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Seventh Circuit Court Of Appeals Rejects "integrated Systems" Doctrine In Determining Coverage For A Third-party Property Damage Claim In The Context Of Construction Defect Litigation

In Haley v. Kolbe Kolbe Millwork Co., 866 F.3d 824 (7th Cir. 2017) reh'g denied (Sept. 7, 2017) the Seventh Circuit Court of Appeals, applying Wisconsin law, found that a home has components. This case involved a putative class action against the insureds' defective windows that had been installed in residential properties. The District Court applied the "integrated systems" doctrine in finding coverage. The "integrated systems" doctrine extends the "economic loss" rule to cases where a defective product is integrated into a larger product and then the larger product fails to perform as expected due to the defective component. The Seventh Circuit Court of Appeals held that the District Court had misapplied this doctrine. The Court found that the "integrated system" was not considered third-party property damage, but was merely a defective product for which no tort recovery was allowed. The insurance companies argued that the homes were "integrated systems" and the windows that had been installed by the insured were merely components that rendered the entire system (each home) defective. The Court noted that the defective windows had allegedly caused damage to sheetrock, framing, and other components that the insured did not supply and therefore qualified as third-party property damage.

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