The economic loss rule is a judicially-created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses. Economic losses involve injury to a financial or business interest as distinguished from losses involving personal injury or injury to property. In March 2013, the Florida Supreme Court receded from an earlier line of cases and clarified that the economic loss rule applies only to products liability cases. In so doing, the stage may be set for the expansion of tort claims on construction projects at the expense of contract law principles. Claimants may seek to recover special, consequential, or punitive damages, which may have otherwise been limited by contract law principles. While courts in other states are not bound to follow Florida law, it is likely that the Florida case will be cited as persuasive authority in legal arguments made to advance tort claims on construction projects in other states in cases where the economic loss rule may otherwise bar such claims.

In Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Companies, Inc., 2013 WL 828003 (Fla. March 7, 2013), the underlying dispute arose from a contract between Tiara Condominium Association and its insurance broker. Tiara was responsible for managing a condominium tower located on Singer Island, Florida. Tiara’s insurance broker secured windstorm coverage through an insurance company which issued a policy containing a loss limit in an amount close to $50 million. In September 2004, the condominium tower suffered extensive wind damage caused by hurricanes Frances and Jeanne. After being assured by its insurance broker that the loss limits coverage was per occurrence (meaning that Tiara would be entitled to almost $100 million rather than coverage in the aggregate, which would be $50 million), Tiara proceeded with expensive remediation efforts. However, when Tiara sought payment, the insurance company claimed that the loss limit was $50 million in the aggregate, not per occurrence. Eventually, Tiara and its insurance company settled for approximately $89 million, but that amount was less than the more than $100 million spent by Tiara. Tiara sued its insurance broker and claimed that its broker caused part of Tiara’s losses by failing to procure an adequate insurance policy for the condominium. Tiara’s lawsuit included claims based on negligence and breach of fiduciary duty. The court considered the legal question whether the economic loss rule barred an insured’s suit against an insurance broker where the parties are in contractual privity with one another and the damages sought are solely for economic losses. The court answered the question in the negative and held that the application of the economic loss rule was limited to products liability cases.

Before the Tiara Condominium case, the economic loss rule had been applied in Florida in two different circumstances sometimes referred to as the “contractual privity economic loss rule” and the “products liability economic loss rule”. Contractual privity means that the parties have a contractual relationship. Applications of the contractual privity economic loss rule have involved instances where the parties were in contractual privity and one party sought to recover damages in tort for matters arising from the contract. Applications of the products liability economic loss rule have involved instances where there was a defect in a product that caused damage to the product but caused no personal injury or damage to other property. The contractual privity economic loss rule served as a prohibition against tort actions to recover solely economic damages for those in contractual privity. It was developed to prevent parties to a contract from circumventing the allocation of losses set forth in the contract by bringing an action for economic loss in tort. The rule is based on the assumption that the parties to a contract have allocated the economic risks of nonperformance through the bargaining process. By making a claim for economic loss in tort, a contracting party may attempt to circumvent the contractual agreement in order to obtain a better bargain than originally made. Contract principles are generally more appropriate for determining remedies for consequential damages that contracting parties have addressed, or could have addressed, through their contractual agreement. Accordingly, courts have held that a tort action is barred where a defendant has not committed a breach of duty apart from a breach of contract.

Given the Florida Supreme Court’s holding in Tiara Condominium Ass’n, Inc.,—that the economic loss rule applies only in the products liability context—there is legitimate concern regarding whether the door is now open to negligence or other tort claims by a party who could not otherwise make out a viable claim for breach of contract. This concern is highlighted by the dissenting opinion wherein Chief Justice Polston stated, “the majority greatly expands the use of tort law at a cost to Florida’s contract law. Now, there are tort claims and remedies available to contracting parties in addition to the contractual remedies which, because of the economic loss rule, were previously the only remedies available.”

To illustrate this concern, consider a hypothetical scenario where your contract contains an enforceable “no damages for delay clause.” Absent any statutory or judicially-created exceptions to the enforceability of the clause, a court should not allow a breach of contract claim for delay damages. Based on the Tiara Condominium case, however, can a party who claims delay damages now argue that it can assert the same claim for damages under a negligence theory even though the contract has an otherwise enforceable no damages for delay clause? Similarly, what if your contract contains a waiver of consequential damages clause? Notwithstanding the express contractual waiver, can plaintiffs now assert claims for consequential damages based on negligence and other tort theories? Arguably, contract principles should still apply absent any wrongdoing that is independent of a party’s breach of its contractual obligations, and courts will continue to carefully scrutinize breach of contract claims which have been repackaged as negligence and other tort claims.

Nonetheless, a debate over this anticipated approach will likely play out in the courts of Florida and elsewhere. In the meantime, you should take steps promptly to protect your company from the ramifications of the Tiara Condominium decision. You should carefully review and, if necessary, update provisions of your contracts, including provisions addressing limitations of damages, indemnity obligations, and dispute resolution procedures. At a minimum, and absent any further guidance from the courts, it may be prudent to consider writing the contractual privity economic loss rule back into your contracts and clearly limit the parties’ remedies in a dispute or claim to those remedies set forth in your contracts.