Upon emphasizing and reaffirming its concern with the over-expansion of the economic loss rule, the Supreme Court of Florida recently rendered a decision in Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Co., Inc. restricting application of the economic loss rule to actions in the products liability context.
In Tiara Condominium, the court considered whether the professional service exception to the economic loss rule extends to insurance brokers such that the economic loss rule would not bar tort claims seeking economic damages arising from the contractual relationship between the insurance broker and the insured. The court held that it was unnecessary to determine whether an insurance broker provided a professional service for purposes of determining the applicability of the economic loss rule because the doctrine was only pertinent in the products liability context.
Tiara Condominium Association (Tiara) retained insurance broker Marsh & McLennan (Marsh). As part of its responsibilities under the contract, Marsh secured windstorm coverage through Citizens Property Insurance Corporation (Citizens); the policy contained a loss limit amount that was close to $50 million. Marsh had assured Tiara that the loss limits coverage was per occurrence, which would entitle Tiara to almost $100 million rather than coverage in the aggregate, which would entitle Tiara to $50 million. After the condominiums sustained significant hurricane damage, Tiara proceeded with expensive remediation efforts for which it subsequently sought payment from Citizens. Citizens, however, claimed that the loss limit was $50 million in the aggregate, not per occurrence. Tiara and Citizens eventually settled for $89 million, an amount less than the amount spent by Tiara on the repairs.
Tiara filed suit against Marsh alleging the following causes of action: breach of contract, negligent misrepresentation, breach of implied covenant of good faith and fair dealing, negligence and breach of fiduciary duty, alleging that Marsh failed to advise Tiara of its complete insurance needs and failed to advise Tiara that it was underinsured. The trial court ruled in favor of Marsh on all counts and Tiara appealed. The appellate court concluded that summary judgment was proper as to the breach of contract, negligent misrepresentation, and breach of implied covenant of good faith and fair dealing claims. The appellate court, however, did not affirm summary judgment on the negligence and breach of fiduciary duty claims and subsequently certified a question to the Supreme Court of Florida to determine whether the economic loss rule prohibits recovery or whether an insurance broker falls under the professional services exception.
The Court’s Holding and Rationale
After reviewing the origin and original purpose of the economic loss rule in context with the court’s unbridled expansion of the rule, the court held that the economic loss rule applies only in the products liability context. As such, the court concluded it was unnecessary to decide whether the economic loss rule exception for professionals applies to insurance brokers. The court further noted, however, that even in the products liability context, previously defined exceptions to the economic loss rule remain untouched by its recent holding, including the “other property” exception and causes of action for torts independent of the contractual breach, such as fraudulent inducement, negligent misrepresentation, or other free-standing statutory causes of action.
Upon examining the historical context surrounding the development of the economic loss rule, the court examined the relationship between contract law and tort law. While contract law was designed to enforce the expectancy interests of contracting parties, tort law was designed to impose a duty of reasonable care. Economic losses have been defined as damages for inadequate value, cost of repair and replacement of the defective product, or consequent loss of profits without any claim of personal injury or damage to other property. As such, because these losses are essentially “disappointed economic expectation,” economic losses are protected by contract law rather than tort law. So as to prevent contracting parties from circumventing recovery of losses available for breach of contract by simply bringing a tort claim rather than a contract claim, the economic loss rule sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic. Accordingly, a tort action is barred where a defendant has not committed a breach of duty apart from a breach of contract.
The economic loss rule historically appeared in the products liability context and had been used as a limitation on damages resulting from defects in the product. The doctrine was intended to protect manufacturers from liability for economic damages caused by a defective product where there was no personal injury or damage to other property. Because a contracting party can recover losses related to the damaged product, damage to a product is the essence of a warranty action. As such, the economic loss rule was used to prevent the purchaser of a product from bringing a tort claim against the manufacturer where the only loss was the defective product. The idea behind the doctrine was essentially that a manufacturer has no duty under either a theory of negligence or strict product liability to “prevent a product from injuring itself” and that to hold otherwise would result in “contract law … drown[ing] in a sea of tort.” See Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Co., Inc., 2013 WL 828003 at 4 (Fla. 2013) (citing East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871 (1986)).
The court acknowledged its “history of unprincipled extension of the rule.” For example, the economic loss rule was extended to preclude a negligence claim arising from breach of a service contract in a nonprofessional service context. Subsequently, the court noted that such decisions evidence its reliance on the economic loss rule as opposed to fundamental contract principles. In Tiara Condominium, the court stated that the numerous exceptions to the rule demonstrate that the expansion of the rule beyond its origins proved to be “unwise and unworkable in practice.” As such, the holding in Tiara Condominium is meant to return the economic loss rule to its intended purpose – to limit actions in the products liability context.