Attorneys for Appellants Attorneys for Appellees
David W. Stone IV Glenn L. Duncan
Anderson, Indiana Jacob S. Frost
Elkhart, Indiana
Christopher Wheeler
Angola, Indiana
____________________________________________________________________________
__
In the
Indiana Supreme Court
_________________________________
No. 76S01-0403-CV-133
Lawrence Gunkel
and Judy Lynn Gunkel,
Appellants (Plaintiffs below),
v.
Renovations, Inc.
and J & N Stone, Inc.,
Appellees (Defendants below).
_________________________________
Appeal from the Steuben Circuit Court, No. 76C01-0010-CT-754
The Honorable Allen N. Wheat, Judge
_________________________________
On Petition To Transfer from the Indiana Court of Appeals, No. 76A01-0306-
CV-206
_________________________________
February 1, 2005
Boehm, Justice.
We hold that damages recoverable in tort for a defective product or
service are governed by the “economic loss” doctrine whether or not the
product or service is supplied in a transaction subject to either the
Products Liability Act or the Uniform Commercial Code, or both. Under the
doctrine, physical injuries and damages to other property are recoverable
in tort, but damages to the defective product itself are not. Whether
damaged property is “other property” turns on whether it was acquired by
the plaintiff as a component of the defective product or was acquired
separately.
Factual and Procedural Background
In March 1999, the Gunkels contracted with Renovations, Inc., for the
construction of a $435,000 three-story residence in Fremont, Indiana. Six
months later, J & N Stone, Inc. was hired by the Gunkels to install a stone
and masonry exterior on the home. Shortly after the stone façade was
installed, water began to enter through gaps in the façade and substantial
moisture problems arose. The Gunkels claim that walls, ceilings, floors,
drywall, carpet, and carpet padding were damaged. The Gunkels claim that
the defective façade required removing and replacing the masonry,
repainting of the interior of the home, clearing and recoating the roof,
replacing exterior doors and windows, reframing some of the exterior door
and window openings, removing mold, and replacing exterior electrical
outlets.
In October 2000, the Gunkels filed suit against Renovations for
breach of contract and fraud seeking compensation for the lost use of their
home and repair costs. The Gunkels then amended their complaint adding J &
N as a defendant and asserted negligence and breach of contract claims
against J & N. J & N moved for partial summary judgment as to the contract
claim, arguing that it was not a party to the contract between the Gunkels
and Renovations and that there was no separate contract between the Gunkles
and J & N. The trial court granted J & N’s motion as to the contract
claim. According to J & N, the Gunkels sought to position J & N as a
subcontractor of Renovations in order to bolster their claim against
Renovations. Whether for that reason or not, the Gunkels elected to forego
any contract claim against J & N and relied solely on J & N’s alleged
negligence. J & N next moved for summary judgment as to the negligence
claim on the ground that the Gunkels sought purely economic damages, which
are not available under a negligence theory. The trial court granted
summary judgment for J & N and certified the order for immediate appeal
pursuant to Trial Rule 54(B). The Court of Appeals held that the Gunkels
were seeking only economic losses and therefore had no tort claim. Gunkel
v. Renovations, Inc., 797 N.E.2d 841, 845 (Ind. Ct. App. 2003). We granted
transfer. Gunkel v. Renovations, Inc., 812 N.E.2d 799 (Ind. 2004).
Standard of Review
On appeal, the standard of review of a summary judgment ruling is the
same as that used in the trial court: summary judgment is appropriate only
where the evidence shows there is no genuine issue of material fact and the
moving party is entitled to a judgment as a matter of law. Ind. Trial Rule
56(C); Shell Oil Co. v. Lovold Co., 705 N.E.2d 981, 983-84 (Ind. 1998).
All facts and reasonable inferences drawn from those facts are construed in
favor of the non-moving party. Colonial Penn Ins. v. Guzorek, 690 N.E.2d
664, 667 (Ind. 1997). The review of a summary judgment motion is limited
to those materials designated to the trial court. T.R. 56(H); Rosi v. Bus.
