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Divided Wisconsin Supreme Court finds use of defective ingredient requiring destruction of health supplement not Property Damage.

The Wisconsin Supreme Court, in a ruling 3-2 ruling, found that Nebraska Cultures of California, Inc. (“Nebraska Cultures”) and Jeneil Biotech, Inc. (“Jeneil”) were not entitled to a defense or indemnity from their respective insurers, Evanston Insurance Co. (“Evanston”) and The Netherlands Insurance Co. (“Netherlands”).  The insureds allegedly provided a defective product to Nutritional Manufacturing Services, LLC (“NMS”), a contractor for Wisconsin Pharmacal Company, LLC (“Pharmacal”), for inclusion in a health supplement.

Pharmacal hired NMS to make a health supplement that contained a probiotic bacteria.  NMS contracted with Nebraska Cultures to supply the probiotic bacteria ingredient that Nebraska Cultures had purchased from Jeneil.  NMS then blended the ingredients together, but it was later determined that the wrong bacteria was in the product.  The product was recalled and destroyed.  NMS assigned to Pharmacal its claims against Nebraska Cultures and Jeneil and their respective insurers, Evanston and Netherlands.

The Wisconsin Supreme Court found that the incorporation of a contaminated ingredient into another product was not “property damage” caused by an accidental occurrence within the meaning of the Evanston and Netherlands general liability policies.  The court reasoned that the health supplement was an “integrated system.”  As such, there was no damage to other property as required under the policies.  The court also rejected the policyholders’ “loss of use” argument because a decrease in all value was not the same as a loss of use.  Furthermore, even if the policyholders were to successfully demonstrate a property damage claim, the court found that it would have been barred by the “impaired property exclusions” in the policies which exclude coverage due to a defect or inadequacy in the policyholders’ own work.

A vigorous dissent criticized the majority opinion due to its reliance on the “economic loss doctrine” which it characterized as “The Blob” and superseded interpretation of actual policy language.  Wis. Pharmacal Co. LLC v. Nebraska Cultures of Cal.  Inc., Nos. 2013AP613 & 2013AP687 (Wisc. Mar. 1, 2016).

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