On March 15, 2013, the Kentucky Court of Appeals issued a significant decision for construction professionals doing work in the Commonwealth of Kentucky. In Cincinnati Insurance Companies v. Staggs & Fisher Consulting Engineers, Inc., et al., a Kentucky court, for the first time, explicitly adopted and applied the economic loss rule in a construction case.

The economic loss rule generally bars recovery in tort (i.e. negligence) for purely economic losses where there is no contractual relationship between the parties in dispute. Economic loss includes, among other things, the cost to repair or replace defective materials or workmanship, lost profits, diminution in value and loss of use. The economic loss rule originated in a 1986 United States Supreme Court products liability case, but many states have since adopted and applied it to construction cases too. While the Kentucky Supreme Court formally adopted the economic loss rule in 2011 in a products liability case, and while Kentucky courts had arguably applied some of the economic loss rule’s principles in construction cases, no Kentucky court had explicitly adopted and applied the economic loss rule in a construction case until now.

The Staggs & Fisher case involved a construction project at Northern Kentucky University’s Nunn Hall. The Commonwealth of Kentucky contracted with Omni Associates, Ltd. (“Omni”) to design the project who, in turn, subcontracted work to Staggs & Fisher Consulting Engineers, Inc. (“S&F”). The Commonwealth separately contracted with Messer Construction for construction of the project. Messer Construction subcontracted the electrical work to Banta. Importantly, Banta had no contractual relationship with Omni or S&F.

In January 2007, Nunn Hall suffered damage that was attributed to Banta’s electrical work. Banta’s insurer, Cincinnati Insurance Companies, paid $18,460.19 for property damage. Cincinnati Insurance then filed a lawsuit against Omni and S&F, claiming that it was their negligent installation of a faulty transformer that actually caused damage to Nunn Hall. Omni and S&F filed a motion to dismiss the lawsuit based on the economic loss rule. The trial court granted the motion and the Court of Appeals upheld the dismissal based on the economic loss rule.

While this is an unpublished decision, which limits the precedential value of the case, it provides guidance regarding how Kentucky courts may address similar issues in future construction cases. The decision may significantly impact the ability of contractors and subcontractors, which typically do not have contractual relationships with the design professionals on a construction project, to recover for losses incurred as the result of defective drawings and plans on construction projects in Kentucky