Economic Loss Rule Applied in South Carolina Truck Fire Case

The South Carolina Supreme Court has ruled that the economic loss rule precludes a truck owner’s tort claims against the truck manufacturer.  The case is Sapp & Smith v. Ford Motor CompanyOpinion 26754 (S.C. December 21, 2009).

Sapp filed suit against Ford alleging property damage to his vehicle (there was no personal injury or damage to other property) as a result of a fire Sapp claimed was caused by a design defect in the cruise control switch, which he said would short circuit and cause a fire in the engine compartment.

As explained by the Court,

The economic loss rule is a creation of the modern law of products liability.  Under the rule, there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself.  Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341, 384 S.E.2d 730, 734 (1989).  In other words, tort liability only lies where there is damage done to other property or personal injury.  Id.  

The purpose of the economic loss rule is to define the line between recovery in tort and recovery in contract.  Contract law seeks to protect the expectancy interests of the parties.  Tort law, on the other hand, seeks to protect safety interests and is rooted in the concept of protecting society as a whole from physical harm to person or property.  In the context of products liability law, when a defective product only damages itself, the only concrete and measurable damages are the diminution in the value of the product, cost of repair, and consequential damages resulting from the product’s failure.  Stated differently, the consumer has only suffered an economic loss.  The consumer has purchased an inferior product, his expectations have not been met, and he has lost the benefit of the bargain.  In this instance, however, the risk of product failure has already been allocated pursuant to the terms of the agreement between the parties. On the other hand, the parties have not bargained for the situation in which a defective product creates an unreasonable risk of harm and causes personal injury or property damage.  Accordingly, where a product damages only itself, tort law provides no remedy and the action lies in contract; but when personal injury or other property damage occurs, a tort remedy may be appropriate.

In South Carolina, the "the economic loss rule does not preclude a homebuyer from recovering in tort against the developer or builder where the builder violates an applicable building code, deviates from industry standards, or constructs a house that he knows or should know will pose a serious risk of physical harm."   Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341, 384 S.E.2d 730 (1989).  However, the Court explained  that that decision created an exception to the general rule that was not intended to trump the general rule. 

Plaintiff argued that Colleton Preparatory Academy, Inc. v. Hoover Universal Inc., 379 S.C. 181, 666 S.E.2d 247 (2008),  a later case in which the "majority held that the economic loss rule will not preclude a plaintiff from filing a products liability suit in tort where only the product itself is injured when the plaintiff alleges breach of duty accompanied by a clear, serious, and unreasonable risk of bodily injury or death," meant that the economic loss rule should not be applicable under these facts,  The Court disagreed, saying "[i]n our view, the traditional economic loss rule provides a more stable framework and results in a more just and predictable outcome in products liability cases.  Accordingly, we overrule Colleton Prep to the extent it expands the narrow exception to the economic loss rule beyond the residential builder context."

The concurring opinion is very interesting.  Here is an excerpt that gives you the gist of it:

Today, this Court would overrule Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 379 S.C. 181, 666 S.E.2d 247 (2008).  Colleton adheres to the Kennedy analysis framework.  If it is wrongly decided, then Kennedy should be overruled as well and this Court should simply say that the economic loss rule is not applicable to residential home building.  Of course, this would not explain the negative treatment of the rule in other areas such as professional services.  See Tommy L. Griffin Plumbing & Heating v. Jordan, Jones & Goulding, Inc., 320 S.C. 49, 55, 463 S.E.2d 85, 88-89 (1995) (finding design professionals, including engineers, may have a duty separate and distinct from contractual duties such that the economic loss doctrine would not prohibit a tort action); Beachwalk Villas Condo. Ass’n v. Martin, 305 S.C. 144, 146-47, 406 S.E.2d 372, 374 (1991) (finding a special duty for architects); Lloyd v. Walters, 276 S.C. 223, 226, 277 S.E.2d 888, 889 (1981) (finding an attorney liable for economic loss to a corporate shareholder when attorney breached a duty to the corporation); but see McCullough v. Goodrich & Pennington Mortgage Fund, Inc., 373 S.C. 43, 53, 644 S.E.2d 43, 49 (2007) (rejecting the notion of a special duty in the secured transactions arena). 

The inconsistent treatment of the doctrine, by use of varying analytical frameworks, does not provide the bench and bar guidance in the proper application of the doctrine.  The Court should simply pronounce a list of areas to which public policy prohibits the application of the economic loss doctrine and forego any legal analysis.  [Footnote omitted.]

Chief Justice Janice Holder and the Tennessee Supreme Court recently discussed  the economic loss doctrine.  The case is Lincoln General Insurance Company v. Detroit Diesel Corporation, No. M2008-01427-SC-R23-CQ (Tenn. Aug. 21, 2009).  The result?  "Tennessee does not recognize an exception to the economic loss doctrine under which recovery in tort is possible for damage to the defective product itself when the defect renders the product unreasonably dangerous and causes the damage by means of a sudden, calamitous event."  Tennessee has not yet definitively addressed a case where a plaintiff alleges that the economic loss doctrine should not apply even though only the product itself is injured because the breach of duty is accompanied by a clear, serious, and unreasonable risk of bodily injury or death.