June 22, 2023Client Alert

Wisconsin Supreme Court Rejects The Integrated Systems Rule In Evaluating Coverage Under Standard CGL Policies

In a significant win for Wisconsin policyholders, the Wisconsin Supreme Court on June 20, 2023 rejected the integrated systems rule in evaluating coverage under standard CGL policies. See 5 Walworth, LLC v. Engerman Contracting, Inc., 2023 WI 51. To establish an initial coverage grant under standard CGL policies, the policyholder must prove, among other things, either bodily injury or property damage caused by an occurrence. Based on a 2016 Wisconsin Supreme Court decision, Wisconsin Pharmacal Company, LLC v. Nebraska Cultures of California, Inc., 2016 WI 14, ¶ 28, Wisconsin courts required that the property damage be to “other property,” i.e., not the policyholder’s property, and used the integrated systems rule to determine if “other property” was damaged. Under the integrated systems rule, the Court analyzed whether a policyholder’s product was part of an integrated system, and if so, held that any damage to the integrated system was insufficient to establish property damage under the policy. Thus, the integrated systems rule significantly limited the coverage available to policyholders under standard CGL policies.

In 5 Walworth, however, the Court recognized that Wisconsin Pharmacal was erroneously decided because it departed from Wisconsin’s longstanding contract focused analysis in coverage disputes. As a result, the Court expressly overruled Wisconsin Pharmacal and rejected the integrated systems rule it had established.

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