IN THE SUPREME COURT OF TENNESSEE
AT NASHVILLE
February 5, 2009 Session
LINCOLN GENERAL INSURANCE COMPANY v.
DETROIT DIESEL CORPORATION ET AL.
Rule 23 Certified Question of Law
United States District Court for the Middle District of Tennessee
No. 3:08-CV-00368 Aleta A. Trauger, Judge
No. M2008-01427-SC-R23-CQ - Filed August 21, 2009
We accepted the following question of law certified by the United States District Court for the
Middle District of Tennessee: 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? We answer this question in the negative.
Tenn. Sup. Ct. R. 23 Certified Question of Law
JANICE M. HOLDER, C.J., delivered the opinion of the court, in which CORNELIA A. CLARK, GARY
R. WADE , WILLIAM C. KOCH , JR., and SHARON G. LEE , JJ., joined.
James P. Catalano, Nashville, Tennessee, and Steven B. Epstein, Raleigh, North Carolina, for the
petitioner, Prevost Car (US) Inc.
Jeremy L. Jones and John W. Reis, Charlotte, North Carolina, and Max Smith, Nashville, Tennessee,
for the respondent, Lincoln General Insurance Company.
James C. Bradshaw, III, Nashville, Tennessee, for the defendant, Detroit Diesel Corporation.
OPINION
Facts and Procedural History
Senators Rental, Inc. (“Senators Rental”), an insured of Lincoln General Insurance Company
(“Lincoln General”), purchased a bus manufactured by Prevost Car (US) Inc. (“Prevost”). The
engine in the bus was produced by Detroit Diesel Corporation (“Detroit Diesel”). On May 8, 2006,
the bus was traveling south on Interstate 65 near Goodlettsville, Tennessee, when it caught fire due
to an alleged engine defect. The fire did not cause personal injury or damage to any property other
than the bus itself. Lincoln General paid Senators Rental $405,250 for the fire damage pursuant to
its insurance policy.
Lincoln General filed a complaint against Prevost and Detroit Diesel. The complaint
included counts of breach of express and implied warranties, negligence, and strict products liability.
Prevost and Detroit Diesel removed the case to the United States District Court for the Middle
District of Tennessee. Prevost filed a motion to dismiss for failure to state a claim pursuant to
Federal Rule of Civil Procedure 12(b)(6), arguing that Lincoln General’s tort claims are barred by
the economic loss doctrine.1
On July 1, 2008, the United States District Court certified one question of law to this Court,
which we accepted pursuant to Tennessee Supreme Court Rule 23.2
Analysis
The United States District Court certified the following question of law: 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?
This certified question presupposes that Tennessee recognizes the economic loss doctrine,
a judicially created principle that reflects an attempt to maintain separation between contract law and
tort law by barring recovery in tort for purely economic loss. See generally, Vincent R. Johnson, The
Boundary-Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev. 523 (2009). Although
this Court has never expressly adopted the economic loss doctrine, we expressed agreement with the
policies underlying the doctrine in Ritter v. Custom Chemicides, Inc., 912 S.W.2d 128 (Tenn. 1995).
In Ritter, this Court stated that “Tennessee has joined those jurisdictions which hold that product
liability claims resulting in pure economic loss can be better resolved on theories other than
negligence. . . . In Tennessee, the consumer does not have an action in tort for economic damages
1
Detroit Diesel has taken no position regarding the motion to dismiss.
2
Tennessee Supreme Court Rule 23, section 1 provides as follows:
The Supreme Court may, at its discretion, answer questions of law certified to it by
the Supreme Court of the United States, a Court of Appeals of the United States, a
District Court of the United States in Tennessee, or a United States Bankruptcy
Court in Tennessee. This rule may be invoked when the certifying court determines
that, in a proceeding before it, there are questions of law of this state which will be
determinative of the cause and as to which it appears to the certifying court there
is no controlling precedent in the decisions of the Supreme Court of Tennessee.
In answering the certified question, we assume the facts are as stated in the United States District Court for the
Middle District of Tennessee’s certification order. See Tenn. Sup. Ct. R. 23, § 3(B).
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under strict liability.”3 Id. at 133 (footnote omitted); see also First Nat’l Bank of Louisville v.
