Wis. Pharmacal Co. v. Neb. Cultures of Cal., Inc., s. 2013AP613

Decision Date01 March 2016
Docket Number2013AP687.,Nos. 2013AP613,s. 2013AP613
Citation2016 WI 14,876 N.W.2d 72,367 Wis.2d 221
Parties WISCONSIN PHARMACAL COMPANY, LLC, Plaintiff, v. NEBRASKA CULTURES OF CALIFORNIA, INC. and Evanston Insurance Company, Defendants, Jeneil Biotech, Inc., Defendant–Appellant, The Netherlands Insurance Company, Defendant–Respondent–Petitioner. Wisconsin Pharmacal Company, LLC, Plaintiff, v. Nebraska Cultures of California, Inc., Defendant–Appellant, Jeneil Biotech, Inc. and The Netherlands Insurance Company, Defendants, Evanston Insurance Company, Defendant–Respondent–Petitioner.
CourtWisconsin Supreme Court

For the defendant-respondent-petitioners, there were joint briefs by Thomas R. Schrimpfand Hinshaw & Culbertson, LLP, Milwaukee, Mark F. Wolfeand Traub Lieberman Straus & Shrewsberry, Chicago. Oral argument by Thomas Schrimpfand Mark F. Wolfe.

For the defendant-appellant, Jeneil Biotech, Inc., there was a brief by Douglas M. Raines, James A. Baxterand von Briesen & Roper, S.C., Milwaukee, and oral argument by Douglas M. Raines.

For the defendant-appellant, Nebraska Cultures of California, Inc., there was a brief by Patryk Silver, Borgelt, Powell, Peterson & Frauen, S.C., Madison, and oral argument by Patryk Silver.

There was an amicus curiae brief by James A. Friedman, Todd G. Smith, and Godfrey & Kahn, S.C., Madison on behalf of the Wisconsin Insurance Alliance.

PATIENCE DRAKE ROGGENSACK, Chief Justice.

¶ 1 We review a published decision of the court of appeals1 REVERSING AN ORDER Of the ozaukee county circuiT court2 THAT granted summary judgment to The Netherlands Insurance Company (Netherlands) and Evanston Insurance Company (Evanston). Our review centers on a coverage dispute between the insurers and their respective insureds, Jeneil Biotech, Inc. (Jeneil) and Nebraska Cultures of California, Inc. (Nebraska Cultures). The underlying claims against the insureds arise from their supplying a defective ingredient for incorporation into the plaintiff's, Wisconsin Pharmacal Company (Pharmacal), probiotic supplement tablets.

¶ 2 The insurers argue that the insurance policies do not provide coverage for damages that may arise out of the underlying claims against the insureds. Specifically, the issues before us are: (1) whether the incorporation of a defective ingredient into the supplement tablets constitutes "property damage" caused by an "occurrence" under the policies' language; and (2) if there is "property damage" caused by an "occurrence," whether any of the policies' exclusions apply to negate coverage.

¶ 3 We conclude that there is no "property damage" caused by an "occurrence" because the incorporation of a defective ingredient into the supplement tablets did not damage other property and did not result in loss of use of property. We further conclude that, even if the incorporation of a defective ingredient were to constitute "property damage" caused by an " occurrence," certain exclusions in both policies apply to negate coverage. Accordingly, we reverse the decision of the court of appeals.

I. BACKGROUND

¶ 4 Pharmacal supplies a Daily Probiotic Feminine Supplement to a major retailer. This supplement is in the form of a chewable tablet and contains various ingredients, including a probiotic bacterial species known as Lactobacillus rhamnosus (LRA). In July of 2008, Pharmacal contacted Nutritional Manufacturing Services, LLC to manufacture supplement tablets containing LRA. Nutritional Manufacturing agreed to procure LRA and manufacture supplement tablets containing that ingredient. In order to procure LRA for production of supplement tablets, Nutritional Manufacturing contacted Nebraska Cultures, which agreed to supply LRA. Nebraska Cultures then contracted with Jeneil to supply LRA to Nebraska Cultures for subsequent sale to Nutritional Manufacturing. Nutritional Manufacturing thereafter obtained the ingredient from Nebraska Cultures along with a "Certificate of Analysis," representing the ingredient as LRA.

¶ 5 Having supposedly acquired LRA from Nebraska Cultures, Nutritional Manufacturing manufactured supplement tablets using the provided ingredient, which was defective because it constituted a different species of bacteria, Lactobacillus acidophilus (LA), rather than LRA. This manufacturing process required blending other ingredients that were obtained from other vendors, with the defective probiotic ingredient supplied by Nebraska Cultures and Jeneil. Once all of the ingredients were blended together, they were compressed into tablet form. Once mixed and compressed into tablet form, none of the ingredients could be separated from one another. After manufacturing supplement tablets, Nutritional Manufacturing supplied them to Pharmacal, which, in turn, packaged and shipped them to the retailer.

