Safeco Ins. Co. of Illinois v. LSP Products Group, Inc., 12022 WL 3101577 (D. Idaho 2022)
Chief District Judge David C. Nye boasts an interesting and unique political distinction associated with his nomination and appointment to the federal bench in Idaho—Nye was sworn in as a U.S. District Judge for the District of Idaho on August 1, 2017, after having been nominated by both President Barack Obama and President Donald Trump. But this distinction is not the only thing making Judge Nye unique. On August 4, 2022, he issued an order which creates significant subrogation obstacles when defective products are involved and breaks from the majority rule followed across the country that a strict product liability cause of action is allowed when a defect in one component part of a home causes damage to other component parts of the residence without damaging persons or property separate from the structure.
The Economic Loss Doctrine (ELD) is a court-developed doctrine that has been adopted by a majority of U.S. states and jurisdictions. In its traditional form, it bars recovery in tort for strictly economic losses arising from a contract. When two parties have a contractual relationship, the ELD prevents one party from bringing a negligence action against the other over the first party’s failed expectations. The classic application of the ELD involves a claim for loss of the value of a product (e.g., automobile, agricultural tractor, industrial machine, etc.) which has been destroyed or seriously damaged due to the failure of the product itself (including a defect in design or manufacture). The ELD prohibits the recovery of damages in tort (negligence, strict liability, etc.) when a product defect or failure results in only economic loss but does not cause personal injury or damage to any other property other than the product. The ELD actually has two related applications:
- precluding contracting parties from asserting tort causes of action as a means to recover economic or commercial losses arising out of a contract; and
- precluding a purchaser of a product from recovering from a manufacturer “on a tort theory for damages that are solely economic.” The former application preserves the distinction between contract and tort by requiring contracting/transacting parties to pursue only their contractual remedies (as spelled out in the contract or warranty) for economic damages and encouraging the party best-situated to assess the risk of economic loss – the commercial purchaser, who can assume, allocate, or insure against that risk.
The ELD represents the line between the law of contracts, which secures the expectations of the parties, and the law of torts, which is governed by the duty owed to the injured party. The rationale for the doctrine began with the concern for unlimited liability because economic losses can result in wide-ranging liability based on one product. Hininger v. Case Corp., 23 F.3d 124 (5th Cir. 1994) (quoting Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77 (Tex. 1977)) (recognizing that courts “fear that holding manufacturers liable for economic loss imposes unlimited and unforeseeable liability upon manufacturers”). Courts also felt that the doctrine was needed to help separate warranty and tort claims, and to prevent warranty law from “drown[ing] in a sea of tort.” East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986). The Supreme Court noted that the law of product liability grew out of a public policy to offer injured persons greater protection from dangerous products than is afforded by the warranty of law. A consumer should not have to face alone the risk of personal injury or damage to property when he purchases a product. Id. Therefore, a manufacturer has a duty to manufacture a product which will not cause injury to persons or property. A product injuring itself is not the kind of harm against which public policy requires manufacturers to protect, particularly when a plaintiff can recover in claims for breach of contract or breach of warranty. Murray v. Ford Motor Co., 97 S.W.3d 888, 892 (Tex. App. 2003).
On the other hand, consumers may be burdened with the risk that a product will not meet his economic expectations, unless the manufacturer warrants that it will. Where a tort concern is not triggered and only a product is damaged, a plaintiff’s loss is essentially the loss of the product, which is a loss that can be insured. Enter subrogation. When insurers pay for damage to products (such as a house) resulting from defects in some of its component parts, subrogation provides an invaluable tool to help keep down the cost of insurance premiums. Elevating the financial interests of manufacturers at the expense of consumer insurance premiums is an issue that carries with it political overtones; so it should be no wonder that the ELD is always a hotly-contested issue and can be a setback for the unwary subrogee.
The ELD in Idaho is not as well developed as it is in some other states. However, Idaho courts maintain that absent accompanying personal injury or property damage to property other than the product itself, purely economic losses alone are not recoverable in tort. Duffin v. Idaho Crop Improvement Ass’n, 895 P.2d 1195 (Idaho 1995).
In Safeco Ins. Co. of Illinois v. LSP Products Group, Inc., 12022 WL 3101577 (D. Idaho 2022), the Safeco insured purchased a newly built home in Eagle, Idaho which four short years later sustained a water leak in the master bathroom. Safeco Insurance Company of Illinois (“Safeco”) paid the insured for repairs damages and sought subrogation against LSP Products Group, Inc. (“LSP”), the manufacturer of a water supply line which was defective and caused the leak. Safeco sued based on product liability, negligence, breach of warranty, and malfunction/circumstantial evidence of defect. The defendant filed summary judgment arguing that these claims are all barred by Idaho’s Economic Loss Rule. The court granted the motion because it decided the ELD applied to the house, blinds, oven, dishwasher, and lost rental income. It agreed with the defendant that Idaho’s ELD depends on the subject of the transaction and that the whole house, and not only the supply line, was the subject of the transaction. As such, damage to the house is economic loss. When an item is purchased as part of a larger transaction, the item is integrated into the whole subject of the transaction. The court didn’t agree with plaintiff’s assertion that while a structure’s foundation is necessarily integrated into the whole structure, a small, replaceable supply line is not integrated into the whole house.
Judge Nye’s ruling is a departure from the majority rule which holds that a subrogating carrier can recover under a strict products liability theory against a component part manufacturer whose component part caused damage/destroyed the manufacturing system to which it was incorporated. This is usually the case when the defective part is not the result of substantial change in later processing of the product. In other words, those states that allow a subrogation recovery if “other property” (i.e., property other than the completed product itself) is damaged would usually find that recovery is allowed because the manufacturing system to which the component part was incorporated (in the Idaho case that would mean the home itself as opposed to the failed water supply line which can be purchased at any hardware store and replaced easily) would be considered “other property.”
By way of example, in the California case of Stearman v. Syntex Homes, 78 Cal.App.4th 611 (2000) has facts similar to Safeco Ins. Co. of Illinois v. LSP Products Group, Inc. Defective construction of a tract home caused severe slab movement and deformation. Extensive cracks ultimately manifested themselves throughout the home’s interior and exterior as a result of those defects. The issue in the case was whether a product liability case in tort was appropriate when a defect in one component part of the home caused damage to other parts of the residence without damaging persons or property separate from the structure. Of course, Syntex Homes maintained that a strict liability cause of action was barred by the ELD because the damage amounted to “injury to the product (home) itself” (known as the “integrated system theory”). The California court rejected that argument, holding that a product liability action was available since defects in the home had caused physical damage to the property (i.e., other component parts of the house). The analysis in Wausau Tile, Inc. v. Cty. Concrete Corp., 593 N.W.2d 445, 449 (Wis. 1999), goes like this— the defective product, e.g., cement was integral to the function of the damaged property—i.e., there would be no block without the cement—the cement constituted part of the same integrated system.
In the Idaho case, it would have been logical to determine that the water supply line was not “integral” to the function of the property any more than an electric fan sitting on the counter nearby would. But for now, Judge Nye has made it more difficult to subrogate damage in Idaho thanks to the Economic Loss Doctrine.
For a chart covering the Economic Loss Doctrine laws of all 50 states and the District of Columbia, see HERE. For questions regarding the subrogation of property damage cases anywhere in the U.S., please contact Gary Wickert at [email protected].