Haley v. Kolbe & Kolbe Millwork Co., No. 16-3648 (7th Cir. 2017)

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Justia Opinion Summary

In 2014, Haley and others filed a putative class action against Kolbe & Kolbe Millwork, claiming that windows purchased from Kolbe were defective and had allowed air and water to leak into (and damage) the plaintiffs’ homes. Kolbe tendered the defense of the defective-product claims to several insurance companies. Two companies—United States Fire Insurance and Fireman’s Fund—obtained permission to intervene in the case. United States Fire successfully moved for summary judgment, arguing that a 2016 decision of the Wisconsin Supreme Court (Pharmacal) absolved the insurers of their duty to defend Kolbe in the underlying suit. The court sua sponte awarded judgment to Fireman’s Fund. The Seventh Circuit reversed the judgment that the insurance companies had no duty to defend. The “Pharmacal” analysis does not apply because the homeowners sought compensation for the repair or replacement of individual elements of a larger structure. This kind of particularized demand was not at issue in Pharmacal, which applied an "integrated structure" analysis. Whether the walls and other elements of the plaintiffs’ homes constitute Kolbe’s “product,” such that coverage for any damage to those materials is extinguished by a policy exclusion is ambiguous.

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In the United States Court of Appeals For the Seventh Circuit ____________________ Nos. 16 3563 & 16 3648 MARY HALEY, et al., Plaintiffs, v. KOLBE & KOLBE MILLWORK CO., Defendant Appellant/Cross Appellee, and FIREMAN’S FUND INSURANCE CO., Intervenor Appellee, and UNITED STATES FIRE INSURANCE CO., Intervenor Appellee/Cross Appellant. ____________________ Appeal from the United States District Court for the Western District of Wisconsin. No. 14 cv 99 bbc — Barbara B. Crabb, Judge. ____________________ ARGUED MARCH 28, 2017 — DECIDED AUGUST 8, 2017 ____________________ Before FLAUM, KANNE, and HAMILTON, Circuit Judges. 2 Nos. 16 3563 & 16 3648 FLAUM, Circuit Judge. In 2014, Mary Haley and others filed a putative class action against Kolbe & Kolbe Millwork Com pany, claiming that windows purchased from Kolbe were de fective and had allowed air and water to leak into (and dam age) the plaintiffs’ homes. Kolbe tendered the defense of the defective product claims to several insurance companies, and two of them—United States Fire Insurance Company and Fireman’s Fund Insurance Company—sought and obtained permission to intervene in the case. United States Fire later filed a motion for summary judgment, arguing that a recent decision of the Wisconsin Supreme Court, Wisconsin Pharma cal Co., LLC v. Nebraska Cultures of California, Inc., 876 N.W.2d 72 (Wis. 2016), absolved the insurers of their duty to defend Kolbe in the underlying suit. The district court granted United States Fire’s motion (and sua sponte awarded judgment to Fire man’s Fund)—a decision that Kolbe now appeals. United States Fire appeals the court’s decision not to require Kolbe to reimburse that insurer for any post Pharmacal defense fees, and asks that we remand the case for a determination of whether all pre Pharmacal defense fees were reasonable. We reverse the judgment that the insurance companies had no duty to defend, but otherwise affirm the decisions of the dis trict court. I. Background Plaintiffs in the companion case of Haley v. Kolbe & Kolbe Millwork Co., No. 16 3192, — F.3d —, 2017 WL 2953042 (7th Cir. Jul. 11, 2017), alleged two general categories of damages suffered as a result of defects in Kolbe’s window products: “direct” losses (i.e., from having to replace the windows), and indirect or “consequential” losses from injuries to the plain tiffs’ homes (such as stained walls and buckled plaster). Kolbe Nos. 16 3563 & 16 3648 3 tendered the defense of these claims to four of its insurance providers, and all four agreed to defend Kolbe under a reser vation of rights. When a dispute arose over the choice of defense counsel, however, two of the insurance companies—United States Fire and Fireman’s Fund—sought to intervene in the underlying suit, and to compel Kolbe to switch defense lawyers. The same insurers also moved to bifurcate the insurance coverage and liability issues, and to stay the liability portion of the case until the choice of counsel issue had been resolved. The dis trict court permitted intervention but declined to stay the un derlying litigation, and held that the insurers were equitably estopped from forcing Kolbe to change defense attorneys. The intervening insurers ultimately moved for summary judgment, arguing that they had no duty to defend Kolbe be cause there was no coverage for the plaintiffs’ defective win dow claims. Kolbe’s insurance policies did not cover the “di rect” cost of replacing any faulty windows, said the insurers, because the policies did not cover damage to Kolbe’s own product where, as here, the source of the damage was a prob lem with that product itself; and the policies likewise did not apply to any indirect or “consequential” injuries to the plain tiffs’ homes, argued the insurers, because each home formed an “integrated system” with Kolbe’s windows—and thus the entire house should be treated as Kolbe’s “product” for insur ance coverage purposes. The district court accepted the first of these arguments but rejected the second, and so initially awarded judgment to the insurance companies only in part. The district court changed course on the integrated sys tem issue, however, when United States Fire renewed its mo tion for summary judgment in light of the Wisconsin Supreme 4 Nos. 16 3563 & 16 3648 Court’s decision in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 876 N.W.2d 72 (Wis. 2016). The court then entered judgment for United States Fire and, sua sponte, for Fireman’s Fund (which had neglected to join United States Fire’s second motion but whose policy contained similar lan guage), concluding that neither policy covered the plaintiffs’ consequential damages claims. United States Fire also sought reimbursement of any defense fees incurred since Pharmacal had been decided, but the district court denied that request, concluding that United States Fire had forfeited the reim bursement issue generally by failing to raise it earlier in the litigation. Kolbe now appeals the district court’s ruling that the in surers had no duty to continue defending Kolbe in the under lying leaky windows suit. United States Fire appeals the court’s refusal to compel reimbursement of any post Pharma cal defense fees, and seeks a remand to the district court for a determination of whether the other fees charged by Kolbe’s defense counsel were reasonable. II. Discussion A. Kolbe’s Appeal 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. B. United States Fire’s Cross Appeal While United States Fire’s (renewed) motion for summary judgment on the duty to defend issue was still pending in the district court, the court dismissed all of the plaintiffs’ remain ing claims in the underlying suit and ordered the insurance company to show cause why, in light of that dismissal, the pending motion should not be denied as moot. United States Fire responded that the motion should still be resolved be cause, in the event the plaintiffs filed an appeal, the insurers would have a continuing duty to defend Kolbe throughout 4 We note, however, that if the integrated system rule applied in this case as it did in Pharmacal, then the “your product” exclusion would in deed extinguish coverage, as the insurance companies urge. See 876 N.W.2d at 90 n.14. 14 Nos. 16 3563 & 16 3648 the appellate process unless the district court decided other wise. In addition, should the court determine that the duty to defend had been extinguished, United States Fire asked that the court order Kolbe to reimburse its insurer for all monies paid toward Kolbe’s defense since the duty had ended. The insurance company also suggested that it planned to chal lenge the reasonableness of the defense fees already charged by Kolbe’s counsel. Although the district court agreed with United States Fire that the insurers no longer had a duty to defend, the court declined to order the reimbursement of any fees, as United States Fire had not asked for that kind of relief in its pleading, and it was too late in the litigation to allow an amendment. The court then entered judgment in the insurers’ favor on their duty to defend claims, and terminated the case. United States Fire appeals the denial of its request for re imbursement, but as we have concluded that the insurer owed a continuing duty to defend, we do not reach that issue: It is moot. As to the reasonableness of Kolbe’s defense fees gener ally, the insurance company never made a formal request for the recoupment of excessive charges. Having resolved all out standing motions and causes of action, it was not inappropri ate for the district court to terminate the case. If, on remand, the district court wishes to entertain a motion for recoupment, however, the court certainly has the discretion to do so. III. Conclusion For the foregoing reasons, we REVERSE the judgment that the insurance companies did not have a duty to defend and REMAND with instructions to vacate that judgment. We AFFIRM as to the reimbursement of defense fees and initial termination of the case.

Primary Holding

Seventh Circuit holds that insurers of millwork company may have a duty to defend in a class action alleging that company's defective windows caused damage to other components of plaintiffs' homes.

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