Haley v. Kolbe & Kolbe Millwork Co.

• Decision Date: 08 August 2017
• Docket Number: Nos. 16-3563 & 16-3648,s. 16-3563 & 16-3648
• Citation: 866 F.3d 824
• Parties: 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.
• Court: U.S. Court of Appeals — Seventh Circuit

866 F.3d 824

Mary HALEY, et al., Plaintiffs,

v.KOLBE & KOLBE MILLWORK CO., Defendant–Appellant/Cross–Appellee,andFireman's Fund Insurance Co., Intervenor–Appellee,

and

United States Fire Insurance Co., Intervenor–Appellee/Cross–Appellant.

Nos. 16-3563 & 16-3648

United States Court of Appeals, Seventh Circuit.

Argued March 28, 2017

Decided August 8, 2017

Rehearing Denied September 7, 2017

Michael J. Flannery, Attorney, CUNEO GILBERT & LADUCA, LLP, St. Louis, MO, Joseph DePalma, Attorney, LITE DEPALMA GREENBERG, LLC, Newark, NJ, for Plaintiffs.

Susan G. Schellinger, Attorney, Aaron E. Hall, Attorney, DAVIS & KUELTHAU, Milwaukee, WI, for Defendant–Appellant.

Beth Ann Berger, Attorney, Jeffrey Alan Goldwater, Attorney, LEWIS BRISBOIS BISGAARD & SMITH LLP, Chicago, IL, for Intervenor–Appellee FIREMAN'S FUND INSURANCE COMPANY.

David E. Schoenfeld, Attorney, Riley Caroline Mendoza, Attorney, SHOOK, HARDY & BACON LLP, Chicago, IL, for Intervenor–Appellee UNITED STATES FIRE INSURANCE COMPANY.

Graham C. Mills, Attorney, NEWMEYER & DILLION, LLP, Walnut Creek, CA, for Amicus Curiae UNITED POLICYHOLDERS.

Before Flaum, Kanne, and Hamilton, Circuit Judges.

Flaum, Circuit Judge.

In 2014, Mary Haley and others filed a putative class action against Kolbe & Kolbe Millwork Company, 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, 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 Pharmacal Co., LLC v. Nebraska Cultures of California, Inc. , 367 Wis.2d 221, 876 N.W.2d 72 (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 Fireman'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 district court.

I. Background

Plaintiffs in the companion case of Haley v. Kolbe & Kolbe Millwork Co. , 863 F.3d 600 (7th Cir.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 plaintiffs' homes (such as stained walls and buckled plaster). Kolbe tendered the defense of these claims to four of its insurance providers, and all four agreed to defend Kolbe under a reservation 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 district court permitted intervention but declined to stay the underlying 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 because there was no coverage for the plaintiffs' defective-window claims. Kolbe's insurance policies did not cover the "direct" 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 problem with that product itself; and the policies likewise did not apply to any indirect or "consequential" injuries to the plaintiffs' 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 insurance-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-system issue, however, when United States Fire renewed its motion for summary judgment in light of the Wisconsin Supreme Court's decision in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc. , 367 Wis.2d 221, 876 N.W.2d 72 (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 language), 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 reimbursement issue generally by failing to raise it earlier in the litigation.

Kolbe now appeals the district court's ruling that the insurers had no duty to continue defending Kolbe in the underlying leaky-windows suit. United States Fire appeals the court's refusal to compel reimbursement of any post- Pharmacal 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 inferences in favor of the non-moving party—here, Kolbe. Cohan v. Medline Indus., Inc. , 843 F.3d 660, 665 (7th Cir. 2016) (citation 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).

1. "Integrated Systems" and the Economic–Loss Doctrine

At the heart of the parties' dispute over insurance coverage here is the integrated-system rule, a common-law rule from the so-called "economic loss" doctrine. Under that doctrine, the purchaser of a product is barred from using tort law to recover from the manufacturer any purely economic injuries (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. , 283 Wis.2d 606, 699 N.W.2d 189, 192 (2005) (citations omitted); Wausau Tile, Inc. v. Cty. Concrete Corp. , 226 Wis.2d 235,593 N.W.2d 445, 451 (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. , 283 Wis.2d 511, 699 N.W.2d 167, 171 (2005) (citation and internal quotation 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 omitted).

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 (citations omitted). But there's a catch: If the defective product is a component of a larger, "integrated system," damage by that component to the other elements of the system, or to the system 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 cement—an ingredient of concrete—had allegedly caused the paving blocks to crack and buckle. As the cement was an integral component of the finished blocks, the cement had not damaged any "other property," and the economic-loss doctrine applied. See id. at 453–54.

2. The PharmacalDecision

The economic-loss doctrine generally does not apply to insurance-coverage disputes, see Am. Family Mut. Ins. Co. v. Am. Girl, Inc. , 268 Wis.2d 16, 673 N.W.2d 65, 75 (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 probiotic 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 ingredients together and compressing the mixture into chewable tablets. See id. As it turned out, however, the bacteria incorporated 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 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...