Brooks Farms, 821 S.W.2d 925, 930-31 (Tenn. 1991) (finding that actions under the Tennessee
Products Liability Act are limited to those brought on account of personal injury, death, or property
damage and do not include actions brought for pecuniary loss).
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.
The question certified presents us with our first opportunity to examine the proper application
of the economic loss doctrine when only the defective product is damaged. In the seminal case of
East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 868-71 (1986), the United
States Supreme Court examined three approaches to the economic loss doctrine used by various state
and federal courts, which it described as the “majority,” “minority,” and “intermediate” positions,
and adopted the majority approach. In East River, a shipbuilder contracted with a manufacturer for
the production of turbines to propel four oil-transporting super tankers. While at sea, the turbines
malfunctioned due to design and manufacturing defects. Only the turbines themselves were
damaged. In a unanimous decision, the Supreme Court held that the economic loss doctrine barred
the shipbuilder’s products liability suit in admiralty against the manufacturer.
In adopting the “majority approach” to the economic loss doctrine, the Supreme Court chose
a bright-line rule that precludes recovery in tort when a product damages itself without causing
personal injury or damage to other property. In reaching this conclusion, the Supreme Court
observed that “[w]hen a product injures only itself the reasons for imposing a tort duty are weak and
those for leaving the party to its contractual remedies are strong.” Id. at 871. Specifically, the
Supreme Court reasoned that damage to a defective product is merely a failure of the product to meet
the purchaser’s expectations, a risk that the parties had the opportunity to allocate by negotiating
contract terms and acquiring insurance. Id. at 871-72. In contrast, the “‘cost of an injury and the loss
of time or health may be an overwhelming misfortune,’ and one the person is not prepared to meet.”
Id. at 871 (quoting Escola v. Coca Cola Bottling Co., 150 P.2d 436, 441 (Cal. 1944)). Finally, the
3
The Tennessee Court of Appeals has cited Ritter consistently to support its application of the economic loss
doctrine. See McLean v. Bourget’s Bike W orks, Inc., No. M2003-01944-COA-R3-CV, 2005 W L 2493479, at *5 (Tenn.
Ct. App. Oct. 7, 2005); Messer Griesheim Indus., Inc. v. Cryotech of Kingsport, Inc., 131 S.W .3d 457, 463 (Tenn. Ct.
App. 2003); Tenn. Farmers Mut. Ins. Co. v. Ford Motor Co., No. W 2001-00046-COA-R3-CV, 2002 W L 1332492, at
*3 (Tenn. Ct. App. June 17, 2002); Trinity Indus., Inc. v. McKinnon Bridge Co., 77 S.W .3d 159, 173 (Tenn. Ct. App.
2001).
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Supreme Court expressed concern that permitting recovery in tort for purely economic loss could
subject the manufacturer to an indefinite amount of damages. Id. at 874. A warranty action, on the
other hand, has a “built-in limitation on liability.” Id.
In contrast, the “minority approach” to the economic loss doctrine permits tort recovery for
purely economic loss.4 The Supreme Court explained that jurisdictions following the minority
approach do not distinguish between economic loss and personal injury or property damage because
in either circumstance, the damage was caused by the defendant’s conduct. Id. at 869; see Farm
Bureau Ins. Co., 878 S.W.2d at 743. In the minority view, the manufacturer’s duty to produce non-
defective products and tort law’s corresponding concern with safety apply equally when the harm
is purely economic. E. River S.S. Corp., 476 U.S. at 868-69; see Thompson, 647 P.2d. at 337.
Ultimately, the Supreme Court rejected the minority approach because it “fails to account for the
need to keep products liability and contract law in separate spheres and to maintain a realistic
limitation on damages.” E. River S.S. Corp., 476 U.S. at 870-71.
Lincoln General urges us to recognize a variation of the third approach to the economic loss
doctrine, the “intermediate approach.” States that follow the intermediate approach permit tort
recovery for damage to the defective product alone under limited exceptions that “turn on the nature
of the defect, the type of risk, and the manner in which the injury arose.” Id. at 870. The exception
advanced by Lincoln General would permit recovery for unreasonably dangerous products that cause
damage to themselves during sudden, calamitous events.5 This exception would require courts to
distinguish between those products that expose a product owner to an unreasonable risk of injury
during an abrupt and disastrous occurrence and those products that merely disappoint a product
owner’s expectations. See id. at 869-70.
