see Glendenning's
Limestone, 295 Wis. 2d 556, ¶27. Importantly, although the soil
engineer negligently, or accidentally, rendered the faulty
advice, this advice was not an "occurrence." Am. Girl, 268
Wis. 2d 16, ¶5. Rather, the faulty advice caused the
"occurrence," which, in turn, caused property damage. Id.24
Nos. 2013AP613 & 2013AP687
¶54 Similarly, where windows were defectively constructed,
that defective construction did not, in itself, constitute an
"occurrence" simply because defects arose via an accident.
Glendenning's Limestone, 295 Wis. 2d 556, ¶28 (citing
Kalchthaler v. Keller Constr. Co., 224 Wis. 2d 387, 391, 392
n.2, 591 N.W.2d 169 (Ct. App. 1999)). However, when defective
windows allowed rain to leak inside, thereby causing property
damage to wooden floors within the building, the leaking of the
windows constituted an "occurrence." Id., ¶29.
¶55 In light of the foregoing, we conclude that, although
a breach of contract may give rise to property damage caused by
an "occurrence," a breach of contract, standing alone, does not
constitute an "occurrence." See id., ¶39 (explaining that "[a]n
'accident' may be caused by faulty workmanship, but every
failure to adequately perform a job, even if that failure may be
characterized as negligence, is not an 'accident,' and thus not
an 'occurrence' under the policy.").
¶56 In the instant case, Jeneil's provision of a defective
ingredient is analogous to the soil engineer's faulty advice and
the defectively constructed windows. An accidental provision of
a defective ingredient does not constitute an "occurrence" in
and of itself. Therefore, we conclude that there is no property
damage caused by an "occurrence" as defined by the Netherlands
policy. Consequently, this also precludes an initial grant of
coverage under the Netherlands policy. We now consider whether
there is an initial grant of coverage under the Evanston policy.
25
Nos. 2013AP613 & 2013AP687
2. Evanston policy
¶57 Evanston's CGL policy similarly provides coverage for
Nebraska Cultures' losses arising out of "bodily injury" or
"property damage" caused by an "occurrence." The policy defines
"property damage" as "physical injury to or destruction of
tangible property including, consequential loss of use thereof;
o[r] loss of use of tangible property which has not been
physically injured or destroyed."
¶58 California CGL policies have been described as
follows:
General liability policies, such as the ones in
dispute here, are not designed to provide contractors
and developers with coverage against claims [that]
their work is inferior or defective. The risk of
replacing and repairing defective materials or poor
workmanship has generally been considered a commercial
risk which is not passed on to the liability insurer.
Rather[,] liability coverage comes into play when the
insured's defective materials or work cause injury to
property other than the insured's own work or
products. . . . "This distinction is significant.
Replacement and repair costs are to some degree within
the control of the insured. They can be minimized by
careful purchasing, inspection of material, quality
control and hiring policies. If replacement and
repair costs were covered, the incentive to exercise
care or to make repairs at the least possible cost
would be lessened since the insurance company would be
footing the bill for all scrap."
Maryland Cas. Co. v. Reeder, 221 Cal. App. 3d 961, 967 (Cal. Ct.
App. 1990) (citations omitted).
¶59 Bearing these principles in mind, we first discuss
whether there is property damage under either policy definition.
26
Nos. 2013AP613 & 2013AP687
a. property damage (physical injury)
¶60 Under California law, "property damage is not
established by the mere failure of a defective product to
perform as intended." F & H Constr. v. ITT Hartford Ins. Co. of
the Midwest, 118 Cal. App. 4th 364, 372 (Cal. Ct. App. 2004);
Reeder, 221 Cal. App. 3d at 969. Simply stated, a liability
insurance policy is not a performance bond. F & H Constr., 118
Cal. App. 4th at 373.
¶61 Also, when considering whether a defective product has
caused property damage, California courts examine whether the
defective product is hazardous. If the defective product is
hazardous, courts have found immediate property damage to other
property caused by a defective product. See Watts Indus., Inc.
v. Zurich Am. Ins. Co., 121 Cal. App. 4th 1029, 1044-46 (Cal.
Ct. App. 2004) (concluding that a hazardous product manufactured
with excessive lead percentages permitted lead to leach into
water flowing in contact with the product, causing damage to
other property).
¶62 However, under California law, when contractually
nonconforming pile caps were welded onto steel composite piles
that had been driven into the ground to support a water pumping
facility, no property damage occurred because the nonconforming
caps did not result in physical injury to other property. F & H
Constr., 118 Cal. App. 4th at 373-74. To explain further, the
parties contracted for grade A-50 caps, but grade A-36 caps were
supplied and subsequently welded onto the piles, thereby
rendering the pilings inadequate to support the building. Id.
27
Nos. 2013AP613 & 2013AP687
The court determined that, even though the contractually
nonconforming caps rendered the pilings inadequate for their
intended purpose, there was no property damage to the piles or
any other property. Id.
¶63 This is in contrast to a situation in which hazardous
property is connected to a building such that it damages the
building. For example, property damage was found where asbestos
was connected and linked to a building, thereby rendering the
entire building's air supply hazardous. Armstrong World Indus.,
Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 92-94 (Cal.
Ct. App. 1996). Similarly, where a nut cluster cereal was
contaminated by wood splinters, there was property damage
because the splinters rendered the cereal hazardous for
consumption. Shade Foods, Inc. v. Innovative Prods. Sales &
Mktg., Inc., 78 Cal. App. 4th 847, 865-66 (Cal. Ct. App. 2000).
