Wisconsin Label v. Northbrook Prop. & Cas. Ins.

Decision Date21 March 2000
Docket NumberNo. 98-0194.,98-0194.
Citation607 N.W.2d 276,233 Wis.2d 314,2000 WI 26
PartiesWISCONSIN LABEL CORPORATION, Plaintiff-Appellant-Petitioner, v. NORTHBROOK PROPERTY & CASUALTY INSURANCE COMPANY, Defendant-Respondent.
CourtWisconsin Supreme Court

For the plaintiff-appellant-petitioner, there were briefs by George Burnett and Liebmann, Conway, Olejniczak & Jerry, S.C., Green Bay, and oral argument by George Burnett.

For the defendant-respondent there was a brief by Susan R. Tyndall and Hinshaw & Culbertson, Milwaukee, and oral argument by Susan R. Tyndall.

¶ 1. JON P. WILCOX, J.

Wisconsin Label Corporation Wisconsin Label petitions this court for review of a published decision of the court of appeals, Wisconsin Label Corp. v. Northbrook Property & Casualty Insurance Co., 221 Wis. 2d 800, 586 N.W.2d 29 (Ct. App. 1998). The court of appeals affirmed a decision of the Circuit Court for Kewaunee County, Dennis J. Mleziva, Judge, granting summary judgment in favor of Northbrook Property & Casualty Insurance Company (Northbrook).

¶ 2. The case arose because a company owned by Wisconsin Label allegedly failed to properly label products. For the purposes of this summary judgment motion, the parties stipulate that products were mislabeled and that the mislabeling caused the products to be sold at less than half of their intended retail price. After the distributor of the products was forced to pay the retailer for the resulting losses, the distributor sought reimbursement and offset invoices for the completed work against the amount due for reimbursement.

¶ 3. Wisconsin Label notified its insurer, Northbrook, of its intention to seek indemnification for its losses under its commercial general liability insurance policy. Northbrook informed Wisconsin Label that the policy did not provide coverage because no "property damage" had occurred as that term is defined in the policy. ¶ 4. After Northbrook denied coverage, Wisconsin Label sued, alleging that Northbrook was in breach of the policy. Northbrook filed a motion for summary and declaratory judgment. The circuit court granted Northbrook's motion, holding that Northbrook had no duty to defend or indemnify Wisconsin Label for losses arising out of the mislabeling. The court of appeals affirmed, and Wisconsin Label petitions for review.

¶ 5. Because we conclude that no "property damage" occurred as that term is defined in Wisconsin Label's insurance policy, we affirm the decision of the court of appeals.

BACKGROUND

¶ 6. For purposes of the summary judgment motion, the parties stipulated to the following facts. Wisconsin Label acquired the assets and operations of Ameripac Corporation (Ameripac), an Illinois corporation. Subsequent to Wisconsin Label's acquisition of Ameripac, Northbrook issued an insurance policy ("the Policy") to Ameripac in Illinois. The Policy provided coverage from October 1, 1992 until October 1, 1993.

¶ 7. In October 1992 Ameripac contracted with Personal Products Company (PPC) to assemble two separate PPC products into a single promotional package for retail sale. Under the promotion, PPC wanted to allow consumers who bought a box of "Stay Free Maxi-Pads" to receive a box of "Care Free Panty-Shields" at no extra charge. Accordingly, Ameripac was supposed to (1) package the two separate products into a single promotional package, and (2) cover all of the existing UPC bar codes and replace them with new UPC labels reflecting the price of the "Stay Free Maxi-Pads." ¶ 8. Ameripac wrapped and labeled over 350,000 promotional packages, and PPC distributed the packages to various Wal-Mart stores for retail sale. After sales began, Wal-Mart claimed that Ameripac had failed to completely cover the old UPC labels on a number of the packages. As a result, Wal-Mart claimed that its registers had scanned many packages at the lower" Care Free Panty-Shields" price of $1.16, rather than the "Stay Free Maxi-Pads" price of $2.47. Wal-Mart asked PPC to reimburse it for lost profits that resulted from this undercharging and for the costs of relabeling the remaining packages. PPC paid Wal-Mart approximately $200,000 in compensation for these losses.

