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.
Mary Haley v. Kolbe & Kolbe Millwork Co., I
Combined Opinion