The court stated that there may be a "finding [of] property
damage where a potentially injurious material in a product
causes loss to other products." Id. However, "property damage
is not established by the mere failure of a defective product to
perform as intended." F & H Constr., 118 Cal. App. 4th at 372.
¶64 In the instant case, a defective ingredient was
incorporated into the supplement tablets. Unlike the obvious
hazardousness of asbestos connected to a building or wood
splinters in cereal, there is no evidence suggesting that the
defective probiotic ingredient, LA, is hazardous. The tablets
were simply labeled as containing one probiotic ingredient when
they actually contained another. Therefore, due to the
28
Nos. 2013AP613 & 2013AP687
incorporation of a defective ingredient, the tablets were not
the product for which the parties had contracted.
¶65 Although a defective ingredient rendered the tablets
inadequate for their contracted purpose, the mere presence of a
defective ingredient did not render them hazardous.
Accordingly, we conclude that there is no property damage under
this policy definition.12 We next consider whether there is
property damage due to "loss of use of tangible property that
has not been physically injured" under the Evanston policy.
b. property damage (loss of use)
¶66 Under California law, loss of use damages refer to the
rental value of temporary replacement property, rather than the
value of replacing the property itself. Advanced Network, Inc.
v. Peerless Ins. Co., 190 Cal. App. 4th 1054, 1062-63 (Cal. Ct.
App. 2010). Such damages for loss of use of property are
distinct from loss of property. Id. at 1062. California courts
utilize the following example to illustrate this distinction:
[A]ssume that an automobile is stolen from its owner.
The value of the "loss of use" of the car is the
rental value of a substitute vehicle; the value of the
"loss" of the car is its replacement cost. . . . The
measure of damages for the loss of use of personal
property may be determined with reference to the
rental value of similar property which the plaintiff
can hire for use during the period when he is deprived
of the use of his own property.
12
For these same reasons, we further conclude that the
incorporation of a defective ingredient does not constitute
physical injury to the cartons, shippers, inserts, tooling and
dies associated with the supplement tablets.
29
Nos. 2013AP613 & 2013AP687
Collin v. Am. Empire Ins. Co., 21 Cal. App. 4th 787, 818 (Cal.
Ct. App. 1994) (internal quotation marks and citation omitted).
Moreover, while Pharmacal may not be able to use its property
because it is permanently unusable, such damages do not
constitute loss of use damages but, rather, "the value of the
property itself. Had [the insurer] wished to insure 'loss of
property,' its policy would have so provided." Id. at 818-19.
Therefore, where damages are unrelated to the rental value of
temporary replacement property, such damages do not constitute
loss of use under California law. See F & H Constr., 118 Cal.
App. 4th at 377.
¶67 As set forth, in full, above, the incorporation of a
defective ingredient rendered the tablets worthless for their
contracted purpose, and they were discarded due to their lack of
value. Therefore, Pharmacal's underlying claims are not for
loss of use damages because they relate to the permanent
uselessness of the tablets and not to the value of temporary
replacement property.13 Accordingly, we conclude that the
Evanston policy does not provide coverage because there is no
property damage due to "loss of use of tangible property that
has not been physically injured."
¶68 As we have concluded that the incorporation of a
defective ingredient into the tablets does not constitute
13
For these same reasons, we further conclude that the
policy does not provide coverage for the permanent loss of use
of the cartons, shippers, inserts, tooling and dies associated
with the supplement tablets.
30
Nos. 2013AP613 & 2013AP687
property damage under either definition in the Evanston policy,
there is no initial grant of coverage. However, in the interest
of completeness, we proceed to consider whether there has been
an "occurrence."
c. occurrence
¶69 The Evanston policy defines "occurrence" as "an
accident, including continuous or repeated exposure to
substantially the same general harmful conditions." California
courts interpret "[t]he plain meaning of the word 'accident'
[a]s an event occurring unexpectedly or by chance." Ray v.
Valley Forge Ins. Co., 77 Cal. App. 4th 1039, 1045-46 (Cal. Ct.
App. 1999).
¶70 Under California law, "[a]n accident . . . is never
present when the insured performs a deliberate act. . . .[W]here
the insured intended all of the acts that resulted in the
victim's injury, the event may not be deemed an accident merely
because the insured did not intend to cause injury." Id. at
1046 (alterations in original) (internal quotation marks
omitted) (quoting Merced Mut. Ins. Co. v. Mendez, 213 Cal. App.
3d 41, 50 (Cal. App. Ct. 1989)).
¶71 For example, in Ray, the California Court of Appeals
held that there was no "occurrence" where a roofing consultant
negligently gave faulty advice on the suitability of roofing
materials for a building. Id. at 1043. The unsuitability of
the roofing materials caused the building to be excessively hot,
rendering it uninhabitable for certain portions of the year.
Id. at 1044-45. The consultant sought coverage under his
31
Nos. 2013AP613 & 2013AP687
insurance policy for what the court characterized as breach of
contract claims, alleging that the consultant "rendered bad
advice" in recommending the roofing materials. Id. at 1045.
¶72 The court held that the faulty advice did not
constitute an accident because the consultant deliberately gave
the advice and intended the plaintiffs to utilize the roofing
materials that he had suggested. Id. at 1046. Therefore, the
faulty advice could not be considered an "occurrence" even
though it was occasioned by the consultant's negligence. Id.
