Economic Loss Rule

• Author: Jim Wren
• Pages: 629-656

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22. Economic

Loss Rule

Chapter 22

Economic Loss Rule

I. Rationales and Origins of an Economic Loss Rule

§22:01 Varying Definitions of an Economic Loss Rule

§22:02 First Rationale: Protect Boundary Between Contract and Tort

§22:03 Origin of the “Boundary Protection” Rationale

§22:04 Second Rationale: Put Limits on Negligence Actions

§22:05 Origin of the “Limits on Negligence” Rationale

II. Inconsistent Development of an Economic Loss Rule

§22:10 Sampling of Economic Loss Rule Cases

§22:11 Economic Loss Rule Is Potentially a Stealth Weapon

§22:12 Variations Among Jurisdictions

§22:13 Meaning of Damage to Other Property

§22:14 Question of Privity and Application to Contractual Strangers

§22:15 Professional Duty Exception

§22:16 Negligent Misrepresentation Exception

§22:17 Personal Services Exception

§22:18 Common Non-Application of Rule to Intentional Torts

§22:19 Unreasonably Dangerous Condition Exception

§22:20 Other Potential Exceptions

§22:21 ALI Restatement History of an Economic Loss Rule

III. ALI Restatement (Third) of Torts: Products Liability

§22:30 Original Formulation of an Economic Loss Rule

§22:31 Some Jurisdictions Limit Rule to Products Liability Only

IV. ALI Restatement (Third) of Torts: Liability for Economic Harm

§22:40 Sec. 1: Limiting Negligence by Starting With “No Duty”

§22:41 Sec. 2: Defining Economic Loss

§22:42 Sec. 3: Stating an Economic Loss Rule to Protect Contracts

§22:43 Sec. 4: Recognizing Loss for Professional Negligence

§22:44 Sec. 5: Recognizing Loss for Negligent Misrepresentation

§22:45 Sec. 6: Proposal to Recognize Loss for Negligent Services

§22:46 Sec. 7: Proposal to Limit Liability Resulting from Another’s Injury

§22:47 Sec. 8: Proposal to Recognize Loss From Public Nuisance

§22:48 Sec. 9: Proposal to Recognize Loss for Fraud

§22:49 Sec. 10: Proposal to Recognize Duties to Disclose Information

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§22:01 Proving Damages to the Jury

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22. Economic

Loss Rule

§22:50 Sec. 11: Proposal to Recognize Loss From False Opinions

§22:51 Sec. 12: Proposal to Recognize Loss for Promissory Fraud

§22:52 Sec. 13: Proposal for Out-of-Pocket and Punitive Damages

§22:53 Potential for Further Expansion of Recognized Duties

[Note: The author acknowledges with appreciation the research and drafting assistance

of Baylor Law School graduate Michael Clinton during the development of this chapter.]

I. Rationales and Origins of an Economic Loss Rule

An economic loss rule (also variously referred to in some courts as the “economic loss

doctrine,” the “independent injury rule,” the “independent injury doctrine,” or even the

“Moorman doctrine” in Illinois) has increasingly confounded courts and practitioners in

recent decades. Development of different varieties of an economic loss rule has introduced

much confusion and complexity. Currently, however, the contours are coming somewhat

more into focus, in part because of developments with a new ALI Restatement.

Economic loss represents a huge category of potential recovery within torts, for business

litigants as well as individuals. It is crucially important to determine whether and under what

circumstance an economic loss rule presents a bar to negligence-based torts, and to what

extent the bar reaches to intentional torts such as fraud, conversion, tortious interference

with contract or business relations, or knowing participation in breach of fiduciary duty.

Without an understanding of the competing rationales which have given rise to various

formulations of an economic loss rule, and without an understanding of the most common

applications of and exceptions to an economic loss rule, there is risk of a simplistic and overly

mechanical application of a single so-called “rule.” This chapter discusses some of the major

points of distinction and disagreement between jurisdictions, and the attempt of the new

Restatement (Third) of Torts: Liability for Economic Harm to bridge those disagreements.

The advantage goes to the advocate who is prepared to articulate the policy rationale for

an economic loss rule in combination with the specific facts of a particular case.

§22:01 Varying Definitions of an Economic Loss Rule

The “economic loss rule” is a defense weapon used to prevent the recovery of eco-

nomic damages in tort cases that do not involve physical injury to persons or physical

injury to property. In its broadest form, “Under the economic loss rule, a party generally

may not recover in tort for ‘economic loss.’” [Lockheed Martin Corp. v. RFI Supply, Inc.,

440 F.3d 549, 552 (1st Cir. 2006).] Many business injury cases in particular can get caught

up in its net.

§22:02 First Rationale: Protect Boundary Between

Contract and Tort

The most common justification for an economic loss rule is to properly protect the

boundary between contract law and tort law.

This rationale is explained in the Michigan Supreme Court case of Neibarger v.

Universal Cooperatives, Inc., 439 Mich. 512, 486 N.W.2d 612 (Mich. 1992), as follows:

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