§63.9 Economic Loss Doctrine

The Case: Lincoln General Ins. Co. v. Detroit Diesel Corp., 293 S.W.3d 487 (Tenn. 2009).

The Basic Facts: Plaintiff's insured owed a bus that caught fire due to an alleged engine defect. The engine was manufactured by defendant. The fire did not cause personal injury or damage to any property other than the bus itself. Plaintiff paid the claim made by its insured and sued defendant in federal court for breach of warranty, negligence and strict products liability. Defendant filed a motion to dismiss the tort claims, saying that they were barred by the economic loss doctrine. The federal court certified this question to the Tennessee Supreme Court: "Does Tennessee law 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?" 293 S.W.3d at 488.

The Bottom Line:

• "The economic loss doctrine is implicated in products liability cases when a defective product damages itself without causing personal injury or damage to other property. In this context, "economic loss" is defined generally as "the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold." Comment, Manufacturers' Liability to Remote Purchasers for "Economic Loss" Damages-Tort or Contract?, 114 U. Pa. L. Rev. 539, 541 (1966). Two types of economic loss, direct and consequential, occur when a defective product is damaged. See, e.g., [Restatement (Third) of Torts]: Products Liability § 21, cmt. d (1998). Direct economic loss may be measured by the defective product's cost of repair or replacement. Id. Consequential economic losses, such as lost profits, result from the product owner's inability to use the product. Id." Id. at 489.
• "We agree with the United States Supreme Court that the owner of a defective product that creates a risk of injury and was damaged during a fire, a crash, or other similar occurrence is in the same position as the owner of a defective product that malfunctions and simply does not work. It follows that the remedies available to these similarly situated product owners should derive from the parties' agreements, not from the law of torts, lest we disrupt the parties' allocation of risk. See Prosser & Keeton on the Law of Torts § 101(3), at 709 (5th ed. 1984) ('[R]isk of harm to the product itself due to the condition of the product would seem to be a type of risk that the parties to a purchase and sale contract should be allowed to allocate pursuant to the terms of the contract.'). To hold otherwise would make it more difficult for parties to predict the consequences of their business transactions, the cost of which ultimately falls on consumers in the form of increased prices. See E. River S.S. Corp., 476 U.S. at 872 ('The increased cost to the public that would result from holding a manufacturer liable in tort for injury to the product itself is not justified.'); Bocre Leasing Corp. v. Gen. Motors Corp. (Allison Gas Turbine Div.), 84 N.Y.2d 685, 692 (1995) ('In essence, all consumers would subsidize or 'pay premiums' for purchasers of assertedly 'unduly dangerous' products.')." Id. at 491.
• "We therefore hold that Tennessee law 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 damage by means of a sudden, calamitous event." Id. at 492.
• "[O]ur holding is consistent with the [Restatement (Third) of Torts]: Products Liability (1998). Section 21 specifically excludes harm to "the defective product itself" from the definition of "harm to persons or property" for which economic loss is recoverable.^FN7 Comment (d) to section 21 further explains:

  A plausible argument can be made that products that are dangerous, rather than merely ineffectual, should be governed by the rules governing products liability law. However, a majority of courts have concluded that the remedies provided under the Uniform Commercial Code-repair and replacement costs and, in appropriate circumstances, consequential economic loss-are sufficient. Thus, the rules of this [Restatement] do not apply in such situations.
  
  FN7. [Restatement (Third) of Torts]: Products Liability § 21 provides, in its entirety:
  
  For purposes of this [Restatement], harm to persons or property includes economic loss if caused by harm to:
  
  (a) the plaintiff's person; or
  (b) the person of another when harm to the other interferes with an interest of the plaintiff protected by tort law; or
  (c) the plaintiff's property other than the defective product itself."
  
  (emphasis added by the Court).

  Id. at 493.