¶ 9. After PPC paid Wal-Mart for its losses, PPC in turn asked Ameripac for reimbursement. In addition to the $200,000 it had paid to Wal-Mart, PPC asked for $25,000 in reimbursement for costs that PPC incurred in reinspecting the unsold packages. PPC offset Ameripac's invoices, which totaled approximately $125,000, against PPC's claim for reimbursement. Although PPC has withheld payment on Ameripac's invoices, it has not yet sued to recover the balance.

¶ 10. Wisconsin Label1 seeks insurance coverage for its losses due to the mislabeling under the Policy. Wisconsin Label argues that the following insuring clauses of the Policy provide coverage:

SECTION 1 — COVERAGES

COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement
a. We will pay those sums that the Insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies....
b. This insurance applies to any bodily injury and property damage only if:
1. The bodily injury or property damage is caused by an occurrence that takes place in the coverage territory; and
2. The bodily injury or property damage occurs during the policy period.

The Policy defines "property damage" as:

a. Physical injury to tangible property, including all resulting loss of use of that property ...; or
b. Loss of use of tangible property that is not physically injured. . . .

Wisconsin Label asked Northbrook to indemnify it for the losses that resulted from the mislabeling, arguing that the losses were sums it had become legally obligated to pay "as damages because of . . . property damage," according to the definition of "property damage" in the Policy. ¶ 11. Northbrook rejected Wisconsin Label's claim for indemnification because it concluded that Wisconsin Label's losses are not the result of "property damage" as that term is defined in the Policy. Northbrook argued that no "property damage" occurred under either part of the Policy definition because (1) the mislabeling did not constitute "physical injury to tangible property," and (2) there was no "loss of use of tangible property that is not physically injured."

¶ 12. Furthermore, even if property damage did occur, Northbrook argued that the "impaired property exclusion" precluded any coverage. The impaired property exclusion denies coverage for:

m. Property damage to impaired property or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in your product or your work; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

"Impaired property" is defined as:

[T]angible property, other than your product or your work that cannot be used or is less useful because:
a. It incorporates your product or your work that is known or thought to be defective, deficient, inadequate or dangerous, or b. Any Insured has failed to fulfill the terms of a contract or agreement;
if such property can be restored to use by:
a. The repair, replacement, adjustment or removal of your product or your work; or
b. Your fulfilling the terms of the contract or agreement.

The impaired property exclusion is subject to one exception; it does not exclude coverage for "the loss of use of other property arising out of sudden and accidental physical injury to your product or your work after it has been put to its intended use." Because it concluded that the Policy provided no coverage, and that in any case the impaired property exclusion would preclude coverage, Northbrook declined to indemnify Ameripac for its losses.

¶ 13. Wisconsin Label sued Northbrook, claiming that Northbrook had breached the Policy by failing to investigate the claim and by failing to pay for the claim. Wisconsin Label sought compensatory damages for this alleged breach of the Policy. Northbrook filed a motion for summary and declaratory judgment, seeking judgment in favor of Northbrook as a matter of law and a declaration that Northbrook has no obligation to indemnify Wisconsin Label for the loss at issue.

¶ 14. The circuit court granted Northbrook's motion for summary judgment. The court first analyzed whether the Policy provided coverage for the loss. The court determined that the Policy did not extend coverage because no "property damage" had occurred under either part of the definition. Under the first part of the definition, the court concluded that no "physical injury to tangible property" had occurred. Under the second part of the definition, the court determined that the mislabeling did not give rise to any "loss of use," but only to economic loss, and that the type of economic loss created by the mislabeling was not covered by the Policy. The court also rejected Wisconsin Label's argument that the diminished value of the products constituted property damage, because the mislabeling did not diminish the physical usefulness of the products. Thus, the court concluded that no coverage existed under the coverage provisions of the Policy.

¶ 15. In addition, the circuit court concluded that even if Wisconsin Label's losses were due to "property damage," the impaired property exclusion precluded any coverage. The court explained that the packages were "impaired property" under the Policy definition because they could be restored to use by repair or replacement of the labels. Wisconsin Label argued that the packages that were sold at the wrong price were not "impaired property" because they could no longer be repaired or replaced. The court rejected this argument, because the definition of "impaired property" requires only that the products "can be restored to use," not that they actually be restored to use. Since the products...

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