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Definitions of “Economic Loss...

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Definitions of “Economic Loss Rule” and “Other Property” Under Economic Loss Rule

“The economic loss rule prevents a party from claiming economic damages ‘in negligence absent physical property damage or bodily injury.’” Fennell v. Green, 2003 UT App 291, ¶ 13, 77 P.3d 339 (quoting SME Industries, Inc. v. Thompson, 2001 UT 54, ¶ 32, 28 P.3d 669 (additional quotations and citation omitted)).      

 Economic loss is defined as:

[d]amages for inadequate value, costs of repair and replacement of the defective product, or consequential loss of profits without any claim of personal injury or damage to other property…as well as ‘the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.

SME Industries, 2001 UT 54 at ¶ 32 (citations omitted) (emphasis added).  Note Utah Code Ann. § 78B-4-513, which defines economic loss using essentially the same definition. Accordingly, where there is no personal injury or damage to “other property”, the economic loss rule prevents claims for at least unintentional torts based upon damage relating to the contractual property. 

“Other property” outside of a contract is protected from damage by the common law duty of care and such a determination is a means to identify if a contractual duty, or the common law duty, applies. American Towers Owners Ass’n, Inc. v. CCI Mech., Inc., 930 P.2d 1182, 1191 (noting a distinction between tort recoveries for “physical injuries” and contract/warranty for economic loss); Davencourt, 2009 UT 65 at ¶¶ 24-26 at  (suggesting that “other property” retains a separate character from the contracted-for product); see also Grams v. Milk Prods., Inc., 699 N.W.2d 167, 172-173 (Wis. 2005) (discussing how contract and tort deal with risk of damage or loss in different ways and under different standards).

 “Other property” excepted from the economic loss rule does not include property that is part of the same “package” for which the parties contracted. Davencourt, 2009 UT 65 at ¶¶ 24-26 (finding construction components integrated into a finished product do not constitute “other property.”).  Davencourt discusses the “other property” exception for construction defect cases like this one.  In that case, the Plaintiff homeowners association (HOA) sought to sue the developer, general contractor, and subcontractor for various construction defects to the complex.  The HOA only had a contractual relationship with the developer, Davencourt at Pilgrims Landing, LC; the HOA did not contract with any of the construction contractors. Id. at ¶¶ 24-26.

Recognizing the challenges of the economic loss rule, but while still trying to maintain a negligence action against the general contractor and the other construction contractors, the HOA argued that the defective construction had caused damage to other public property in the development that would not otherwise have been damaged. Id.  In other words, separate components of the finished development that the HOA had purchased from the developer constituted “other property” preventing the economic ross rule from operating. Id. at ¶¶ 24-26.

The Supreme Court disagreed.  Where the “property” was the entire project itself “that was constructed as an integrated unit under one general contract,” the physical damaged caused by one portion of the building to another is not “other property.”  Id. at ¶ 25.   This is because the plaintiffs “bought finished products—dwellings—not the individual components of those dwellings.  They bargained for the finished products, not their various components.  The [allegedly defective component] became an integral part of the finished product and, thus, did not injure ‘other’ property.”  Id. (emphasis added). 

Elaborating, the Court continued by stating that the HOA members “did not separately bargain for and purchase individual components when they acquired their townhomes.”  Id.  “Rather, each purchased a finished product, which included the integral components of the roof, the foundation, and the siding.Id. at ¶ 26. (emphasis added). “To contend that these integral components somehow retain a separate character apart from the final product of the townhome goes too far.”  Id. The result would be that the exception would swallow the rule in every construction defect case. See also American Towers, 930 P.2d at 1191 (“This argument fails because in this case the ‘property’ was the entire complex itself that was constructed as an integrated unit under one general contract…The package is alleged to have been defective–one or more of its component parts was sufficiently substandard as to cause damage to other parts.  The effect of the failure of the substandard parts to meet the bargained-for level of quality was to cause a diminution in the value of the whole, measured by the cost of repair.  This is a purely economic loss, for which the law of contracts provides the sole remedy.”) (citations and internal quotation marks omitted).