¶73 In the instant case, Jeneil's provision of a defective
ingredient may have been occasioned by negligence; however,
Jeneil deliberately supplied the ingredient to Nebraska
Cultures, which, in turn, supplied the ingredient to Nutritional
Manufacturing. Moreover, Jeneil intended the ingredient to be
incorporated into the tablets. Given the deliberate nature of
these actions, the provision of a defective ingredient cannot be
said to constitute an "occurrence" under California law.
Consequently, this also precludes an initial grant of coverage
under the Evanston policy.
F. Exclusions
¶74 Finally, although we have concluded that neither
policy provides an initial grant of coverage to the respective
insureds, in the interest of completeness, we address whether,
if there were property damage caused by an "occurrence,"
exclusions apply and negate coverage.
¶75 Exclusions in insurance policies are written to
exclude described risks. Because they may limit coverage that
32
Nos. 2013AP613 & 2013AP687
is otherwise available, if they are ambiguous, exclusions are
construed narrowly against the drafter of the policy. Frost v.
Whitbeck, 2002 WI 129, ¶19, 257 Wis. 2d 80, 654 N.W.2d 225. If
the policy language is not ambiguous, we apply the plain meaning
of the words employed. Id., ¶17.
¶76 The court of appeals determined that damages stemming
from the recall of the supplement tablets were excluded under
both policies' recall, or "sistership," exclusions. Wis.
Pharmacal, 358 Wis. 2d 673, ¶32. The court of appeals went on
to conclude that damages unassociated with the recall expenses
were not excluded under any of the policies' remaining
exclusions. Id., ¶¶34-35; see Armstrong World, 45 Cal. App. 4th
at 113 (explaining that sistership exclusions negate coverage
for costs associated with preventative action of the recall, but
do not "operate to exclude coverage for actual damage caused by
the very product" that is the cause for the recall).
¶77 However, as set forth below, we conclude that, even if
the policies were to provide an initial grant of coverage, the
plain meaning of both polices' "impaired property" exclusions
operate to negate coverage. Therefore, we need not address the
sistership exclusions.
1. Netherlands policy
¶78 The Netherlands policy excludes coverage for:
"Property damage" to "impaired property" or
property that has not been physically injured, arising
out of: (1) A defect, deficiency, inadequacy or
dangerous condition in "your product" or "your work";
or (2) A delay or failure by [the insured] or anyone
33
Nos. 2013AP613 & 2013AP687
acting on [the insured's] behalf to perform a contract
or agreement in accordance with its terms.
This exclusion does not apply to the loss of use
of other property arising out of sudden and accidental
physical injury to "your product" or "your work" after
it has been put to its intended use.
¶79 This exclusion operates to negate coverage where
property damage results from "the failure of the insured's
products to meet the level of performance which the insured
warranted or represented." Am. Motorists Ins. Co. v. Trane Co.,
544 F. Supp. 669, 688 (W.D. Wis. 1982). It also excludes
coverage when the insured fails to perform a contract according
to its terms. Moreover, the only exception to this exclusion
occurs when the damage to other property arises from "sudden and
accidental physical injury" to the insured's product. Id.¶80 Here, there was no sudden and accidental physical
injury to the LA, other ingredients or supplement tablets.
Nutritional Manufacturing deliberately manufactured the tablets
with the ingredients supplied and Pharmacal deliberately
destroyed them. Therefore, there can be no loss of other
property resulting from sudden and accidental physical injury to
the insured's product.14 Furthermore, because the tablets
constituted an integrated system, as we have explained above,
there was no damage to other property on that basis as well.
14
Alternatively, the Netherlands policy excludes
"[p]roperty damage" to the insured's product "arising out of it
or any part of it." Therefore, even if we were to conclude that
there were sudden and accidental physical injury to a defective
ingredient, the other ingredients, or the tablets, such damages
would be excluded as arising out of Jeneil's product.
34
Nos. 2013AP613 & 2013AP687
Accordingly, the exception to the exclusion is inapplicable.
Therefore, we need determine only whether the exclusion itself
applies.
¶81 We conclude that it does. Jeneil argues that the
incorporation of a defective ingredient constitutes loss of use
because the tablets and other ingredients were worthless as
labeled and could not be sold. However, we have already
concluded that no loss of use of other property occurred.
Stated otherwise, any loss of use was due to the incorporation
of Jeneil's defective probiotic. The Netherlands policy
specifically excludes damages caused by such a loss.
¶82 Furthermore, as repeatedly alleged by Pharmacal, the
provision of a defective ingredient constitutes a breach of
contract. We agree. The parties contracted for the sale of
LRA, but LA was supplied. This failure of Jeneil to perform a
contract in accordance with its terms is likewise excluded from
the Netherlands policy. Accordingly, we conclude that
Netherlands' "impaired property" exclusion operates to negate an
initial grant of coverage, if there were such a grant.
2. Evanston policy
¶83 The Evanston policy similarly excludes coverage for:
[A]ny Claim based upon or arising out of loss of use
of tangible property which has not been physically
injured or destroyed resulting from: (i) a delay in
or lack of performance by or on behalf of the Named
Insured of any contract or agreement; or (ii) a
defect, deficiency, inadequacy or dangerous condition
in the products, goods or operations of the Named
Insured;
35
Nos. 2013AP613 & 2013AP687
provided, however, this exclusion does not apply to
loss of use of other tangible property resulting from
the sudden and accidental physical injury to or
destruction of the Named Insured's Products . . .
after such products . . . have been put to use by any
person or organization other than an Insured[.]15
¶84 Under California law, this exclusion precludes
coverage for loss of use damages "arising out of [the insured's]
negligent failure to perform its contractual obligations" or its
defective product or work. Reg'l Steel Corp. v. Liberty Surplus
Ins. Corp., 226 Cal. App. 4th 1377, 1394 (Cal. Ct. App. 2014).
