Opinion ID: 1304917
Heading Depth: 1
Heading Rank: 4

Heading: analysis

Text: [3-5] ¶ 23. Insurance policies are contracts and are governed by the same rules that govern interpretation of contracts in general. Id. at 806; Kremers-Urban Co. v. American Employers Ins. Co., 119 Wis. 2d 722, 735, 351 N.W.2d 156 (1984). The primary goal in interpreting a contract is to determine and give effect to the parties' intention. Gorton v. Hostak, Henzl & Bichler, S.C., 217 Wis. 2d 493, 506, 577 N.W.2d 617 (1998); Kremers-Urban, 119 Wis. 2d at 735. When the language of a contract is unambiguous, we apply its literal meaning. Gorton, 217 Wis. 2d at 506. However, if contractual language may reasonably be construed to have more than one meaning, the contract is ambiguous. Id. [6-8] ¶ 24. Whether a contract is ambiguous is a question of law. Id. Any ambiguity that does exist will be interpreted against the drafter, especially when the contract is a standard form supplied by the drafting party. Id. On the other hand, if the language of the policy is not ambiguous, we will not engage in construction, but will merely apply the policy terms. Kremers-Urban, 119 Wis. 2d at 736. [9, 10] ¶ 25. When the contract at issue is an insurance policy, we are guided by the principle that the words of the policy should be given the meaning that a reasonable person in the position of the insured would have given them. Id. at 735. However, we must not rewrite an insurance policy so as to provide coverage for a risk that the insurer did not contemplate and for which it has not been paid. Smith, 226 Wis. 2d at 807. ¶ 26. The coverage dispute in this case arises in a somewhat atypical manner. Coverage disputes usually arise when an insured is sued by a third party and focus on whether the insurer has a duty to defend the insured in the lawsuit. See, e.g., id. at 806-07; Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 266, 593 Wis. 2d 445 (1999). Here, the parties stipulate that PPC has not yet sued Wisconsin Label for reimbursement, and Wisconsin Label does not specifically argue that Northbrook has breached a duty to defend. Of course, there remains a risk that PPC will decide to sue Wisconsin Label at some future date. Because Northbrook's motion asks for a summary and declaratory judgment against Wisconsin Label's claim for indemnification, we must resolve any doubt as to whether the Policy provides coverage in favor of Wisconsin Label. See Wausau Tile, 226 Wis. 2d at 266. ¶ 27. With these principles in mind, we now turn to the question of whether the Policy provides coverage for Wisconsin Label's losses. The Policy is a standard commercial general liability or CGL policy. [3] A CGL policy protects the insured against liability for damages the insured's negligence causes to third parties. General Casualty Co. v. Hills, 209 Wis. 2d 167, 172-73 n.9, 561 N.W.2d 718 (1997). More specifically: 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. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained. Bulen v. West Best Mutual Insurance Co., 125 Wis. 2d 259, 264-65, 371 N.W.2d 392 (Ct. App. 1985) (quoting Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 791 (N.J. 1979). ¶ 28. Under the Policy, Northbrook promises to pay those sums that the Insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. None of the damages in this case resulted from bodily injury. Therefore, whether coverage exists depends solely upon whether Wisconsin Label has become legally obligated to pay damages because of . . . property damage. The Policy defines property damage to mean (1) [p]hysical injury to tangible property, including all resulting loss of use of that property, or (2) [l]oss of use of tangible property that is not physically injured. ¶ 29. Combining the language of the insuring agreement with the language defining property damage, the Policy provides coverage for sums that Wisconsin Label has become legally obligated to pay as damages because of . . . (1) physical injury to tangible property, including all resulting loss of use of that property, or (2) loss of use of tangible property that is not physically injured. ¶ 30. We begin by considering whether, under the first part of this definition, Wisconsin Label has become obligated to pay damages because of physical injury to tangible property, including all resulting loss of use of that property. [11] ¶ 31. We agree with the court of appeals' determination that this definition is unambiguous and that no physical injury to tangible property occurred in this case. Wisconsin Label, 221 Wis. 2d at 808-09. Language in an insurance contract is interpreted according to its common and ordinary meaning. Kremers-Urban, 119 Wis. 2d at 735. Although the term injury, standing alone, may refer broadly to both physical and non-physical types of damage, when it is qualified by the word physical, its meaning is limited to physical damage. Thus, as the court of appeals pointed out, the phrase physical injury ordinarily refers to some sort of physical damage. Wisconsin Label, 221 Wis. 2d at 809. ¶ 32. No physical damage occurred in