Opinion ID: 4194164
Heading Depth: 2
Heading Rank: 1

Heading: Kolbe’s Appeal

Text: We review de novo a district court’s grant of summary judgment, construing all facts and drawing all reasonable in‐ ferences in favor of the non‐moving party—here, Kolbe. Co‐ han v. Medline Indus., Inc., 843 F.3d 660, 665 (7th Cir. 2016) (ci‐ tation omitted). Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). Nos. 16‐3563 & 16‐3648 5 1. “Integrated Systems” and the Economic‐Loss Doctrine At the heart of the parties’ dispute over insurance cover‐ age here is the integrated‐system rule, a common‐law rule from the so‐called “economic loss” doctrine. Under that doc‐ trine, the purchaser of a product is barred from using tort law to recover from the manufacturer any purely economic inju‐ ries (such as a loss of the product’s value) arising from that product’s failure to work as expected. See Linden v. Cascade Stone Co., 699 N.W.2d 189, 192 (Wis. 2005) (citations omitted); Wausau Tile, Inc. v. Cty. Concrete Corp., 593 N.W.2d 445, 451 (Wis. 1999) (citations omitted).1 By eliminating all tort‐based avenues of recovery (which in general offer “a broader array of damages” than do contract suits, Grams v. Milk Prods., Inc., 699 N.W.2d 167, 171 (Wis. 2005) (citation and internal quota‐ tion marks omitted)), the doctrine encourages the buyer in a commercial transaction—the party “best situated to assess the risk[s] of economic loss”—to allocate those risks through the bargaining process, Linden, 699 N.W.2d at 194–95 (quoting Wausau Tile, 593 N.W.2d at 451), and thus helps to protect the manufacturer’s ability to continue making its goods, see Grams, 699 N.W.2d at 172 (“With no ability to share their risk with commercial users of the product, manufacturers would … be reluctant to produce certain products.”) (citation omit‐ ted). As its name suggests, the economic‐loss doctrine applies only to economic injuries, and so does not preclude actions in tort for bodily injuries or for injuries to property other than the defective product. See Wausau Tile, 593 N.W.2d at 451 (ci‐ tations omitted). But there’s a catch: If the defective product is 1 The parties agree that Wisconsin law governs their dispute. 6 Nos. 16‐3563 & 16‐3648 a component of a larger, “integrated system,” damage by that component to the other elements of the system, or to the sys‐ tem as a whole, is likewise considered damage to the defective component itself, and so does not qualify as damage to “other property.” See id. at 452 (citations omitted). Thus, in Wausau Tile, the Wisconsin Supreme Court held that a manufacturer and seller of concrete paving blocks could not maintain any tort‐based claims against its cement supplier after the ce‐ ment—an ingredient of concrete—had allegedly caused the paving blocks to crack and buckle. As the cement was an in‐ tegral component of the finished blocks, the cement had not damaged any “other property,” and the economic‐loss doc‐ trine applied. See id. at 453–54. 2. The Pharmacal Decision The economic‐loss doctrine generally does not apply to in‐ surance‐coverage disputes, see Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, 75 (Wis. 2004) (citation omitted), but in 2016, the Wisconsin Supreme Court extended Wausau Tile’s integrated‐system analysis to an insurance case involving a general‐liability policy similar to the ones at issue here. The plaintiff in Pharmacal, a retail supplier of dietary supplements, agreed to purchase from a supplement manufacturer probi‐ otic pills containing a certain species of bacteria. See 876 N.W.2d 72, 76. The manufacturer sourced the ingredients from another company—which in turn procured the bacterial component from a separate supplier—before blending the in‐ gredients together and compressing the mixture into chewa‐ ble tablets. See id. As it turned out, however, the bacteria in‐ corporated into the tablets was the wrong one, and the retailer was forced to recall the finished pills. See id. Litigation ensued, and the bacteria supplier’s insurance company moved for Nos. 16‐3563 & 16‐3648 7 summary judgment on the issue of coverage. See id. at 77. The trial court agreed with the insurer that there was no coverage because there had been no “property damage” within the meaning of relevant insurance policy. See id. The court of ap‐ peals reversed, and the Wisconsin Supreme Court granted re‐ view. See id. The supreme court began its analysis by reiterating the general procedure for determining whether coverage exists under an insurance policy: First, the court examines the facts of the insured’s claim to determine if there is an “initial grant” of coverage—that is, if the policy generally covers the cate‐ gory of loss at issue; if so, the court examines the policy for any exclusions that may preclude coverage; and if an exclu‐ sion applies, the court determines whether any exceptions to that exclusion operate to restore coverage. See id. at 79 (citing Preisler v. Gen. Cas. Ins. Co., 857 N.W.2d 136, 143 (Wis. 2014)). The policy in Pharmacal, like the policies here, required the in‐ surance company to cover any losses that the insured became obligated to pay “as damages because of … property dam‐ age,” where “property damage” was defined to include “[p]hysical injury to tangible property.” Id. (internal quotation marks