The Economic Loss Doctrine Is Alive and Well in Tennessee and Kentucky
Two recent decisions from neighboring states offer important insights into the economic loss doctrine.
In Lincoln General Ins. Co. v. Detroit Diesel Corp., No. M2008-10427-SC-R23-CQ (Tenn. Aug. 21, 2009), the Tennessee Supreme Court for the first time answered the question whether the economic loss doctrine was part of Tennessee law. In Lincoln General, an insurer sued the manufacturer of a bus and the manufacturer of the bus engine for monies that the insurer had paid to its insured after the engine caught fire and destroyed the bus. Only the bus had been destroyed; there was no injury to people or other property.
The federal district court that had been adjudicating the case certified this question to the Tennessee Supremes: "Does Tennessee law recognize an exception to the economic loss doctrine under which recovery in tort is possible for damage to the defective product itself when the defect renders the product unreasonably dangerous and causes the damage by means of a sudden, calamitous event?"
The court's decision in Lincoln General has a good discussion of the seminal U.S. Supreme Court case on the economic loss doctrine, East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986). It also does an excellent job of collecting cases that have interpreted that decision.
After a discussion of the doctrine's purpose in preserving the risk allocation inherent in the contract-based warranty causes of action, the Lincoln General court considered the plaintiff's argument that where the machine suffers a catastrophic failure that, but for the grace of God, could have seriously injured or killed someone, an exception to the economic loss doctrine should apply so that tort theories could be pled and the deterrence interests of tort law could be satisfied.
The court concluded that a buyer who suffers a catastrophic failure that only injures the product itself is still in the same position as a buyer who bought a product that simply does not work, and thus the parties' allocation of risk should be respected. Moreover, the court reasoned, it would be difficult for courts to apply a rule that focuses on the degree of risk and how the product was damaged. "[D]eterrence is adequately promoted by existing law that permits tort recovery for personal injury and damage to property other than the product itself" because the manufacturer cannot predict that the damage his product will cause will not include personal injuries and property damage," the court held. It also noted that this holding is consistent with Restatement (Second) of Torts Section 21.
Accordingly, the court suggested that the negligence and strict liability claims could not proceed under the economic loss doctrine.
An intermediate appellate court in Kentucky was faced with a somewhat different question in Industrial Risk Insurers v. Giddings & Lewis, Inc., No. 2007-CA-0012163-MR (Ky. App. Aug. 21, 2009). There, the insured had bought a special lathe, two machining centers, and a material handling system from the defendant. In using the lathe's clamp -- which weighed 1,500 pounds -- to hold blocks of metal weighing up to several hundred pounds, the whole thing collapsed, causing damage not only to the lathe itself, but also to the machining centers and the material handling system.
The Industrial Risk court first concluded that Kentucky law recognizes the economic loss doctrine. It then considered whether there should be an exception where the loss results from a catastrophic event that could have harmed other people or property. The court held that Kentucky law recognizes no such exception.
The court next considered what causes of action were eliminated by the economic loss doctrine. The answer to this question mattered to the plaintiff because the statute of limitations had run on the implied warranty claim. The court held that one must look to the source of the duty (rather than the harm the product caused), and that the economic loss doctrine only precludes claims whose duties "arise" out of contract. Thus, the court concluded, the negligence and warranty claims were contractual in nature and were precluded by the economic loss doctrine. But the duties for the negligent misrepresentation and fraud claims arise out of common law duties not to deceive and thus are not subject to the economic loss doctrine, the court held. The court remanded the case to the trial court for a jury's determination of whether the lathe, two machining centers, and the material handling system were properly considered "one product" so that it could be said that the "product" only injured "itself," or whether they were separate products (in which case the plaintiff could recover for harm to the two machining centers and the material handling system as "other property").
These cases demonstrate the difficulties in applying the economic loss doctrine in practice. It also should be noted that these cases involved commercial sellers and purchasers. The conclusions reached in these cases should not be assumed to be the ones that would have been reached if one of the parties were a consumer who bought the product under a contract of adhesion.