Furniture Corp., 615 N.E.2d 431, 434 (Ind. 1993). We must carefully review
decisions on summary judgment motions to ensure that the parties are not
improperly denied their day in court. Estate of Shebel v. Yaskawa Elec.
Am., Inc., 713 N.E.2d 275, 277 (Ind. 1999).
“Other Property” for Purposes of the “Economic Loss” Doctrine
Under the “economic loss” doctrine, contract is the sole remedy for
the failure of a product or service to perform as expected. We agree with
the Seventh Circuit that “economic loss” is not a helpful term in
understanding the doctrine. See Miller v. United States Steel Corp., 902
F.2d 573, 574 (7th Cir. 1990) (Damage to a product is called “economic
loss.” A “better term” for injuries other than to the plaintiff’s person
or “other property” is “commercial loss, . . . because tort law is a
superfluous and inapt tool for resolving purely commercial disputes”).
Despite its imprecision, the term “economic loss” has been adopted by
courts in this and most other jurisdictions and we use it here with the
caveat that it does not necessarily lead to a proper understanding of the
scope and applicability of the doctrine.
This doctrine was first applied in Indiana before the Products
Liability Act was amended to govern negligence claims as well as strict
liability. Reed v. Central Soya Co., Inc., 621 N.E.2d 1069 (Ind. 1993),
modified on other grounds, 644 N.E.2d 84 (Ind. 1994), was a Products
Liability Act case. The Products Liability Act at that time excluded
recovery for “economic damage.” See Ind. Code § 33-1-1.5-2 (1988). Reed
explained that under this doctrine, contract is the only available remedy
“where the loss is solely economic in nature, as where the only claim of
loss relates to the product’s failure to live up to expectations, and in
the absence of damage to other property or person.” Id. at 1074-75. This
was reiterated in Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078
(Ind. 1993), which involved claims under the Products Liability Act and
also claims for breach of contract and negligence. In addressing the
negligence claim we held that: “Economic losses are not recoverable in a
negligence action premised on the failure of a product to perform as
expected unless such failure causes personal injury or physical harm to
property other than the product itself.” Id. at 1091. Accord W. Page
Keeton et al., Prosser and Keeton on Torts § 101, at 708 (5th ed. 1984).
The same doctrine has since been applied to claims governed by the current
version of the Indiana Products Liability Act. In Progressive Insurance
Co. v. General Motors Corp., 749 N.E.2d 484, 491 (Ind. 2001), we held that
the Products Liability Act does not support an action based on a defect in
a product where the only damage is to the product itself. In Fleetwood
Enterprises, Inc. v. Progressive Northern Insurance Co., 749 N.E.2d 492
(Ind. 2001), a defect in a motor home caused the motor home to be engulfed
in flames. We held that although damage to the motor home itself was
ninety-six percent of the claim, “personal injury and damage to other
property from [the] defective [motor home] [were] actionable under the
[Products Liability] Act, but their presence [did] not create a claim under
the Act for damage to the product itself.” Id. at 493.
In sum, Indiana law under the Products Liability Act and under general
negligence law is that damage from a defective product or service may be
recoverable under a tort theory if the defect causes personal injury or
damage to other property, but contract law governs damage to the product or
service itself and purely economic loss arising from the failure of the
product or service to perform as expected. In this respect, Indiana law is
consistent with admiralty law,[1] and the law of most other states.[2]
“Economic losses” occur when there is no personal injury and no physical
harm to other property. See W. Prosser, Handbook on the Law of Torts §
101, at 665 (4th ed. 1971). Rather these losses are viewed as disappointed
contractual or commercial expectations. Am. United Logistics, Inc. v.
Catellus Dev. Corp., 319 F.3d 921, 926 (7th Cir. 2003). Thus, economic
loss has been defined by Indiana courts as “the diminution in the value of
a product and consequent loss of profits because the product is inferior in
quality and does not work for the general purposes for which it was
manufactured and sold. Economic loss includes such incidental and
consequential losses as lost profits, rental expense and lost time.” Reed,
621 N.E.2d at 1074 (citations omitted). Damage to the product itself,
including costs of its repair or reconstruction, is an “economic loss” even
though it may have a component of physical destruction. Progressive Ins.,
749 N.E.2d at 488.
Because the “economic loss” doctrine permits tort recovery only for
personal injury or damage to “other property,” if property is damaged it is
necessary to identify the product at issue which defines “other” property.
