Last month, in Giddings & Lewis, Inc. v. Industrial Risk Insurers (Case Nos. 2009-SC-485, 2009-SC-825), the Kentucky Supreme Court handed down an important decision confirming Kentucky courts' adherence to the "economic loss rule." The economic loss rule, as described by the Court, prevents the commercial purchaser of a product from suing in tort to recover purely economic losses resulting from the failure of the product. Under the rule, the purchaser's right to recover for such losses is governed exclusively by contract law, including any limitations on warranty coverage or contractual remedies that were bargained for between the buyer and the seller. In practice, the rule precludes tort claims for losses relating to damage to the product itself, repair costs, lost profits, or other items that equate to the failure of the purchaser to receive the benefit of its bargain as a result of the product's failure. However, a purchaser may still bring tort claims for injuries to persons or damages to "other property" – i.e., property other than the product itself – caused by the product's failure.
While a majority of states now follow some form of the economic loss rule, its status in Kentucky had been uncertain prior to the Giddings & Lewis decision. Contradictory statements in earlier Kentucky decisions had led some federal courts to conclude that Kentucky law did not follow the economic loss rule. However, Giddings & Lewis put an end to this confusion, and formally adopted a robust version of the rule in Kentucky.
The buyer in Giddings & Lewis purchased a specialized manufacturing system consisting of numerous component parts. After the expiration of the express warranty, a large portion of the system's vertical turning lathe broke off, causing catastrophic damage to the system, but not injuring any other persons or property. The buyer's insurer brought a variety of tort claims – including negligence, strict products liability, and negligent misrepresentation – to recover the costs to repair the damaged system, overtime payments to employees, and related expenses.
The Kentucky Supreme Court held these tort claims were barred by the economic loss rule. In so holding, the Court clarified that the economic rule applies regardless of whether the product fails as a result of a "calamitous event," or merely as a result of wear and tear over time. The Court also explained that the "product" for purposes of the economic loss rule included all components and equipment that were purchased as part of the same transaction. So, the fact that the failure of the lathing blade caused damage to other separable components of the manufacturing system did not change the fact that the only damage done was to the product itself. Giddings & Lewis thus provides significantly greater clarity about Kentucky's adherence to the economic loss rule, and the scope of remedies available to buyers in commercial settings.