The East River Court rejected the dichotomy between disappointed and endangered product
owners as “too indeterminate to enable manufacturers easily to structure their business behavior.”
Id. at 870. The Court also found unpersuasive an exception that focuses on the manner in which the
harm occurred:
4
Our research indicates that tort recovery for purely economic loss is permissible in at least three states. See
Farm Bureau Ins. Co. v. Case Corp., 878 S.W .2d 741, 743 (Ark. 1994); La. Rev. Stat. Ann. § 9:2800.53(5) (2009);
Thompson v. Neb. Mobile Homes Corp., 647 P.2d. 334, 336-37 (Mont. 1982); see also Presnell Constr. Managers, Inc.
v. EH Constr., LLC, 134 S.W .3d 575, 588 (Ky. 2004) (Keller, J., concurring) (explaining that Kentucky appellate courts
have never expressly adopted the economic loss rule).
5
A number of cases express agreement with a form of the intermediate approach based on unreasonably
dangerous products; sudden, calamitous events; or both. See Pratt & W hitney Can., Inc. v. Sheehan, 852 P.2d 1173,
1181 (Alaska 1993); Salt River Project Agric. Improvement & Power Dist. v. W estinghouse Elec. Corp., 694 P.2d 198,
209-10 (Ariz. 1984), abrogated on other grounds by Phelps v. Firebird Raceway, Inc., 111 P.3d 1003 (Ariz. 2005);
Vulcan Materials Co. v. Driltech, Inc., 306 S.E.2d 253, 257 (Ga. 1983); Am. Fire and Cas. Co. v. Ford M otor Co., 588
N.W .2d 437, 439-40 (Iowa 1999); Morris v. Osmose W ood Preserving, 667 A.2d 624, 632 (Md. 1995); Russell v. Ford
Motor Co., 575 P.2d 1383, 1386-87 (Or. 1978); Touchet Valley Grain Growers, Inc. v. Opp & Seibold Gen. Constr.,
Inc., 831 P.2d 724, 733-35 (W ash. 1992); Anderson v. Chrysler Corp., 403 S.E.2d 189, 192-93 (W . Va. 1991).
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We realize that the damage may be qualitative, occurring through
gradual deterioration or internal breakage. Or it may be calamitous.
But either way, since by definition no person or other property is
damaged, the resulting loss is purely economic. Even when the harm
to the product itself occurs through an abrupt, accident-like event, the
resulting loss due to repair costs, decreased value, and lost profits is
essentially the failure of the purchaser to receive the benefit of its
bargain—traditionally the core concern of contract law.
Id. (citations omitted).
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.”).
It is difficult, moreover, for parties and courts to apply a rule that focuses on the degree of
risk and the manner in which the product was damaged as opposed to a rule that hinges on harm the
plaintiff actually sustains. Lincoln General suggests, nonetheless, that adopting the bright-line rule
espoused in East River would come at too great a price—the decreased safety of Tennessee citizens.
We believe, however, that deterrence is adequately promoted by existing law that permits tort
recovery for personal injury and damage to property other than the product itself. As explained by
the Illinois Supreme Court, “[b]ecause no manufacturer can predict with any certainty that the
damage his unsafe product causes will be confined to the product itself, tort liability will continue
to loom as a possibility.” Trans States Airlines v. Pratt & Whitney Can., Inc., 682 N.E.2d 45, 53 (Ill.
1997).
Finally, Lincoln General argues that adopting the East River approach is inconsistent with
the General Assembly’s intentions under the Tennessee Products Liability Act of 1978, Tenn. Code
Ann. §§ 29-28-101 to 108 (2000). We disagree. Application of the Tennessee Products Liability
Act is limited to “actions brought for or on account of personal injury, death or property damage.”