The subject of “other property” has been approached in a number of
different ways.[3] Much of the law addressing the issue of what
constitutes “other property” deals with whether the other property is a
distinct item or merely a component of the overall defective product.[4]
Other courts have focused on whether “goods” are involved.[5] Yet others
have concluded that the economic loss doctrine precludes recovery for
injury to “other property” if the injury was, or should have been,
reasonably contemplated by the parties to the contract.[6] Some have
concluded that the “product” is the product purchased by the plaintiff, not
the product sold by the defendant.[7]
The theory underlying the economic loss doctrine is that the failure
of a product or service to live up to expectations is best relegated to
contract law and to warranty either express or implied. The buyer and
seller are able to allocate these risks and price the product or service
accordingly. As explained in Reed,
The justifications for adhering to this rule are several. The
law of sales set out in Article 2 of the Uniform Commercial Code
governs the economic relations between buyer and seller; the
dissatisfied buyer may avail himself of those statutory remedies
fashioned by the legislature. Allowing a buyer to recover in tort
where he has suffered only economic loss allows him to circumvent the
seller’s effective limitation or exclusion of warranties under the
U.C.C., and subjects manufacturers to liability for damages of unknown
and unlimited scope. . . . Contract law remains the appropriate
vehicle to redress a purchaser’s disappointed expectations when a
defect renders a product inferior or unable adequately to perform its
intended function.
621 N.E.2d at 1075. Reed dealt with a sale of “goods” subject to the
Uniform Commercial Code and therefore expressed the rationale in those
terms, but the concepts expressed in Reed apply equally in other contexts.
The central theory underlying “economic loss” is that the law should permit
the parties to a transaction to allocate the risk that an item sold or a
service performed does not live up to expectations. The source of the
economic loss doctrine did not limit it to sale of goods. The seminal case
on this issue is Justice Traynor’s opinion in Seely v. White Motor Co., 403
P.2d 145 (Cal. 1965), which speaks in terms of warranty and does not
mention the U.C.C. Similarly, the doctrine was explained shortly after it
arose as: “[T]he manifest intent of the parties should ordinarily control
the nature and extent of the obligations of the parties to a contract of
sale, either of real or personal property or a contract of service.”
Keeton, supra, § 92, at 657. Indeed, in Progressive Insurance we observed
that viewing losses as purely “economic loss” and not personal or property
damage loss is consistent with Indiana law in the context of claims for
negligent construction such as we have here. 749 N.E.2d at 488 (citing
Choung v. Iemma, 708 N.E.2d 7, 13-14 (Ind. Ct. App. 1999) (negligent
construction)). Construction claims are not necessarily based on defective
goods or products, but nonetheless are subject to the economic loss
doctrine. In general, a claim that a product or service did not perform as
expected is best left to contract law remedies.
We think that the theory supporting the economic loss doctrine
supplies the answer to whether damage to “other property” is involved.
Only the supplier furnishing the defective property or service is in a
position to bargain with the purchaser for allocation of the risk that the
product or service will not perform as expected. If a component is sold to
the first user as a part of the finished product, the consequences of its
failure are fully within the rationale of the economic loss doctrine. It
therefore is not “other property.” But property acquired separately from
the defective good or service is “other property,” whether or not it is, or
is intended to be, incorporated into the same physical object. Although we
express our reasoning slightly differently, we align ourselves with the
courts that have concluded that the “product” is the product purchased by
the plaintiff, not the product furnished by the defendant. The cases that
have used this formulation have typically involved claims by a first
user[8] of a finished product that includes a component supplied by the
defendant where the purchaser had no dealings with the defendant. A
frequently cited example is King v. Hilton-Davis, 855 F.2d 1047 (3d Cir.