this case. The products were improperly labeled, but both the products themselves and the packaging remained physically undamaged at all times. The lack of physical damage is demonstrated by the fact that the products were sold to customers with the improper labeling. Labeling could conceivably result in physical injury to tangible property, if, for instance, a caustic adhesive burned through the packaging and actually injured the product. However, no such physical damage occurred here. [12] ¶ 33. Wisconsin Label contends that any reasonable insurer would conclude that the products were physically injured because they required physical repair. However, the only repair that was required was to inspect and relabel the packages to ensure that they would always scan at the correct price. This inspection and relabeling was necessary to remedy Wisconsin Label's defective workmanship, not to repair any physical injury to the products. Thus, the economic losses that resulted were not due to physical injury to PPC's product but due to Wisconsin Label's failure to complete the work it promised to do under the contract. CGL policies do not provide coverage for the insured's liability for repairing or replacing the insured's defective work; they provide coverage for the insured's liability for physical injury to, or loss of use of, another's property. See Bulen, 125 Wis. 2d at 264-65. No reasonable insured would conclude that PPC's undamaged, saleable products suffered physical injury simply because Wisconsin Label improperly placed the labels on the packages. ¶ 34. Wisconsin Label also argues that under Eljer Manufacturing, physical injury occurred because its defective work was incorporated into another's product and had to be replaced in order to prevent a future loss from materializing. See Eljer, 972 F.2d at 810, 814. Eljer involved leaky plumbing systems that were installed in hundreds of thousands of United States residences. Id. at 807. Thousands of tort claims were filed and approximately five percent of the systems were deemed likely to eventually result in lawsuits. Id. The insurer involved in the particular suits at issue in Eljer contended that coverage for such claims was not triggered until a system actually leaked, causing damage to the rest of the residence. Id. at 808. The Seventh Circuit determined that, to the contrary, physical injury had occurred whenever a defective system was installed into a residence, because the probability that the system would fail was high enough to induce a rational owner to replace it before it fails. Id. at 812. The court concluded, incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation. Id. at 814. ¶ 35. Wisconsin Label argues that, like in Eljer, physical injury occurred when Wisconsin Label incorporated defective work, i.e., misplaced labels, into PP C's products. ¶ 36. We find Eljer to be factually distinguishable from the case at hand. Unlike the plumbing systems, the labels were not defective components. More importantly, even if putting the labels in the wrong place constituted defective work, this defect could never be expected to cause physical injury. The mislabeling left the products themselves physically unharmed. If left on the packages, the only injury that the labels could ever cause would be lost profit, when the product sold for less than its intended price. Thus, the labels in no sense posed the sort of latent danger that was at issue in Eljer. See id. at 807 (explaining that a leaky plumbing system is like a time bomb placed in an airplane luggage compartment: harmless until it explodes). ¶ 37. Wisconsin Label next contends that we should find coverage because the mislabeling caused a diminution in value of the PPC products. It is unclear whether Wisconsin Label contends that this diminution in value is covered under the physical injury portion or the loss of use portion of the property damage definition. The court in Eljer interpreted the physical injury part of the definition to include diminution in value that resulted from physical incorporation of one product into another. See Travelers Insurance Co. v. Eljer Manufacturing, Inc., 718 N.E.2d 1032, 1040-41 (Ill. Ct. App. 1999)(rejecting Eljer 's reasoning), appeal allowed by 723 N.E.2d 1170 (Ill. 1999). In Sola Basic, under an earlier definition of property damage, this court held that a CGL policy covered losses that measured the diminution in the value of a manufacturing plant that resulted from the removal of a malfunctioning transformer. Sola Basic, 90 Wis. 2d at 654. ¶ 38. Because we have already determined that the PPC products were not physically injured, the physical injury prong of the definition of property damage cannot extend coverage under a diminution in value theory. PPC's products were not physically injured, so they were not diminished in value due to physical injury. ¶ 39. However, Wisconsin Label contends that even in the absence of physical injury, PPC's products suffered a diminution in value when they were sold at the incorrect, lower price. We must examine whether the Policy provides