¶ 6 In April of 2009, the retailer notified Pharmacal that the supplement did not contain LRA but, rather, it contained LA. Pharmacal performed independent testing on supplement tablets and confirmed that they contained LA rather than the contracted-for LRA. Upon this confirmation, Pharmacal notified the retailer that the supplements were mislabeled as containing LRA when they actually contained LA. In May of 2009, the retailer recalled the supplement. After the recall, Pharmacal destroyed the supplement tablets containing the defective ingredient.

¶ 7 Nutritional Manufacturing assigned any and all of its causes of action against Nebraska Cultures and Jeneil to Pharmacal. On January 14, 2011, Pharmacal filed suit against Nebraska Cultures and its general liability insurer, Evanston, as well as Jeneil and its general liability insurer, Netherlands. Pharmacal alleged numerous causes of action,3 including various tort and contract claims. Additionally, Nebraska Cultures filed a cross claim against Jeneil for negligence. In October of 2011, the circuit court dismissed with prejudice all of Pharmacal's claims against Jeneil and Netherlands. With respect to the claims against Nebraska Cultures and Evanston, the circuit court dismissed with prejudice all tort claims. Therefore, the remaining claims include: (1) Nebraska Cultures' cross claim against Jeneil for negligence;4 and (2) Pharmacal's various contract-based claims against Nebraska Cultures. All of these claims allege that Jeneil and Nebraska Cultures incorrectly supplied LA to Nutritional Manufacturing and Pharmacal when the parties had contracted for LRA.

¶ 8 Subsequently, Netherlands and Evanston moved to bifurcate and stay the merits of the proceedings pending the circuit court's determination of whether their respective insurance policies provided coverage, thereby triggering the insurers' duties to defend and indemnify. Netherlands and Evanston moved for summary judgment, arguing that the insurance policies did not cover any damages that may arise out of the remaining causes of action against Jeneil and Nebraska Cultures because there was no property damage caused by an occurrence.

¶ 9 In October of 2012 and January of 2013, the circuit court held two hearings5 on the coverage issue and ultimately granted the insurers' motions for summary judgment. The circuit court concluded that the facts of the case did not trigger the insurers' duties to defend. Specifically, the circuit court concluded that the incorporation of a defective probiotic ingredient into the tablets did not constitute property damage caused by an occurrence because it harmed only the product itself, which is an integrated system.

¶ 10 The court of appeals reversed the circuit court's grant of summary judgment, concluding that the policies provided coverage. Wis. Pharmacal Co. v. Neb. Cultures of Cal., Inc., 2014 WI App 111, 358 Wis.2d 673, 856 N.W.2d 505. The court of appeals concluded that the integrated system rule was not relevant to the coverage dispute and that the incorporation of a defective ingredient constituted property damage to the product (the probiotic supplement tablets) caused by an occurrence under the policies' language and that no exclusion negated coverage. Id., ¶¶ 20–26. The court of appeals also held that Netherlands breached its duty to defend6 by "reject[ing] Jeneil's initial tender, prior to the discovery of additional facts bearing on coverage." Id., ¶ 39.

¶ 11 We granted the insurers' joint petition for review.

II. DISCUSSION
A. Standard of Review

¶ 12 Reviewing a grant of summary judgment, we independently apply the same methodology as the circuit court and the court of appeals while benefitting from their analyses. Preisler v. Gen. Cas. Ins. Co., 2014 WI 135, ¶ 16, 360 Wis.2d 129, 857 N.W.2d 136. "The standards set forth in Wis. Stat. § 802.08are our guides." Id. Summary judgment "shall be rendered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Wis. Stat. § 802.08(2)(2013–14).

¶ 13 While the parties do not dispute the facts giving rise to the underlying causes of action, our review requires us to interpret the insurance policies. "The interpretation of an insurance [policy] is a question of law that we review independently." Siebert v. Wis. Am. Mut. Ins. Co., 2011 WI 35, ¶ 28, 333 Wis.2d 546, 797 N.W.2d 484.

B. Choice of Law

¶ 14 Initially, we note that there are two insurance policies at issue in this case. Jeneil's coverage is governed by the Netherlands policy, while Nebraska Cultures' coverage is governed by the Evanston policy. The parties agree that the Netherlands policy should be interpreted according to Wisconsin law, while the Evanston policy should be interpreted according to California law. We agree as well.

¶ 15 When parties do not specifically provide a choice of law provision in the policy, we have "adopted the 'grouping-of-contacts' approach for resolving conflicts questions raised as to a disputed contract." Utica Mut. Ins. Co. v. Klein & Son, Inc., 157 Wis.2d...

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