Tenn. Code Ann. § 29-28-102(6) (emphasis added). We interpret “property damage” to mean
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damage to property other than the defective product. See Progressive Ins. Co. v. Gen. Motors Corp.,
749 N.E.2d 484, 487-89 (Ind. 2001). A product’s self-destruction is naturally understood as
“economic loss” because it “is indistinguishable in consequence from the product’s simple failure
to function.” Progressive Ins. Co., 749 N.E.2d at 488. This Court previously held in Ritter that the
Tennessee Products Liability Act does not afford the right to recover purely economic losses. 912
S.W.2d at 132-33; see also First Nat’l Bank, 821 S.W.2d at 931 (“[T]he rights and liabilities of
parties to actions based on diminished economic expectations can be better adjudicated on other
legal theories.”); Olin Corp. v. Lambda Elecs., Inc., 39 F. Supp. 2d 912, 914 (E.D. Tenn. 1998). In
the almost fourteen years since our decision in Ritter, the General Assembly has not amended the
Tennessee Products Liability Act to permit claims for purely economic loss.
In our view, the East River approach fairly balances the competing policy interests and
clearly delineates between the law of contract and the law of tort. 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.
In so holding, we join the majority of state appellate courts that have considered the adoption
of an exception to the economic loss doctrine based on unreasonably dangerous products; sudden,
calamitous events; or both. See Airport Rent-A-Car, Inc. v. Prevost Car, Inc., 660 So.2d 628, 631-32
(Fla. 1995); Trans States Airlines, 682 N.E.2d at 54-55; Progressive Ins. Co., 749 N.E.2d at 491;
Jordan v. Case Corp., 993 P.2d 650, 651-52 (Kan. Ct. App. 1999); S.J. Groves & Sons Co. v.
Aerospatiale Helicopter Corp., 374 N.W.2d 431, 433-35 (Minn. 1985), overruled on other grounds
by Hapka v. Paquin Farms, 458 N.W.2d 683 (Minn. 1990); Sharp Bros. Contracting Co. v. Am.
Hoist & Derrick Co., 703 S.W.2d 901, 902-03 (Mo. 1986); Nat’l Union Fire Ins. Co. of Pittsburgh
v. Pratt & Whitney Can., Inc., 815 P.2d 601, 604-05 (Nev. 1991); Utah Int’l, Inc. v. Caterpillar
Tractor Co., 775 P.2d 741, 743-44 (N.M. Ct. App. 1989); Bocre Leasing Corp., 84 N.Y.2d at 688-94;
Coop. Power Ass’n v. Westinghouse Elec. Corp., 493 N.W.2d 661, 665-66 (N.D. 1992); REM Coal
Co. v. Clark Equip. Co., 563 A.2d 128, 132-34 (Pa. Super. Ct. 1989); Gen. Cas. Co. of Wis. v. Ford
Motor Co., 592 N.W.2d 198, 200 (Wis. 1999); Cont’l Ins. v. Page Eng’g Co., 783 P.2d 641, 647-49
(Wyo. 1989).6
Finally, our 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
6
In addition, many federal courts exercising diversity jurisdiction have predicted that other states would also
follow the bright-line rule of East River and decline to recognize an intermediate position. See Lockheed Martin Corp.
v. RFI Supply, Inc., 440 F.3d 549, 553-55 (1st Cir. 2006) (applying New Hampshire law); Detroit Edison Co. v.
NABCO, Inc., 35 F.3d 236, 242-43 (6th Cir. 1994) (applying Michigan law); Laurens Elec. Coop., Inc. v. Altec Indus.,
Inc., 889 F.2d 1323, 1325-26 (4th Cir. 1989) (applying South Carolina law); Naporano Iron & Metal Co. v. Am. Crane
Corp., 79 F. Supp. 2d 494, 504 (D.N.J. 1999) (applying New Jersey law); Sebago, Inc. v. Beazer E., Inc., 18 F. Supp.
2d 70, 94 (D. Mass. 1998) (applying Maine and Massachusetts law); Corsica Coop. Ass’n v. Behlen Mfg. Co., 967 F.
Supp. 382, 387 (D.S.D. 1997) (applying South Dakota law); Vt. Plastics, Inc. v. Brine, Inc., 824 F. Supp. 444, 451 (D.
Vt. 1993) (applying Vermont law).
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of “harm to persons or property” for which economic loss is recoverable.7 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.
Conclusion
In addressing the United States District Court’s certified question, we are persuaded that the
rationale proffered by the United States Supreme Court in East River is sound. We therefore hold
that Tennessee 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 the damage by means of a sudden, calamitous event. The costs
of this appeal are taxed to the respondent, Lincoln General Insurance Company, for which execution
may issue if necessary.
___________________________________
JANICE M. HOLDER, CHIEF JUSTICE
7
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).
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