coverage for this diminution in value in the absence of physical injury. ¶ 40. The idea that diminution in value constitutes property damage, even in the absence of physical injury or loss of use, made sense under the definition of property damage that was at issue in Sola Basic. The court in Sola Basic interpreted the 1966 standard CGL policy, which provided a misleadingly simple definition of property damage: injury to or destruction of tangible property. Sola Basic, 90 Wis. 2d at 647. ¶ 41. Sola Basic applied this definition in the context of an insured's liability for rendering its customer's manufacturing plant partially unusable. Sola Basic Industries sold its customer a defective transformer and then negligently damaged the transformer while attempting to repair it. Id. at 644. Consequently, the transformer had to be removed from the manufacturing plant and completely rebuilt. Id. While the transformer was out for repairs, the manufacturer could not use its electric furnaces and was forced to incur additional costs to continue its operations by other methods. Id. Sola Basic paid for the removal and repair of the transformer at its own expense, but the manufacturer made an additional claim for damages resulting from the loss of use of its electric furnaces. Id. Sola Basic tendered this claim to its insurer under its CGL policy. Id. at 644-45. ¶ 42. In analyzing whether the CGL policy provided coverage, this court first took note of comments by insurance industry trade organizations, which explained that the definition of property damage in the 1966 standard form purposely omitted any requirement of physical injury to tangible property. Id. at 647-48 (citations omitted). Instead, the 1966 definition was designed to cover non-physical injury to tangible property that did not sustain physical damage but was nonetheless rendered useless by the insured's negligence. Id. at 647. For example, if a large piece of equipment broke down in the street, limiting access to stores, the damages sustained by the stores due to the resulting loss of use of the stores would be covered by the policy. Id. ¶ 43. The Sola Basic court then considered precedent from several other jurisdictions interpreting similar definitions of property damage in CGL policies. See id. at 648-653. In Hauenstein v. St. Paul-Mercury Indemnity Co., 65 N.W.2d 122 (Minn. 1954), the Minnesota Supreme Court interpreted a CGL policy to cover the diminished market value of a building that resulted from the application of defective plaster, because `the presence of the defective plaster on the walls and ceilings reduced the value of the building and constituted property damage.' Sola Basic, 90 Wis. 2d at 648 (quoting Hauenstein, 65 N.W.2d at 358). Similarly, and in express reliance on Hauenstein, the California Supreme Court held that property damage to homes in the form of the diminished market value that resulted from the installation of defective aluminum doors was covered by the standard CGL policy. Geddes & Smith, Inc. v. St. Paul-Mercury Indemnity Co., 334 P.2d 881, 885 (Cal. 1959). Also, in Pittway Corp. v. American Motorists Insurance Co., 370 N.E.2d 1271 (Ill. Ct. App. 1977), an Illinois court held that the inclusion of defective valves in hairspray cans, which forced the hairspray distributor to scrap the entire product, constituted property damage. Sola Basic, 90 Wis. 2d at 652-53 (citing Pittway, 370 N.E.2d at 1274). ¶ 44. Having examined these and other precedents, this court derived four basic principles pertaining to CGL policies: 1) The exclusions [in CGL policies] eliminate coverage for injury to or destruction of the product furnished or work completed by the insured; 2) if the defect in the product furnished or work completed of the named insured causes damage to other tangible property, there is coverage for such damage to other property; 3) the term property damage to tangible property does not necessarily require physical damage; 4) tangible property may be damaged in that it is diminished in value or made useless, irrespective of actual physical injury to the tangible property. Sola Basic, 90 Wis. 2d at 653-54. Guided by these principles, the court concluded that costs of removing and replacing the transformer and costs of continuing operations due to the loss of the electric furnace were covered under the CGL policy. Id. at 654. The court explained that [t]hese costs do not represent lost profits, but are a measure of the diminution to the value of the plant caused by the malfunctioning transformer. Id. [13] ¶ 45. Sola Basic 's holding must be read in context. The case was decided a decade before this court first adopted the economic loss doctrine in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 921, 437 N.W.2d 213 (1989). Wausau Tile, 226 Wis. 2d at 268 n.19. The economic loss doctrine precludes a purchaser of a product from employing negligence or strict liability theories to recover from the product's manufacturer loss which is solely economic. Id. at 245-46. The doctrine preserves the fundamental distinction between tort law and contract