Pharmacal alleges that Nebraska Cultures breached its contract
by supplying a defective ingredient, which was subsequently
incorporated into the supplement tablets. Therefore, any
resulting loss of use damages arise out of Nebraska Cultures'
failure to properly perform its contractual obligations when it
provided LA, a defective component of the supplement tablets.
Such damages are specifically excluded by the Evanston policy.
Accordingly, we conclude that, even if there were an initial
15
For similar reasons as those set forth with respect to
the Netherlands policy, the exception to the exclusion is
inapplicable. The Evanston policy also excludes coverage for:
[A]ny Claim based upon or arising out of Property
Damage to the Named Insured's Products arising out of
it or any part of it, or for the cost of inspecting,
repairing or replacing any defective or allegedly
defective product or part thereof or for loss of use
of any defective or allegedly defective product[.]
Therefore, even if we were to conclude that there were physical
injury to a defective ingredient, the other ingredients, or the
tablets, such damages would be excluded.
36
Nos. 2013AP613 & 2013AP687
grant of coverage, Evanston's impaired property exclusion
operates to negate such coverage.
III. CONCLUSION
¶85 In light of the foregoing, we conclude that there is
no "property damage" caused by an "occurrence" because the
incorporation of a defective ingredient into the supplement
tablets did not damage other property and did not result in loss
of use of property. We further conclude that, even if the
incorporation of a defective ingredient were to constitute
"property damage" caused by an "occurrence," certain exclusions
in both policies apply to negate coverage. Accordingly, we
reverse the decision of the court of appeals.
By the Court.—The decision of the court of appeals is
reversed and remanded for further proceedings consistent with
this opinion.
¶86 ANNETTE KINGSLAND ZIEGLER and REBECCA G. BRADLEY, JJ.,
did not participate.
37
No. 2013AP613 & 2013AP687.ssa
¶87 SHIRLEY S. ABRAHAMSON, J. (dissenting). "Like the
ever-expanding, all-consuming alien life form portrayed in the
1958 B-movie classic The Blob, the economic loss doctrine
[continues] to be a swelling globule on the legal landscape of
this state."1
¶88 In the instant case, the majority opinion expands the
already swollen flow of economic loss jurisprudence into
heretofore unknown territory, grafting the "integrated system"
rule from the economic loss doctrine onto the analysis of two
commercial general liability (CGL) insurance policies'
definitions of "property damage" and "occurrence."
¶89 "Like the Blob, the more it eats, the more it grows."2
¶90 The insurance policies at issue provide coverage for
losses due to "property damage" arising from an "occurrence" to
two suppliers of probiotic bacteria:3 Nebraska Cultures of
California, Inc. and Jeneil Biotech, Inc. Nebraska Cultures is
insured by Evanston Insurance Company. Jeneil is insured by
Netherlands Insurance Company. For simplicity I will refer to
the insurance policies simply as "Nebraska Cultures' policy" and
"Jeneil's policy," or, collectively, as "the insurance
policies."
1
Grams v. Milk Prods., Inc., 2005 WI 112, ¶57, 283
Wis. 2d 511, 699 N.W.2d 167 (Abrahamson, C.J., dissenting).
2
1325 N. Van Buren, LLC v. T-3 Grp., Ltd., 2006 WI 94, ¶69,
293 Wis. 2d 410, 716 N.W.2d 822 (Bradley, J., dissenting).
3
Probiotics are bacteria and yeasts with beneficial effects
on health, particularly digestion.
1
No. 2013AP613 & 2013AP687.ssa
¶91 The insureds, Nebraska Cultures and Jeneil, contracted
with a third party, Nutritional Manufacturing, to supply one
type of probiotic bacteria, Lactobacillus rhamnosus A (LRA) for
incorporation into probiotic tablets. After the bacteria was
incorporated into tablets by Nutritional Manufacturing, the
tablets were packaged and sold to a retailer by Pharmacal. The
retailer to whom Pharmacal sold the packaged tablets discovered
the tablets contained a different probiotic bacteria,
Lactobacillus acidophilus (LA). As a result, the mislabeled
tablets were withdrawn from the market and destroyed (with their
packaging).
¶92 Pharmacal filed suit against Nebraska Cultures and
Jeneil. Evanston Insurance Company and Netherlands Insurance
Company sought to stay and bifurcate the proceedings. They
asserted that no coverage existed under the insurance policies
because the incorporation of the wrong probiotic ingredient into
Pharmacal's probiotic tablets was not "property damage" caused
by an "occurrence," and that even if it were, certain exclusions
negated coverage. The majority opinion adopts the position of
the two insurance companies.
¶93 I conclude that the court of appeals' interpretation
of the insurance policies (an interpretation that does not
import elements of the economic loss doctrine) is more
persuasive than that of the majority opinion. As a result, I
would affirm the decision of the court of appeals.
¶94 One of my chief concerns with the majority opinion is
its incorporation of the "integrated system" analysis derived
2
No. 2013AP613 & 2013AP687.ssa
from the tort economic loss doctrine into the interpretation of
insurance policies in Wisconsin.4 The economic loss doctrine is
a remedies principle that bars recovery in tort for economic
losses stemming from, among other things, a product's failure to
perform up to expectations. See Am. Family Mut. Ins. Co. v. Am.