omitted). The court observed that it had previously in‐ terpreted this definition to describe only those injuries to property “other than [the insured’s] product … itself,” id. (quot‐ ing Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 607 N.W.2d 276, 283 (Wis. 2000)). So the court asked whether the incorporation of the wrong bacteria into the supplement tab‐ lets constituted physical injury to tangible property “other than” the bacterial component. See id. at 80. To answer that question in Pharmacal, the court borrowed from its integrated‐ system analysis in Wausau Tile, explaining that such an analy‐ sis was necessary because, if the supplement tablet were an 8 Nos. 16‐3563 & 16‐3648 integrated system, then damage to the system would consti‐ tute damage only to the defective element. See id. (citing Wausau Tile, 593 N.W.2d at 452). The court held that mixing a probiotic ingredient together with other ingredients, and combining the whole into a single tablet, did indeed create an integrated system, as the various components could not be “separate[d] out” from the larger product. Id. at 82. Thus, the injury claimed—the inability to use the finished tablets—was not one of damage to “other property,” and there was no ini‐ tial grant of coverage. Id. at 82–83. 3. Coverage in the Suit Against Kolbe The insurance companies here read Pharmacal as mandat‐ ing an integrated‐system analysis in (and as importing the en‐ tirety of Wisconsin’s integrated‐system case law into) all gen‐ eral‐liability insurance disputes. Pharmacal therefore dictates that there is no initial grant of coverage in this case, argue the insurers, because the Wisconsin Court of Appeals has other‐ wise held (under the economic‐loss doctrine) that the win‐ dows of a house have no function or purpose apart from— and thus form an “integrated system” with—their surround‐ ing structures, see Bay Breeze Condo. Ass’n. v. Norco Windows, Inc., 651 N.W.2d 738, 746 (Wis. Ct. App. 2002) (citations omit‐ ted); Selzer v. Brunsell Bros., 652 N.W.2d 806, 835 (Wis. Ct. App. 2002) (citing Bay Breeze, 651 N.W.2d at 746). Damage to those structures, caused by a defect in the windows, therefore counts as damage to the windows themselves; and, absent any injury to “other” property, no insurance coverage ob‐ tains—or so the argument goes. In our view, this argument stretches Pharmacal beyond its intended reach. Nos. 16‐3563 & 16‐3648 9 Whether an insurance policy covers a particular claim de‐ pends on the nature of the plaintiff’s (alleged) loss. In Pharma‐ cal, the only loss alleged—and thus the only basis for the un‐ derlying suit—was the plaintiff’s inability to use the supple‐ ment tablets as a whole. See 876 N.W.2d at 76. The plaintiff in that case did not seek reimbursement for the cost of repairing or replacing the tablets’ non‐defective ingredients—presuma‐ bly because, even if there had been evidence of physical injury to those components (and there was none, see id. at 82), the components were indistinguishable from each other and from the larger product, see id. Not so here. Here, the homeowners sought compensation for the repair or replacement of individ‐ ual elements of a larger structure. This kind of particularized demand was not at issue in Pharmacal. Accordingly, we do not read Pharmacal as requiring an integrated‐system analysis in this case.2 Kolbe’s insurers next assert that, even if the policies here afford an initial grant of coverage for the plaintiffs’ leaky‐win‐ dow claims, the “your product” exclusion operates to remove any such coverage. We interpret the exclusion as would a rea‐ sonable person in the position of the insured. See Water Well 2 Kolbe requests (in the alternative) that we certify to the Wisconsin Supreme Court several questions concerning the application of Pharmacal to cases like this one. See Cir. R. 52(a); Wis. Stat. § 821.01. In general, certi‐ fication is appropriate where the relevant issue is one of “vital public con‐ cern” and is likely to recur in other suits, where resolution of that issue is dispositive of the present action, and where the state supreme court has not yet had an opportunity to “illuminate a clear path” forward. Plastics Eng’g Co. v. Liberty Mut. Ins. Co., 514 F.3d 651, 659 (7th Cir. 2008) (quoting Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 639 n.18 (7th Cir. 2002)). We do not see a need for certification here, as we think it sufficiently clear that Pharmacal’s integrated‐system approach does not govern in this dispute. 10 Nos. 16‐3563 & 16‐3648 Sols. Serv. Grp., Inc. v. Consol. Ins. Co., 881 N.W.2d 285, 291 (Wis. 2016) (citations omitted); Fontana Builders, Inc. v. Assur‐ ance Co. of Am., 882 N.W.2d 398, 408 (Wis. 2016) (citation omit‐ ted). Unambiguous terms are given their common and ordi‐ nary meaning, while ambiguous terms are construed in favor of coverage. See Fontana, 882 N.W.2d at 408 (citation omitted); Am. Girl, 673 N.W.2d at 73 (“Exclusions are narrowly or strictly construed against the insurer if their effect is uncer‐ tain.”) (citation omitted). The United States Fire policy excludes from coverage any “’[p]roperty damage’ to ‘your product’ arising out of it or any part of it,” where “your product” is defined as: (1) Any goods or products … manufactured, sold, handled, distributed or disposed