Karen M. Stemland

Karen M. Stemland
Of Counsel

Recent caselaw highlights the limitations on an owner’s ability to sue a subcontractor for negligence to recover economic losses. For example, in Allstate Ins. Co. v. Structures Design/Build LLC, a subrogee of an owner sued the contractor and subcontractor. In Count IV, the subrogee alleged the subcontractor was negligent in failing to properly install a hot water system.

The subcontractor filed a motion to dismiss, arguing the subrogee could not recover such economic losses in a tort action against the subcontractor. The court agreed, reasoning that the “hot water system was a part of a package” that was the subject of a contract. The damages to the property itself related to the contractual package. The court only allowed Count IV to proceed to the extent it sought damages for the personal property stored within the property because this personal property was outside the scope of the contractual package.

The focus of inquiry in withstanding this type of economic loss rule challenge is whether the alleged damages are unrelated to the contractual package. For example, in USAA Prop & Cas Ins. Co v. Armstrong Air Conditioning, Inc., a subrogee of homeowners whose house was destroyed by fire sued the supplier that sold the defective oil burning furnace to the contractor. The complaint alleged that the supplier’s negligent introduction of the defective furnace into the market and failure to warn caused destruction of the house. The court allowed the claim to proceed, holding that the oil burning furnace “injured other property, not the subject of the oil burning furnace contract.” (emphasis added.)

In contrast, in Sesenbrenner v. Rust, Orling & Neale, Architects, Inc., the court found that the plaintiff was seeking nothing more than disappointed economic expectations, for which the law of contracts provides the sole remedy. In Sesenbrenner, the owner sued a subcontractor and architect relating to faulty construction of a new home, including an enclosed swimming pool. Because damages were to a component of the contractual package, the damages were economic losses that could not be recovered in a tort action against the subcontractor.

In short, the economic loss rule generally bars an owner’s ability to sue a subcontractor in tort for economic losses resulting from breaches of duties assumed in contract. Whether the claim will be barred depends upon whether the damages relate to the contractual package (the scope of the contract governing the work), or relate to other property separate from the contractual package. If damages relate to injury to persons or property beyond the scope of the contractual package, they will not be considered economic losses and will not be barred by the economic loss rule.