1988), where a farmer sued the manufacturer of a chemical used to treat the
seed potatoes that the farmer purchased from a supplier. The Third Circuit
applied Pennsylvania law but followed the United States Supreme Court’s
reasoning in East River Steamship Corp. v. Transamerica Delaval, Inc., 476
U.S. 858 (1986), finding that there was no reason to give purchasers a
broader tort remedy against the remote supplier than the purchaser could
assert against the manufacturer of the assembled defective product. Id. at
1051. Similarly, a purchaser of a complete aircraft is remitted to
warranty remedies and has no tort remedy against a component supplier even
if the entire aircraft is damaged by a defective component. Airlift Int’l,
Inc. v. McDonnell Douglas Corp., 685 F.2d 267 (9th Cir. 1982) (California
law).
Here we have the obverse situation. The Gunkels did deal directly
with J & N. The same formulation of the demarcation between contract and
tort remedies is controlling—property acquired by the plaintiff separately
from the defective goods or services is “other property” whose damage is
recoverable in tort. That formulation excludes from “other property” other
parts of a finished product damaged by components supplied to the seller by
other manufactures and imported into the seller’s product. But it does
make property acquired separately “other property” for purposes of the
economic loss rule even if the defective product is to be incorporated into
a completed product for use or resale.
The Court of Appeals held that here the “product” is the entire house
on which the stone façade was installed. Under this view, the damage
caused to other parts of the house by the alleged defect in the façade is
damage to the product itself and is barred by the economic loss rule. As
will be seen from the foregoing, we disagree. The economic loss rule does
not bar recovery in tort for damage that a separately acquired defective
product or service causes to other portions of a larger product into which
the former has been incorporated. See, e.g., Jimenez v. Superior Court, 58
P.3d 450, 457 (Cal. 2002) (holding that the manufacturer of a defective
window installed in a mass-produced home may be held liable in tort for
damage that the window’s defect causes to other parts of the home in which
it is installed). The product or service purchased from J & N was the
façade added to the exterior of the Gunkels’ home by J & N. J & N
installed the façade under an arrangement with the Gunkels that was
independent of the contract with Renovations to build the home. Therefore,
the economic loss rule precludes tort recovery for damage to the façade
itself, but tort recovery for damage to the home, and its parts, caused by
the allegedly negligent installation of the façade is not limited by the
economic loss rule.
Conclusion
Summary judgment as to the negligence claim is reversed. This case
is remanded for further proceedings consistent with this opinion.
Shepard, C.J., and Dickson, and Rucker JJ., concur.
Sullivan, J., dissents, believing the analysis and conclusion of the
Court of Appeals in this case, 797 N.E.2d 841 (Ind. Ct. App. 2003), is
correct.
-----------------------
[1] See, e.g., Saratoga Fishing Co. v. J. M. Martinac & Co., 520 U.S. 875
(1997) (allowing recovery in tort for “other property” which included extra
equipment added to the ship). Thus, the United States Supreme Court held
the economic loss rule did not bar recovery under admiralty tort law for
damages to “other property” where a defective hydraulic system caused an
engine room fire and flood that led to the sinking of a fishing vessel.
The plaintiff sought recovery for damages to the ship (the product) and
extra equipment (other property), which included a skiff, a fishing net,
and spare parts. The Court affirmed its holding in East River Steamship
Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 859 (1986), that “an
admiralty tort plaintiff cannot recover for the physical damage the
defective product causes to the ‘product itself.’” Saratoga, 520 U.S. at
877. Since the hydraulic system was a component of the damaged ship
recovery was withheld. Id. However, the plaintiff was permitted to
recover for physical damage to the other equipment even though it had been
affixed to the vessel. Id.
[2] See, e.g, Carstens v. City of Phoenix, 75 P.3d 1081, 1083 (Ariz. Ct.