Girl, Inc., 2004 WI 2, ¶¶34-35, 268 Wis. 2d 16, 673 N.W.2d 65(citing Wausau Tile, Inc. v. Cnty. Concrete Corp., 226
Wis. 2d 235, 245-46, 593 N.W.2d 445 (1999)).
¶95 The majority opinion applies an "integrated system"
analysis derived from the economic loss doctrine as explained in
Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235,
250-52, 593 N.W.2d 445 (1999), a tort liability case (not a case
interpreting an insurance policy), to the interpretation of
insurance policies. Based on its "integrated system" analysis,
4
Although California law may have a role in the instant
case, I question the majority opinion's application of the
"grouping-of-contacts" choice of law analysis. The only
contacts that the majority opinion notes are that the
Netherlands policy was issued to Jeneil in Wisconsin and the
Evanston policy was issued to Nebraska Cultures in California.
Majority op., ¶16. The majority opinion does not analyze other
contacts that may be relevant.
The majority opinion's discussion of choice of law should
not be read as a complete or exhaustive application of
Wisconsin's choice of law rules; the majority opinion is
cursory. See Drinkwater v. Am. Family Mut. Ins. Co., 2006 WI
56, ¶¶32-64, 290 Wis. 2d 642, 714 N.W.2d 568 (reviewing the
"checkered past" of Wisconsin's choice of law jurisprudence and
discussing the principles that drive choice of law analyses in
Wisconsin).
In any event, the majority opinion's interpretation of
California law is suspect.
3
No. 2013AP613 & 2013AP687.ssa
rather than on the words of the policies, the majority opinion
concludes there is no coverage under the insurance policies
"because the incorporation of a defective ingredient into
the . . . tablets did not damage other property and did not
result in loss of use of property."5
¶96 I write separately to make two points.
¶97 First, reading elements of the economic loss doctrine
in tort law into the interpretation of insurance policies is
unwise and contrary to this court's precedent. As this court
has previously stated: "The [economic loss] doctrine does not
determine insurance coverage, which turns on the policy
language." Am. Girl, 268 Wis. 2d 16, ¶6 (emphasis added).
¶98 Second, I agree with the court of appeals'
interpretation of the text of the insurance policies without
incorporating elements of the economic loss doctrine.
¶99 Under the text of the insurance policies, the
incorporation of the wrong probiotic ingredient in Pharmacal's
probiotic supplements was "property damage" caused by an
"occurrence," and none of the insurance policies' exclusions
negate coverage.
¶100 Accordingly, I would affirm the court of appeals'
detailed and well-reasoned decision and hold that the insurance
policies provide coverage.
I
5
Majority op., ¶3.
4
No. 2013AP613 & 2013AP687.ssa
¶101 The language of a contract determines the rights and
responsibilities of the parties to the contract.
¶102 The goal of a court in interpreting an insurance
policy, a contract, is "to determine and carry out the
intentions of the parties as expressed by the language of the
insurance policy."6
¶103 "Insurance coverage depends upon the policy language,
not the theory of liability." 1325 N. Van Buren, LLC v. T-3
Grp., Ltd., 2006 WI 94, ¶59, 293 Wis. 2d 410, 716 N.W.2d 822;
see also Am. Girl, 268 Wis. 2d 16, ¶¶6, 35.
¶104 The majority opinion's analysis all but ignores this
principle, beginning not by analyzing the language of the
insurance policies——which define both "property damage" and
"occurrence"——but by analyzing whether any such "property
damage" was damage to "other property."7
¶105 This focus on damage to "other property" by the
majority opinion is derived not from the language of the
insurance policies (which do not refer to "other property") but
rather from tort cases applying the economic loss doctrine.
These economic loss cases refer to damage to "other property."
¶106 The economic loss cases state that the doctrine does
not bar recovery in tort for "a product purchaser's claims of
6
Day v. Allstate Indem. Co., 2011 WI 24, ¶27, 332
Wis. 2d 571, 798 N.W.2d 199 (citing Folkman v. Quamme, 2003 WI
116, ¶12, 264 Wis. 2d 617, 665 N.W.2d 857).
7
Majority op., ¶¶24-26. Wisconsin case law interprets and
applies these words in insurance policies.
5
No. 2013AP613 & 2013AP687.ssa
personal injury or damage to property other than the product
itself."8
¶107 The "other than the product itself" concept is
addressed in Wausau Tile. In that case, the economic loss
doctrine was used to bar tort claims stemming from the expansion
and cracking of concrete paving blocks because the damage was
caused by the incorporation of defective aggregate and concrete
into the paving blocks, an "integrated system."9 The paving
blocks were an "integrated system" because the components of the
paving blocks were integrated into a finished product and could
not be separated from the finished product.10
¶108 The majority opinion in the instant insurance case
states that the "integrated system" analysis in Wausau Tile, a
tort liability case, "is necessary when evaluating coverage
under a CGL policy because we must decide whether the product is
to be treated as a unified whole or whether a defective
component can be separated out such that the claimed damage
8
Wausau Tile, Inc. v. Cnty. Concrete Corp., 226
Wis. 2d 235, 247, 593 N.W.2d 445 (1999) (citations omitted)
(emphasis added). In other words, if a defective component of
an integrated system causes damage to that system, that damage
is not compensable in tort. Wausau Tile, 226 Wis. 2d at 249("Damage by a defective component of an integrated system to
either the system as a whole or other system components is not
damage to 'other property' which precludes the application of
the economic loss doctrine.") (citations omitted).
9
Wausau Tile, 226 Wis. 2d at 249-253.