of by: (a) You [the insured]; (b) Others trading under your name; or (c) A person or organization whose business or assets you have acquired; and (2) Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.3 The Fireman’s Fund policy is largely identical, except it de‐ fines the insured’s “product” as “[a]ny goods or products, 3 The insured’s “product” also includes: “[w]arranties or representa‐ tions made at any time with respect to the fitness, quality, durability, per‐ formance or use of [the insured’s product],” and the “providing of or fail‐ ure to provided [sic] warnings or instructions.” (internal quotation marks omitted). Nos. 16‐3563 & 16‐3648 11 other than real property, manufactured, sold, handled, distrib‐ uted or disposed of by” Kolbe (along with any containers, etc., “furnished in connection with” those goods or products) (em‐ phasis added). The parties agree that Kolbe’s windows, which Kolbe manufactured, are Kolbe’s “goods or products” under the first part of the definition—so Kolbe’s insurers are not on the hook for the cost of replacing any windows that are defective (or, relatedly, for any losses stemming from replacement opera‐ tions). The parties disagree, however, as to whether the walls and other elements of the plaintiffs’ homes constitute Kolbe’s “product” under the second part of the definition, such that coverage for any damage to those materials is likewise extin‐ guished by the exclusion. Kolbe says not, because Kolbe did not “furnish” any of the drywall, wood framing, stucco, or bricks at issue. The insurance companies argue that, unlike the first part of the “your product” definition—which explic‐ itly limits Kolbe’s “product” to goods or products made or sold, etc., by the insured—the second paragraph contains no such limitation, looping in all materials that have simply been “furnished in connection with such goods or products.” We agree with Kolbe that a reasonable insured could un‐ derstand “furnished in connection with,” as that phrase is used in the second part of the “your product” definition, to mean furnished by the actors specified in the preceding clause—here, Kolbe (the insured). “In connection with” is a phrasal preposition that, like other prepositions, is used to in‐ dicate a relationship between an object and its antecedent. The particular relationship signaled, however, may differ depend‐ ing on the context in which the preposition appears. When a journalist reports that “a man was questioned in connection 12 Nos. 16‐3563 & 16‐3648 with a robbery,” for instance, we understand “in connection with” to mean “concerning” or “regarding.” But if someone tells us that “these chairs were purchased in connection with the table,” the “connection” has changed: Now we under‐ stand that the chairs were purchased “together with,” or “around the same time as and for reasons related to the pur‐ chase of” the table—and, importantly, that the former items were purchased by the same person, or at least by someone acting in agreement with the person, who bought the latter. Kolbe’s insurance policies define Kolbe’s “product” as (1) “goods or products … manufactured, sold, handled, dis‐ tributed or disposed of by” Kolbe, and (2) “[c]ontainers …, materials, parts or equipment furnished in connection with such goods or products.” An insured could understand “in connection with,” as it is used here, to have the same meaning as it did in our table‐and‐chairs example above. Because both the “containers” et al. and the “goods or products” are capable of being “furnished” or supplied, the reader could reasonably assume that the former items must come from the source of, or from someone acting in agreement with the source of, the latter items; and the first clause clearly identifies that source as the insured. Cf. Pharmacal, 876 N.W.2d at 80 (“[T]he insured risk (i.e., physical injury to tangible property) applies to phys‐ ical injury to tangible property other than … the product … the insured supplied.” (citing Vogel v. Russo, 613 N.W.2d 177, 182 (Wis. 2000), abrogated in part on other grounds by Ins. Co. of N. Am. v. Cease Elec., Inc., 688 N.W.2d 462 (Wis. 2004))) (em‐ phasis added); Am. Girl, 673 N.W.2d at 78 (“The business risk exclusions eliminate coverage for … property damage to the insured’s own … product ….”) (emphasis added). At the very least, the definition of “your product” is ambiguous, so we Nos. 16‐3563 & 16‐3648 13 must construe the “your product” exclusion in favor of cover‐ age. Am. Girl, 673 N.W.2d at 73. As Kolbe did not supply or request that anyone else supply the drywall and other mate‐ rials allegedly damaged in the plaintiffs’ homes, the damage, though arising from Kolbe’s “product,” was not also to that “product”—so the “your product” exclusion does not elimi‐ nate coverage for these claims.4 Where, as here, it appears that there may be coverage for at least one of the claims in an underlying suit, the insurer has a duty to defend the policyholder against all claims alleged in that suit. Water Well, 881 N.W.2d at 292 (citing Fireman’s Fund Ins. Co. of Wis. v. Bradley Corp., 660 N.W.2d 666, 674 (Wis. 2003)). We therefore reverse the judgment declaring that United States Fire and Fireman’s Fund had no duty to defend in this case, and remand with instructions to vacate that judg‐ ment.