law and protects the parties' freedom to allocate economic risk by contract. Id. at 247. In Wausau Tile, having determined that a purchaser's claims for negligence and strict liability were precluded by the economic loss doctrine, this court held that an insurer had no duty to defend against those claims under a CGL policy like the one in this case. Id. at 267-69. ¶ 46. Moreover, Sola Basic was interpreting the 1966 definition of property damage, which omitted any requirement that an injury be physical in order to trigger coverage. As Hauenstein held, the broad 1966 definition therefore could encompass diminution in value of tangible property, even without any physical injury. Hauenstein, 65 N.W.2d at 126. ¶ 47. The 1966 policy form was standard in the insurance industry until a new form was promulgated in 1973. Vasicheck, 68 Minn. L. Rev. at 798-99. The post-1973 forms define property damage much more specifically than the 1966 form. The first part of the 1973 definition explicitly requires physical injury; the second part requires loss of use of tangible property that is not physically injured. Unlike the 1966 definition, neither part of the later definition is broad enough to encompass mere diminution of value of a product in the absence of physical injury or loss of use. Recognizing this crucial difference, the Minnesota Supreme Court concluded that Hauenstein 's reasoning did not apply to the newer definition of property damage, and that diminution in value caused by incorporation of a defective component therefore is not property damage under post-1973 CGL policies. Federated Mutual Insurance Co. v. Concrete Units, Inc., 363 N.W.2d 751, 756 (Minn. 1985). Under the same reasoning, the Illinois Court of Appeals explicitly rejected Eljer 's holding and concluded that the post-1973 definition of property damage does encompass diminution in value that is unrelated to physical damage. Travelers Insurance, 718 N.E.2d at 1040-41 (holding that Eljer ignored the plain meaning of the phrase physical injury when it interpreted the policy to provide coverage for the intangible diminution in value that resulted from installation of leaky pipes). See also Wyoming Sawmills, Inc. v. Transportation Insurance Co., 578 P.2d 1253, 1256 (Or. 1978)(holding that the inclusion of the word physical in the definition of property damage negates any possibility that the policy was intended to include consequential or intangible damage,' such as depreciation in value); Vasichek, 68 Minn. L. Rev. at 821 (Although lost use of tangible property continues to be covered under the 1973 `property damage' definition, diminution in value of tangible property does not.) [14] ¶ 48. We agree with these courts that diminution in value caused by incorporation of a defective product does not constitute property damage under post-1973 policies unless it is the result of physical injury or loss of use. Any suggestion in Sola Basic that CGL policies provide coverage for diminution in value that is not caused by physical injury or loss of use is inconsistent with the definition of property damage in post-1973 policies. We therefore conclude that the Policy provides no coverage for diminution in value in the absence of physical injury or loss of use. ¶ 49. Having determined that the Policy does not provide coverage for diminution in value in the absence of physical injury or loss of use, and that the damages in this case did not result from physical injury, we now examine whether the damages resulted from loss of use. ¶ 50. The loss of use prong of the Policy's definition of property damage provides coverage for damages that Wisconsin Label has become obligated to pay because of loss of use of tangible property that is not physically injured. Under Sola Basic, property damage occurs when the property of a third party is rendered useless due to the insured's actions. Sola Basic, 90 Wis. 2d at 654. Wisconsin Label asserts that a loss of use occurred because Wal-Mart was forced to remove the PPC products from its shelves and delay sale while the products were relabeled. ¶ 51. However, Wisconsin Label has not actually become liable to pay any damages relating to the delay in sale of the PPC products. PPC paid Wal-Mart $200,000 in compensation for lost profits on packages that were sold at the wrong price and costs of relabeling unsold packages. PPC seeks reimbursement for this $200,000 and for an additional $25,000 in costs of reinspecting the packages. Thus, PPC's $25,000 in inspection costs, as well as some portion of the $200,000 paid to Wal-Mart, relate to inspecting and relabeling the packages, while the rest of the damages relate to lost profits that resulted from undercharging. Neither portion of the damages relates to the loss of use of the products during the time that they were being relabeled. This is to be contrasted with Sola Basic, where the damages related to the manufacturer's loss of use of its electric furnace while the defective transformer was being repaired. ¶ 52. Wisconsin Label also cites American Motorists Insurance Co. v. Trane Co., 718 F.2d 