10
Wausau Tile, 226 Wis. 2d at 251.
6
No. 2013AP613 & 2013AP687.ssa
constitutes damage to property other than the defective
component itself."11
¶109 Applying an "integrated system" analysis, the majority
opinion concludes that the tablets were an "integrated system"
because the wrong probiotic bacteria, like the defective
aggregate in Wausau Tile, was integrated into a finished product
and could not be separated out after integration.12 As a result,
the majority opinion concludes that there was no "property
damage" in the instant case.13
¶110 The majority opinion, however, ignores a critical
distinction between Wausau Tile and the instant case.
¶111 Wausau Tile was a tort liability case applying the
economic loss doctrine. It was not an insurance coverage
dispute. Although an insurance policy in Wausau Tile covered
"property damage" arising from an "occurrence," the Wausau Tile
court was not addressing insurance issues; it did not decide
whether the insurance policy in Wausau Tile provided coverage.14
¶112 The majority opinion treats Wausau Tile as an
insurance policy case and reads the economic loss doctrine into
the interpretation of insurance policy language. Wausau Tile
11
Majority op., ¶28.
12
See majority op., ¶¶34-35.
13
See majority op., ¶35.
14
Wausau Tile, 226 Wis. 2d at 268 n.19 ("[I]t is not
necessary for us to decide precisely which property damage is
covered under the policy . . . .").
7
No. 2013AP613 & 2013AP687.ssa
does not compel the majority opinion's unwise and unprecedented
approach.
¶113 Under the majority opinion's approach, the first step
in evaluating a claim for "property damage" arising from an
"occurrence" (at least when the "property damage" is caused by a
defective product or component) is an "integrated system"
analysis, not an interpretation of the language of the policies.
¶114 By conducting an "integrated system" analysis first,
without regard to the underlying policy language, the majority
opinion undercuts precedent. This court has held that the
language of the policy, not the economic loss doctrine,
determines insurance coverage.15
¶115 For example, in American Family Mutual Insurance Co.
v. American Girl, Inc., 2004 WI 2, ¶¶6, 35-36, 268 Wis. 2d 16,
673 N.W.2d 65, this court held that even if "the economic loss
doctrine may indeed [have] preclude[d] tort recovery," the
economic loss doctrine "does not determine whether an insurance
policy covers a claim, which depends instead upon the policy
language."16
¶116 The majority opinion acknowledges our holding in
American Girl and states that "the economic loss doctrine does
15
Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2,
¶¶6, 35, 268 Wis. 2d 16, 673 N.W.2d 65.
16
This court reaffirmed American Girl's approach in 1325 N.
Van Buren, LLC v. T-3 Grp., Ltd., 2006 WI 94, ¶59, 293
Wis. 2d 410, 716 N.W.2d 822, noting that "although the economic
loss doctrine may limit a party to contract rather than tort
remedies, it does not determine insurance coverage."
8
No. 2013AP613 & 2013AP687.ssa
not control a coverage dispute."17 Nonetheless, the majority
opinion concludes that "the court of appeals did not perceive
the importance of an integrated system analysis when deciding
whether claimed damage arose from physical injury to tangible
property other than to the LA."18
¶117 But how can an "integrated system" analysis be
important to resolving whether there was "property damage"
caused by an "occurrence" under insurance policies when the
insurance policies define these words and do not invoke the
economic loss doctrine or integrated system rule?
¶118 The majority opinion concludes that the importance of
the "integrated system" analysis stems not from the language of
the insurance policies, but from the risks intended to be
insured by a CGL policy.19 Unlike a performance bond, which
insures against the risk another party to a contract will fail
to perform their obligations, the majority opinion states that a
CGL policy is intended to insure against "'the risk that the
insured's goods, products, or work will cause bodily injury or
damage to property other than the product or the completed work
of the insured.'"20
17
Majority op., ¶32.
18
Majority op., ¶32.
19
Majority op., ¶¶25-26 & n.8.
20
Majority op., ¶26 (quoting Vogel v. Russo, 2000 WI 85,
¶17, 236 Wis. 2d 504, 613 N.W.2d 177, abrogated in part on other
grounds by Ins. Co. of N. Am. v. Cease Elec., Inc., 2004 WI 139,
¶25 n.6, 276 Wis. 2d 361, 688 N.W.2d 462).
9
No. 2013AP613 & 2013AP687.ssa
¶119 I agree, however, with Professor Ellen S. Pryor's
rejection of this argument in her article entitled The Economic
Loss Rule and Liability Insurance, 48 Ariz. L. Rev. 905 (2006).
As Professor Pryor points out, insurers have done a "poor job of
implementing the economic loss rule through general insuring
language," and the general language of CGL policies "poorly
expresses" the differences between CGL policies and performance
bonds.21
¶120 In short, the majority opinion ignores the language of
the insurance policies, our accepted rules of interpreting
insurance policies, and Wisconsin precedent.
II
21
See Ellen S. Pryor, The Economic Loss Rule and Liability
Insurance, 48 Ariz. L. Rev. 905, 906, 920 (2006).
The application of the economic loss doctrine to insurance
policies is a developing issue. See, e.g., Ralph C. Anzivino,
The Economic Loss Doctrine: Distinguishing Economic Loss from
Non-Economic Loss, 91 Marq. L. Rev. 1081, 1116 (2008) (arguing
for adopting the integrated system rule in insurance policy
interpretation).
