An appellate court in Wisconsin, reversing a trial court’s decision, has ruled that the economic loss doctrine barred an insurer’s subrogation action against the manufacturer of an allegedly defective product.
The Case
Wisconsin Utility Exposure, Inc. (“WUE”) alleged that it purchased an excavator called a Mud Dog from Super Products LLC that was damaged in a fire. WUE’s insurer, Secura Insurance, a Mutual Company, paid WUE for the property damage it sustained in the fire.
Secura then sued Super Products, asserting a claim for negligence and seeking recovery for the payments it made to WUE. Secura alleged that Super Products was negligent in its design of and modifications to the Mud Dog.
Secura sought damages for the property damaged by the fire as well as for the total loss of the Mud Dog and for the expenses incurred to clean up the Mud Dog and debris from the Mud Dog.
Super Products moved for partial summary judgment, contending that the economic loss doctrine precluded recovery in tort for damage to the Mud Dog and the clean-up expenses.
In response, Secura conceded that the damage to the product and the clean-up costs ordinarily would be subject to the economic loss doctrine’s bar, but argued that because there was physical injury to other property (for example, WUE’s stepladders), the economic loss doctrine did not apply.
The trial court agreed with Secura, holding that when there was damage to both the product and other property, the economic loss doctrine permitted a negligence claim seeking recovery for both, despite the parties’ contractual remedies.
Super Products appealed.
The Appellate Court’s Decision
The appellate court reversed.
In its decision, the appellate court explained that, under the economic loss doctrine, a party to a contract may not pursue remedies in tort to recover solely economic losses arising out of the performance or nonperformance of the contract. Thus, the appellate court continued, the doctrine precludes a commercial purchaser of a product from recovering in tort for solely economic losses arising from the product.
The appellate court added that the economic loss doctrine seeks to hold parties to their contractual remedies when a product fails to work for the purposes for which it was manufactured and sold. Losses subject to the doctrine include direct economic loss, such as damage to, or loss in the value of, the product itself; consequential economic loss attributable to the product defect, such as repair and replacement expenses; and loss of profits resulting from the inability to make use of the product. By precluding tort claims, the appellate court said, the doctrine aims to protect commercial parties’ freedom to allocate economic risk by contract, and “to encourage the party best situated to assess the risk [of] economic loss, the commercial purchaser, to assume, allocate, or insure against that risk.”
The appellate court then stated that the “other property” exception did not swallow up the economic loss doctrine’s preclusion of tort claims seeking recovery for damage to the product itself. Rather, it only permits “recovery for harm to property other than the product itself.”
The appellate court found no support “for Secura’s attempt to eviscerate the distinction between tort and contract law by precluding the economic loss doctrine’s application any time a party can allege damage to ‘other property.’” The appellate court stated that allowing tort recovery for damage to, or loss in value of, the defective product under these circumstances “would render contractual protections a nullity and destroy any freedom to allocate economic risk by contract.” Manufacturers, in effect, would be deprived of their freedom to negotiate, allocate, and limit liability, it concluded.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].