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Seventh Circuit: Integrated-system rule does not preclude coverage for homeowners’ claims against window manufacturer

August 14, 2017

Seventh Circuit: Integrated-system rule does not preclude coverage for homeowners’ claims against window manufacturer

August 14, 2017

Authored By

Linda Schmidt

Linda S. Schmidt

Special Counsel

Leaking windowThe Seventh Circuit ruled Tuesday that the integrated-system rule, a common law rule under the economic loss doctrine, did not bar liability coverage for damages caused by leaky windows.

Several homeowners brought suit against window manufacturer Kolbe & Kolbe Millwork claiming that defects in windows they had purchased from Kolbe led to stained walls and buckled plaster, among other damages. Kolbe’s insurers argued that the Wisconsin Supreme Court’s application of the economic loss doctrine’s integrated-system rule in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 876 N.W.2d 72 (Wis. 2016) controlled – and required a determination of no coverage. They pointed to two state court of appeals’ decisions holding that windows formed an integrated system with their surrounding structures in additional support of their position.

The purchaser of a product is precluded under the economic loss doctrine from pursuing tort-based avenues of recovery for purely economic injuries and is limited instead to contract-based remedies. The doctrine does not apply to actions for bodily injury or, typically, injury to property other than the defective product. An exception exists if the defective product is a component of a larger, “integrated system.” In that instance, damage by the defective product to other components of the system is considered damage to the product itself, and the economic loss doctrine applies.

In Pharmacal, the supreme court extended the integrated-system rule to the insurance coverage context. There, a faulty ingredient provided by the insured was incorporated into probiotic supplements, causing the supplements to be defective. In a suit by the retail supplier of the supplements for damages arising from the supplements’ recall, the court held that damage to the tablets was damage to the faulty component itself – and there was no liability coverage.

The Seventh Circuit rejected the Kolbe insurers’ argument that Pharmacal mandated a similar result because windows form an integrated-system with the house of which they are a part. The court observed that, unlike Pharmacal, in which the plaintiff sought reimbursement for the loss of the supplements as a whole, the homeowners were requesting compensation for the repair or replacement of individual components of their homes. The homeowners’ more particularized demand, in the court’s view, required a different result.

The Seventh Circuit’s decision is unremarkable to the extent that it focuses on the nature of the homeowners’ underlying claims. It suggests, however, that the Seventh Circuit disagrees with the state court of appeals that the integrated-systems rule precludes tort claims for damage caused by defective windows. Otherwise, why would the court find possible insurance coverage based on damages that the plaintiffs could not possibly recover?

The Seventh Circuit was not in position to answer this question because the Kolbe plaintiffs’ tort claims were previously dismissed after they failed to respond to Kolbe’s motion for partial summary judgment. One wonders though if the insurers might not have had better luck in the state court of appeals.

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