Tennessee Nixes Economic Loss Doctrine Exception in Product Claim

The Tennessee Supreme Court has ruled that the state does not recognize an exception to the economic loss doctrine that generally bars damages if a product defect causes only economic loss and not any personal or additional property damage.

The ruling adopts the reasoning of the U.S. Supreme Court and aligns Tennessee with the majority of states that also do not recognize exceptions to the economic loss doctrine.

“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,” the Tennessee court ruled.

The state court said these product owners should negotiate their remedies as part of their purchasing contract and not look to the law of torts.

The decision rejected the argument that an exception to the economic loss doctrine should be made when the defect “renders the product unreasonably dangerous and causes damage by means of a sudden, calamitous event.”

The economic loss doctrine attempts to maintain separation between contract law and tort law by barring recovery in tort for purely economic loss. The principle is implicated in products liability cases when a defective product damages itself without causing personal injury or damage to other property.

The case that brought the issue before the court involved an insurance company, Liberty General, suing on behalf of its insured, Senators Rental, which had purchased a bus manufactured by Prevost Car. The engine in the bus was produced by Detroit Diesel Corp.

On May 8, 2006, the bus was traveling south on Interstate 65 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 then filed a complaint against Prevost and Detroit Diesel that alleged breach of express and implied warranties, negligence, and strict products liability.

The United States District Court asked the Tennessee high court to answer this question: 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?

The Tennessee court answered no, siding with the “majority approach” to the economic loss doctrine, described by the U.S. Supreme Court in 1986 as a bright-line rule that precludes recovery in tort when a product damages itself without causing personal injury or damage to other property in the case of East River Steamship Corp. v. Transamerica Delaval, Inc.

The U.S. 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.” 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.”

A “minority approach” to the economic loss doctrine permits tort recovery for purely economic loss. 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. The U.S. 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.”

Lincoln General urged a thirs variation to the economic loss doctrine, the “intermediate approach” followed by some states. This approach permits 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.” The exception advanced by Lincoln General would permit recovery for “unreasonably dangerous products that cause damage to themselves during sudden, calamitous events.” This exception, the Tennessee justices noted, 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.

In an opinion written by Chief Justice Janice M. Holder, the Tennessee justices agreed with the U.S. 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,” Holder wrote.

According to the state court, it is difficult 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 suggested that adopting the bright-line rule espoused by the U.S. Supreme Court in the East River decision would come at too great a price—the decreased safety of Tennessee citizens. But the Tennessee justices found that deterrence is adequately promoted by existing law that permits tort recovery for personal injury and damage to property other than the product itself.

The court also rejected Lincoln General’s argument that adopting the East River approach would be inconsistent with the Tennessee Products Liability Act of 1978.

“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,” the court stated.

The decision is Lincoln General Insurance Company v. Detroit Diesel Corporation, et al,