842 (7th Cir. 1983) in support of its contention that a loss of use occurred in this case. Trane held that an allegation that defective heat exchangers caused a manufacturer's plant to operate at less than full capacity  i.e., some of each plant's usefulness was lost, constituted an allegation of property damage. Id. at 844. Thus, in Trane, as in Sola Basic, the damages resulted from loss of use of another's property, the manufacturing plant, caused by the insured's defective product. Id. In this case, in contrast, the damages did not result from loss of use of the PPC products caused by the mislabeling. The damages resulted from undercharging and from relabeling of the unsold products. ¶ 53. Wisconsin Label also contends that under the reasoning of Western Casualty & Surety Co. v. Budrus, 112 Wis. 2d 348, 332 N.W.2d 837 (Ct. App. 1983), the damages in this case are because of loss of use. Budrus concerned mislabeled seed; because the seed was mislabeled, a farmer planted his field with the wrong crops. Id. at 350. The court of appeals affirmed the trial court's holding that the loss of use of a forty-acre field constituted property damage under the farmer's CGL policy. Id. at 352. Wisconsin Label contends that [i]f mistagged seed resulting in lost profits from crop and production losses was property damage in Budrus, lost profits and other losses arising from mislabeled consumer hygiene products constitute property damage here. Br. of Pl.-Appellant at 32. [15] ¶ 54. Like Sola Basic and Trane, Budrus is distinguishable because it involved the loss of use of other property caused by the insured's negligence. After the farmer discovered that the seed he had planted was of the wrong type, it was too late to replant that season; thus, he lost use of his field for the entire season. Id. at 350. The situation is analogous to the example described by the insurance industry trade organization in Sola Basic, in which a broken piece of machinery blocks a street and prevents customers from using a store. See Sola Basic, 90 Wis. 2d at 647-48. In the case at hand, in contrast, although Wal-Mart experienced some brief loss of use of its products while they were relabeled, it does not seek compensation for the loss of use of the products for that period of time. Instead, it seeks reimbursement for the profits it lost when products were sold at the wrong price and for the costs of relabeling. We conclude that Wisconsin Label has not become obligated to pay damages because of loss of use of tangible property that is not physically injured. ¶ 55. Wisconsin Label next argues that the Policy must provide coverage for its losses because purely economic losses are covered under a CGL policy unless excluded in the policy's business risk exclusions because the policy affords coverage for damages arising from property damage. Br. of Pl.-Appellant at 34. ¶ 56. We agree that, as a general proposition, CGL policies may sometimes cover economic losses. For instance, in Sola Basic, the CGL policy covered the economic losses the manufacturer sustained in order to continue operations. Sola Basic, 90 Wis. 2d at 654. Indeed, Northbrook itself does not take the position that economic losses are never covered by CGL policies. Def.-Resp`t's Br. at 31. [16] ¶ 57. However, economic losses will be covered under a CGL policy only when the policy language creates coverage for such losses. In the Policy, coverage applies only when damages are because of physical injury to tangible property or loss of use of tangible property. The economic losses in this case did not result from either of these types of damage. Therefore, there is no coverage. [17, 18] ¶ 58. Instead of resulting from property damage, the damages in this case resulted from Wisconsin Label's failure to adequately perform its contract to label PPC's products. See Wausau Tile, 226 Wis. 2d at 266-68 (holding that a CGL policy did not provide coverage for damages that constituted economic loss and were not recoverable in tort). A CGL policy is not a performance bond; it provides coverage for tort damages but not for economic loss resulting from contractual liability. Jacob v. Russo Builders, 224 Wis. 2d 436, 448, 592 N.W.2d 271 (Ct. App. 1999). Wisconsin Label's damages resulted from its contractual liability for its own defective workmanship, not from physical injury or loss of use that Wisconsin Label caused to PPC's property. The economic losses therefore were risks that Northbrook did not contemplate and for which it has not been paid under the explicit language of the Policy. Smith, 226 Wis. 2d at 807, (quoting Qualman v. Bruckmoser, 163 Wis. 2d 361, 365, 471 N.W.2d 282 (Ct. App. 1991)). ¶ 59. In conclusion, we determine that the CGL policy that Northbrook issued to Ameripac provides no coverage for the losses that Ameripac and Wisconsin Label sustained due to the mislabeling. Because the Policy does not extend coverage for Wisconsin Label's losses, we need not examine whether the impaired property exclusion would preclude coverage. We affirm the decision of the court of appeals. By the Court. Affirmed.