See also Restatement (Third) of Torts: Liability for
Economic Harm § 6 cmt. c (Tentative Draft No. 2, 2014) (stating
that "[n]o tort liability is recognized when a product fails to
perform or causes damage to itself in a manner that produces
pure economic loss," but implying that individuals may insure
against such losses).
For issues involving liability insurance, see the American
Law Institute's current project on a Restatement of Liability
Insurance. As far as I can determine, the distributed
discussion drafts on this project do not address the economic
loss doctrine, but other drafts might.
10
No. 2013AP613 & 2013AP687.ssa
¶121 I turn now to the text of the insurance policies——
"property damage," "occurrence," and exclusions——without
importing elements of the economic loss doctrine.
¶122 The majority opinion acknowledges that in interpreting
an insurance policy, "[t]he reasonable expectations of coverage
of an insured should be furthered by the interpretation given."
Frost ex rel. Anderson v. Whitbeck, 2002 WI 129, ¶20, 257
Wis. 2d 80, 654 N.W.2d 225. The majority opinion never applies
this rule. Wouldn't an objectively reasonable insured conclude
it had insurance coverage in the instant case?
¶123 I agree with the court of appeals' interpretation of
the insurance policies, and, like the court of appeals, I would
hold that coverage exists.
¶124 Both insurance policies extend coverage for "property
damage" caused by an "occurrence."22 "Property damage" and
"occurrence" are commonly used terms in commercial general
liability policies, and the insurance policies contain similar
definitions for both terms. As I noted above, neither
definition refers to "other property" or incorporates the
economic loss doctrine.
¶125 I agree with the court of appeals' decision that "[a]
product is physically injured by the incorporation of a
22
Majority op., ¶¶23, 57.
11
No. 2013AP613 & 2013AP687.ssa
defective, faulty, or inadequate part that renders the other
components or the whole unusable."23
¶126 In the instant case, by incorporating the wrong
probiotic ingredient, the tablets were physically altered in a
material way——the correct ingredients were intermingled with the
wrong probiotic——and that alteration rendered the tablets, other
ingredients and all, unusable.24
¶127 This court has not addressed whether the incorporation
of a defective, faulty, or inadequate part that renders the
whole unusable constitutes "property damage." Decisions from
other jurisdictions are instructive.25 The court of appeals
correctly turns to cases from other jurisdictions to support its
conclusion.
¶128 For example, the court of appeals cited National Union
Fire Insurance Co. of Pittsburgh v. Terra Industries, Inc., 346
F.3d 1160 (8th Cir. 2003), and Shade Foods, Inc. v. Innovative
Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 865 (Ct.
App. 2000).
23
Wis. Pharmacal Co. LLC v. Neb. Cultures of Cal., Inc.,
2014 WI App 111, ¶20, 358 Wis. 2d 673, 856 N.W.2d 505 (emphasis
omitted).
24
"Physical injury to tangible property" refers to "'some
sort of physical damage' to property, such as 'an alteration in
appearance, shape, color, or in other material dimension.'"
Gen. Cas. Co. of Wis. v. Rainbow Insulators, Inc., No.
2010AP347, unpublished slip op., ¶14 (Wis. Ct. App. Mar. 31,
2011) (quoting Wis. Label Corp. v. Northbrook Prop. & Cas. Ins.
Co., 2000 WI 26, ¶31, 233 Wis. 2d 314, 607 N.W.2d 314; Travelers
Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481, 502 (Ill. 2001)).
25
See Wis. Pharmacal, 358 Wis. 2d 673, ¶20.
12
No. 2013AP613 & 2013AP687.ssa
¶129 In National Union Fire, the federal Eighth Circuit
Court of Appeals addressed whether, under Iowa law, the
incorporation of adulterated carbon dioxide into carbonated
beverages was "property damage" caused by an "occurrence." The
federal court, relying on cases involving other adulterated
products, concluded that "the incorporation of contaminated
carbon dioxide into consumer beverages constitutes an
'occurrence' resulting in 'property damage' . . . ."26
¶130 Similarly, in Shade Foods, the California Court of
Appeal concluded that the incorporation of almonds containing
wood splinters into nut clusters for cereal was "physical injury
to tangible property . . . ."27 The Shade Foods court determined
that "the presence of wood splinters in the diced roasted
almonds caused property damage to the nut clusters and cereal
products in which the almonds were incorporated."28
¶131 I am persuaded by the court of appeals' analysis of
these and other cases that a product is physically injured "by
the incorporation of a defective, faulty, or inadequate part
that renders the other components or the whole unusable."29
26
Nat'l Union Fire Ins. Co. v. Terra Indus., Inc., 346
F.3d 1160, 1165 (8th Cir. 2003) (collecting cases).
27
Shade Foods, Inc. v. Innovative Prods. Sales & Mktg.,
Inc., 78 Cal. App. 4th 847, 865 (Ct. App. 2000).
28
Shade Foods, 78 Cal. App. 4th at 866.
29
Wis. Pharmacal, 358 Wis. 2d 673, ¶20 (emphasis omitted);
see also Aetna Cas. & Sur. Co. v. M&S Indus., Inc., 827 P.2d
321, 326 (Wash. Ct. App. 1992); Zurich Am. Ins. Co. v. Cutrale
Citrus Juices USA, Inc., No. 5:00-CV-149-OC-10GRJ, 2002 WL
1433728, at *3 (M.D. Fla. Feb. 11, 2002).
13
No. 2013AP613 & 2013AP687.ssa
¶132 I turn next to whether the physical injury in the
instant case was caused by an "occurrence." I agree with the
court of appeals and conclude that there was an "occurrence."
