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The economic loss rule in Texas generally bars a plaintiff from recovering economic losses in a tort claim (as opposed to breach of contract) when those losses are the subject matter of a contract. Under Texas law, “[t]o avoid the unending reach of pure economic loss in a professional or commercial context, loss of use is only recoverable in tort when the loss is accompanied by a claim for either personal injury or damage to the property of the one claiming the [economic loss].” Goose Creek Consol. Indep. Sch. Dist. of Chambers & Harris Ctys., Texas v. Jarrar's Plumbing, Inc., 74 S.W.3d 486, 494 (Tex. App. 2002). But how much property damage is necessary to avoid application of the economic loss rule? Unfortunately, Texas courts have not directly addressed this question in quantifiable terms.
Goose Creek involved negligence claims raised by a third-party beneficiary to a construction contract against a plumbing subcontractor. The court held that “Goose Creek could assert a claim against [defendant] based on a breach of [defendant’s] duty to all persons to use reasonable care not to injure persons or property in the performance of the contract.” Id. The court found that “the invasion of sewage and sewer gas” into the building constituted “an injury to property. . . .” Id. at 495. This was enough to overcome application of the economic loss rule, which allowed the property owner to recover loss of use damages.
Another Texas court has noted the lack of “definition of property damage in the context of the economic-loss rule . . . .” City of Alton v. Sharyland Water Supply Corp., 277 S.W.3d 132, 154 (Tex. App. 2009), aff'd in part, rev'd in part, 354 S.W.3d 407 (Tex. 2011). Because there was no clear definition, the Sharyland court went on to analyze the definition of property damage in other types of cases. The Sharyland case involved a claim that placement of sewer lines in the ground directly above clean water lines resulted in damage to the clean water provider. Under these facts, the appellate court found that because there was no evidence of physical damage to the clean water lines, and no evidence of contamination of water within them, the economic loss rule barred plaintiff’s claims. Id. at 154-155. However, the Texas Supreme Court took a different approach and overturned this aspect of the decision, ultimately holding that because the water provider was now required to encase or relocate its water lines to comply with applicable law, this amounted to “property damage” and thus the economic loss rule did not govern. Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 420 (Tex. 2011). Sharyland opens the door for claims lacking physical property damage but where some legal or regulatory duty is triggered to amount to “property damage” for the purpose of avoiding application of the economic loss rule.
Some jurisdictions outside of Texas have held that de minimis property damage can occur and the economic loss rule will still apply. A Washington case involved an engine malfunction in a ship, after which the owner brought claims for lost profits, among other damages. Veeder v. NC Mach. Co., 720 F. Supp. 847, 851 (W.D. Wash. 1989). The court held that plaintiff’s claims amounted to only economic losses, despite allegations of property damage to a rug and other surfaces caused by oil spraying out of the engine. Id. at 853. Plaintiff’s failure to submit insurance claims for this alleged property damage supported the court’s finding that it was de minimis. Id.
In a Wisconsin case, pieces of frayed wires from a conveyor belt used at a food production facility fell into food products. Rich Prod. Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 943 (E.D. Wis. 1999), aff'd, 241 F.3d 915 (7th Cir. 2001). The buyer of the food products was forced to issue a recall at a cost of $11 million. Id. at 951-952. The court considered these food products “other property” that was damaged by the defective conveyor belt wires. Id. at 970. The court then asked “how much ‘other property’ must be damaged in order to take a case outside the economic loss rule[?]” Id. In Rich Products, 29 pieces of wire found their way into more than six million cases of food products over a 12 month period. The court held this was not enough property damage to overcome the economic loss rule, noting that “this case is more about failed commercial expectations than it is about injuries to person or property.” Id. at 972.
Because no Texas court has addressed this issue in a clear way, plaintiffs are left in a gray area of the law. Those plaintiffs suffering economic losses without any property damage or personal injury may be able to find additional sources of legal or regulatory duties as a basis of recovery — using separate causes of action to fill the gap. Defendants, for their part, may find success in arguments that the economic loss rule applies even when there has been actual property damage, stressing that the claimed damage is de minimis.
This area of law is developing, and surely we will see more applicable cases as the Texas economy continues to grow — new property inevitably brings new property damages, and hopefully more clarity to the economic loss rule.
For more information on this article and this topic, contact Mark Killingsworth.