2016 WI 14

SUPREME 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 111

OPINION 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. 
2

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. 
2016 WI 14

NOTICE

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.,

 Defendant-Appellant,

Jeneil Biotech, Inc. and The Netherlands 

Insurance Company,

 Defendants,

Evanston Insurance Company,

 Defendant-Respondent-Petitioner.

FILED

MAR 1, 2016

Diane M. Fremgen

Clerk of Supreme Court

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

2

 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.
Nos. 2013AP613 & 2013AP687

3

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 
Nos. 2013AP613 & 2013AP687

4

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 contractedfor 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 
Nos. 2013AP613 & 2013AP687

5

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. 
Nos. 2013AP613 & 2013AP687

6

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. 
Nos. 2013AP613 & 2013AP687

7

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. 
Nos. 2013AP613 & 2013AP687

8

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-ofcontacts' 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 
Nos. 2013AP613 & 2013AP687

9

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 
Nos. 2013AP613 & 2013AP687

10

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. AutoOwners 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. 
Nos. 2013AP613 & 2013AP687

11

¶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. 
Nos. 2013AP613 & 2013AP687

12

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 
Nos. 2013AP613 & 2013AP687

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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 445 

 

8 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).
Nos. 2013AP613 & 2013AP687

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(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.
Nos. 2013AP613 & 2013AP687

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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] 
Nos. 2013AP613 & 2013AP687

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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. 
Nos. 2013AP613 & 2013AP687

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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 
Nos. 2013AP613 & 2013AP687

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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 
Nos. 2013AP613 & 2013AP687

19

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 
Nos. 2013AP613 & 2013AP687

20

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 
Nos. 2013AP613 & 2013AP687

21

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 
Nos. 2013AP613 & 2013AP687

22

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 
Nos. 2013AP613 & 2013AP687

23

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. 
Nos. 2013AP613 & 2013AP687

24

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.
Nos. 2013AP613 & 2013AP687

25

¶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. 
Nos. 2013AP613 & 2013AP687

26

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. 
Nos. 2013AP613 & 2013AP687

27

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. 
Nos. 2013AP613 & 2013AP687

28

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 
Nos. 2013AP613 & 2013AP687

29

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. 
Nos. 2013AP613 & 2013AP687

30

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. 
Nos. 2013AP613 & 2013AP687

31

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 
Nos. 2013AP613 & 2013AP687

32

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 
Nos. 2013AP613 & 2013AP687

33

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 
Nos. 2013AP613 & 2013AP687

34

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. 
Nos. 2013AP613 & 2013AP687

35

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;
Nos. 2013AP613 & 2013AP687

36

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. 
Nos. 2013AP613 & 2013AP687

37

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. 
No. 2013AP613 & 2013AP687.ssa

1

¶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. 
No. 2013AP613 & 2013AP687.ssa

2

¶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 
No. 2013AP613 & 2013AP687.ssa

3

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. 
No. 2013AP613 & 2013AP687.ssa

4

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. 
No. 2013AP613 & 2013AP687.ssa

5

¶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. 
No. 2013AP613 & 2013AP687.ssa

6

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. 
No. 2013AP613 & 2013AP687.ssa

7

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 . . . ."). 
No. 2013AP613 & 2013AP687.ssa

8

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."
No. 2013AP613 & 2013AP687.ssa

9

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). 
No. 2013AP613 & 2013AP687.ssa

10

¶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. 
No. 2013AP613 & 2013AP687.ssa

11

¶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. 
No. 2013AP613 & 2013AP687.ssa

12

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. 
No. 2013AP613 & 2013AP687.ssa

13

¶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). 
No. 2013AP613 & 2013AP687.ssa

14

¶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. 
No. 2013AP613 & 2013AP687.ssa

15

¶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. 
No. 2013AP613 & 2013AP687.ssa

16

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. 
No. 2013AP613 & 2013AP687.ssa

17

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. 
No. 2013AP613 & 2013AP687.ssa

18

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." 
No. 2013AP613 & 2013AP687.ssa

1