A dwelling, such as a townhome, is an integrated product.  The components of a dwelling, such as its roof, foundation, etc., are not various other products. Rather, the buyer purchased an integrated unit.  In Fennell, 2003 UT App 291, 77 P.3d 339, for example, the court held “the damaged property, the land, was part of the ‘package’ [plaintiff] contracted for” thus the plaintiff could not “argue it [was] ‘other property’ for the purpose of establishing an exception to the economic loss rule.”  Fennell v. Green, 2003 UT App, 291, n.8, 77 P.3d 339.

As a starting point, Utah courts have struggled to define what constitutes “other property”. See Davencourt, 2009 UT 65 at ¶ 25 (“[T]his court has never precisely defined what constitutes ‘other property’…”); Wilson v. Tuxen, 754 N.W.2d 220, 226 (Wis. Ct. App. 2008) (“‘Other property’ is a legal term of art, not a literal description.”); Grams, 699 N.W.2d at 173 (a definition for “other property” remains elusive; such distinction is often a difficult task).  “Other property” outside of a contract is protected from damage by the common law duty of care and such a determination is a means to identify if a contractual duty, or the common law duty, appliesAmerican Towers, 930 P.2d at 1191 (noting a distinction between tort recoveries for “physical injuries” and contract/warranty for economic loss); see also Davencourt, 2009 UT 65 at ¶ 18 (“The economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.”).

In making this determination, the Utah Supreme Court suggests that “other property” retains a separate character from the contracted-for product.  Davencourt, 2009 UT 65 at ¶ 25; see also Grams, 699 N.W.2d at 172-173 (discussing how contract and tort deal with risk of damage or loss in different ways and under different standards).  Once the parties enter into a contract, any tort claim can only be premised on an independent duty that exists separate and apart from the contract and the plaintiff must specify that duty; any breach of a contractual duty must be enforced only through a breach of contract action. Reighard, 2012 UT 45 at ¶¶ 21-22.

In some instances, the concept of “other property” can be difficult to understand, particularly if the damages are the result of the failure of a contracted-for product.  While Utah law is not clear as to where the boundary lies in these cases, Wisconsin law has gone one step further.  Courts there incorporate a “disappointed expectations” analysis, such that the “economic loss doctrine will apply when ‘prevention of the subject risk was one of the contractual expectations motivating the purchase of the defective product.’”  Grams, 699 N.W.2d at 178.   In other words, when the alleged property damage was a result of a product or work not performing to the plaintiff’s expectations, then the economic loss rule bars recovery for that loss.  Id. (the loss of livestock resulting from defendant’s defective product constituted an economic loss and not a damage to “other property”); see also D’Huyvetter v. A.O. Smith Harvestore Products, 475 N.W.2d 587 (Wis. Ct. App. 1990) (holding plaintiff’s claims for death and illness of cattle from compromised feed resulting from defendant’s improperly functioning silo constituted economic loss because silo did not perform “as expected”); Selzer v. Brunsell Bros., Ltd., 652 N.W.2d 806 (Wis. Ct. App. 2002) (stating rot in plaintiff’s house, that spread from windows provided by defendant seven years earlier, constituted economic loss because the windows were warranteed to be “deep treated” against rot and decay and the claim was about “disappointed performance expectations.”); Neibarger v. Universal Coops, Inc., 486 N.W.2d 612, 620 (Mich. 1992) (“Where damage to other property was caused by the failure of a product purchased for commercial purposes to perform as expected, and this damage was within the contemplation of the parties to the agreement, the occurrence of such damage could have been the subject of negotiations between the parties.”).

©2014 Mark A. Larsen, Jonathan O. Hafen, Michael A. Stahler, and Steven R. Glauser

 

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