Inclusion of Allegedly Defective Ingredient in Supplement Tablets Was Not “Property Damage,” Wisconsin Supreme Court Rules

The Wisconsin Supreme Court has ruled that because incorporation of an allegedly defective ingredient into supplement tablets did not damage other property and did not result in loss of use of property, there was no “property damage.”

The Case

Wisconsin Pharmacal Company supplied a daily probiotic feminine supplement to a major retailer. The supplement was in the form of a chewable tablet and contained various ingredients, including a probiotic bacterial species known as Lactobacillus rhamnosus (“LRA”).

Pharmacal said that it contacted Nutritional Manufacturing Services, LLC, to manufacture tablets containing LRA. According to Pharmacal, Nutritional Manufacturing manufactured tablets using a different species of bacteria, Lactobacillus acidophilus (“LA”). Unaware, Pharmacal then shipped the tablets to the retailer.

The retailer notified Pharmacal that the supplement did not contain LRA, but rather, LA. The retailer recalled the supplement and Pharmacal destroyed the tablets.

Nutritional Manufacturing assigned any and all of its causes of action against the suppliers to Pharmacal, which sued them and their insurance carriers. Pharmacal alleged that the suppliers had incorrectly supplied LA to Nutritional Manufacturing and Pharmacal when the parties had contracted for LRA.

The insurers asked the trial court to determine whether they were obligated to defend and indemnify the suppliers. The trial court ruled that the facts did not trigger the insurers’ duty to defend. Specifically, the trial 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 was an integrated system.

The court of appeals reversed, concluding that there was coverage. The court of appeals determined 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

The dispute reached the Wisconsin Supreme Court.

The Wisconsin Supreme Court’s Decision

The court reversed the ruling by the court of appeals.

In its decision, the court explained that once the LA had been combined with the other ingredients and incorporated into supplement tablets, it formed an “integrated system” and Pharmacal “could not separate out the LA from the other ingredients or the other ingredients from each other.” In other words, the court said, upon blending LA, rather than LRA, with other ingredients, all of the ingredients were integrated into one product: the tablets.

Therefore, the court ruled, the effect of LA being incorporated with the other ingredients into tablets could “not be said to constitute damage to other property.”

Accordingly, the court concluded, the injury allegedly sustained by Pharmacal had been sustained by the integrated system itself, i.e., the tablets, and “no other property was injured.”

The court rejected the argument that the cartons, shippers, inserts, tooling, and dies associated with the supplement tablets suffered physical injury, thereby constituting property damage.  The court reasoned that the materials associated with shipping the supplement tablets “did not undergo any physical alterations due to LA.”

The case is Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., No. 2013AP613 and 2013AP687 (Wisc. March 1, 2016).