¶133 Both policies define an "occurrence" as "an accident,
including continuous or repeated exposure to substantially the
same general harmful conditions."30
¶134 An "accident" is not defined in the policies, but this
court has defined an "accident" within an insurance policy as
"an event or condition occurring by chance or arising from
unknown or remote causes."31
¶135 In Western Casualty & Surety Co. v. Budrus, 112
Wis. 2d 348, 352-53, 332 N.W.2d 837 (Ct. App. 1983), the court
of appeals held that there was an "occurrence" within the
meaning of a CGL policy when a party negligently sold
incorrectly tagged seed to another. The court of appeals
concluded that "the negligent act of selling the mistagged seed,
which caused the damage" was an "occurrence" within the meaning
of the policy.
¶136 I agree with the court of appeals in the instant case
that, like providing the wrong seed in Budrus, providing the
wrong probiotic bacteria was an "occurrence."32
30
Majority op., ¶¶51, 69.
31
Am. Girl, 268 Wis. 2d 16, ¶37 (quoting Webster's Third
New International Dictionary of the English Language 11 (2002)).
32
Wis. Pharmacal, 358 Wis. 2d 673, ¶26.
14
No. 2013AP613 & 2013AP687.ssa
¶137 The majority opinion concludes that under California
law "Jeneil's provision of a defective ingredient may have been
occasioned by negligence; however, Jeneil deliberately supplied
the ingredient to Nebraska Cultures, which, in turn, supplied
the ingredient to Nutritional Manufacturing. Moreover, Jeneil
intended the ingredient to be incorporated into the tablets.
Given the deliberate nature of these actions, the provision of a
defective ingredient cannot be said to constitute an
'occurrence' under California law."33
¶138 The majority opinion is obviously erroneous in this
respect. An insured's intentional conduct that results in
unintended consequences can be an "accident" under an insurance
policy. As Professor Pryor explains, "[i]f the insured intended
the act that caused the injury, is this enough to take the claim
outside the definition of accident? The answer is universally,
and properly, no. To read the definition of accident so
narrowly would exclude all but inadvertent acts, and would
exclude much of the realm of negligent acts causing personal
injury."34
¶139 Finally, the majority concludes that the policies'
exclusions for "impaired property" negate coverage.35
¶140 Jeneil's policy excludes coverage for "'[p]roperty
damage' to 'impaired property' or property that has not been
33
Majority op., ¶73.
34
Pryor, supra note 21, at 915-16.
35
Majority op., ¶77.
15
No. 2013AP613 & 2013AP687.ssa
physically injured, arising out of," among other things,
deficiencies in "your product" or "your work" or the failure to
perform a contract.36
¶141 "Impaired property" is defined in Jeneil's policy
(with emphasis added) as follows:
8. "Impaired property" means tangible property, other
than "your product" or "your work" that cannot be used
or less useful because:
a. It incorporates "your product" or "your work"
that is known or thought to be defective,
deficient, inadequate or dangerous; or
b. You have failed to fulfill the terms of a
contract or agreement;
if such property can be restored to use by:
a. The repair, replacement, adjustment or removal
of "your product" or "your work"; or
b. Your fulfilling the terms of the contract or
agreement.
¶142 The majority opinion's conclusion that this exclusion
negates coverage rests on its erroneous conclusion (based on its
application of the integrated system rule derived from the tort
economic loss doctrine) that there was no physical injury to
tangible property in the instant case.37
¶143 I agree, however, with the court of appeals that this
exclusion is inapplicable. "A product is physically injured by
36
Majority op., ¶78.
37
Majority op., ¶80.
16
No. 2013AP613 & 2013AP687.ssa
the incorporation of a defective, faulty, or inadequate part
that renders the other components or the whole unusable."38
* * * *
¶144 I disagree with the majority opinion's unwise and
unprecedented application of the "integrated system" analysis
derived from the tort economic loss doctrine to an
interpretation of insurance policies. The (often incoherent)
"Blob" of the economic loss doctrine should not be read into
insurance policy interpretation. Instead, the court should
follow its prior decisions holding that "[t]he [economic loss]
doctrine does not determine insurance coverage, which turns on
the policy language." Am. Girl, 268 Wis. 2d 16, ¶6.
¶145 Because I conclude, as did the court of appeals, after
analyzing the policy language without importing principles from
the economic loss doctrine, that there was "property damage"
caused by an "occurrence" in the instant case and that none of
the policies' exclusions negates coverage, I would affirm the
decision of the court of appeals.
¶146 Finally, I add an additional note about the majority
opinion.
¶147 The majority opinion states that "ANNETTE KINGSLAND
ZIEGLER, J. and REBECCA G. BRADLEY, J., did not participate."
Justice Annette Kingsland Ziegler advised the parties and the
justices of this court that she withdrew from further
38
Wis. Pharmacal, 358 Wis. 2d 673, ¶20.
17
No. 2013AP613 & 2013AP687.ssa
participation.39 Recusal of a justice is a significant issue for
the parties and this court. Why does the majority opinion not
state that Justice Ziegler withdrew from further participation?
¶148 For the reasons set forth, I dissent and write
separately.
¶149 I am authorized to state that Justice ANN WALSH
BRADLEY joins this opinion.
39
See September 21, 2015 Letter from Justice Annette K.
Ziegler to the parties and the justices filed in the
correspondence file of the instant case maintained by the Clerk
of the Supreme Court: "I am writing to advise you of my
decision to withdraw from further participation in this case."
18
No. 2013AP613 & 2013AP687.ssa
1