App. 2003) (“the economic loss rule bars a party from recovering economic
damages in tort unless accompanied by physical harm, either in the form of
personal injury or secondary property damage”); Jimenez v. Superior Court,
58 P.3d 450, 457 (Cal. 2002) (allowing recovery for defects to parts of the
home other than the window which was alleged to be negligently installed);
Northwest Ark. Masonry, Inc. v. Summit Specialty Prod., Inc., 31 P.3d 982,
987 (Kan. Ct. App. 2001) (“recovery for physical damage [to] a product
caused to ‘other property’ is not precluded by the economic loss
doctrine”); A.J. Decoster Co. v. Westinghouse Elec. Corp., 634 A.2d 1330,
1334 (Md. 1994) (allowing recovery in tort for chickens lost after a
ventilation system failure). But see Am. Xyrofin, Inc. v. Allis-Chalmers
Corp., 595 N.E.2d 650, 656 (Ill. App. Ct. 1992) (although blade failure in
centrifugal compressor unit caused damaged to product itself and
surrounding premises, “absent additional factual circumstances sufficient
to implicate legitimate safety/insurance concerns, the sole existence of
damage to other property, in and of itself, is insufficient to allow
recovery in tort”); Citizens Ins. Co. v. Osmose Wood Preserving, Inc., 585
N.W.2d 314, 316 (Mich. Ct. App. 1998) (holding that economic loss doctrine
applied to damages for roof collapse even though court determined that it
was “other property”); Selzer v. Brunsell Bros., Ltd., 652 N.W.2d 806, 817
(Wis. Ct. App. 2002) (disallowing the “other property” exception if, at
bottom, the claim involves disappointed performance expectations).
[3] See Myrtle Beach Pipeline Corp. v. Emerson Elec. Co., 843 F. Supp.
1027, 1057-62 (D.S.C. 1993) for an extensive discussion of the subject.
[4] See, e.g., Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F.2d 925,
929-30 (5th Cir. 1987) (the steering gear engine was not a component
distinct from the shipping vessel); Am. Home Assurance Co. v. Major Tool &
Mach., Inc., 767 F.2d 446, 447-48 (8th Cir. 1985) (damage from defective
turbine parts to remainder of turbine was not damage to other property);
Washington Courte Condominium Ass’n-Four v. Washington-Golf Corp., 501
N.E.2d 1290, 1293-94 (Ill. App. Ct. 1986) (water damage to insulation,
walls, and electrical outlets caused by defective windows and exterior
sliding glass doors was not damage to other property but merely
consequential economic loss not recoverable in tort).
[5] See, e.g., Theuerkauf v. United Vaccines Div. of Harlan Sprague Dawley,
821 F. Supp. 1238, 1241 (W.D. Mich. 1993) (no damages in tort for the death
of minks from vaccination by defendant’s product because the damage arose
out of a commercial sale of goods).
[6] See, e.g., Neibarger v. Universal Coops., Inc., 486 N.W.2d 612, 620
(Mich. 1992) (in a commercial transaction between two sophisticated parties
where the gravamen of the complaint is that the purchased product is of a
lesser quality than warranted, the purchaser cannot bring a tort action for
foreseeable injury to other property).
[7] See, e.g., Easling v. Glen-Gery Corp., 804 F. Supp. 585, 590 (D.N.J.
1992) (building damage caused by defective bricks not barred as economic
loss because plaintiffs purchased completed apartment complex, not a load
of bricks); Casa Clara Condominium Ass’n, Inc. v. Charley Toppino & Sons,
Inc., 620 So. 2d 1244, 1247 (Fla. 1993) (rejecting homeowners’ argument
that damages caused to a condominium by defective concrete was damage to
other property because plaintiffs purchased finished homes, not component
parts); Oceanside at Pine Point Condominium Owners Ass’n v. Peachtree
Doors, Inc., 659 A.2d 267, 271 (Me. 1995) (no recovery for damages caused
by defects in windows because the plaintiffs purchased finished condominium
units, not individual components of the units).
[8] Under admiralty law, the United States Supreme Court concluded that
separately acquired property added by a first user to a ship retained its
character as “other property” for purpose of the economic loss doctrine
even though the plaintiff acquired the ship after the added property had
been attached. Saratoga, 520 U.S. at 876. This is not consistent with the
formulation that the test is “the product purchased by the plaintiff,” but
is consistent with our conclusion that at least in the hands of a first
user, separately acquired goods or services are other property. We are not
presented with the issue raised by a sale subsequent to the addition of
other property and express no opinion as to it.