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The Florida Supreme Court has Limited the Economic Loss Rule to Products Liability Cases: Are Tort Claims now Available for Economic Losses when Parties are in Contractual Privity?
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The Florida Supreme Court has Limited the Economic Loss Rule to Products Liability Cases: Are Tort Claims now Available for Economic Losses when Parties are in Contractual Privity?

March 15, 2013 Community Association Industry Legal Blog

Reading Time: 11 minutes


Likely not; however, the Court’s recent decision leaves the issue open to interpretation.  On March 7, 2013 the Florida Supreme Court published an opinion limiting the Economic Loss Rule to products liability actions.  Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Companies, Inc., 38 Fla. L. Weekly S151a, WL 828003 Fla., 2013.  Tiara Condominium, involves a condominium association (“Tiara”) who retained an insurance broker (“Marsh”) to secure condominium insurance coverage.  Marsh secured windstorm coverage through Citizens Property Insurance Corporation (“Citizens”), which issued a policy that contained a loss limit of $50 million.  In September of 2004, hurricanes Frances and Jeanne caused significant damage to the condominiums and Tiara began the process of loss remediation.  Tiara asked and after being assured by Marsh that the loss limits of the coverage policy were per occurrence, i.e., Tiara would be entitled to $100 million rather than coverage in the aggregate of only $50 million, Tiara proceeded with remediation efforts that slightly exceeded $100 million.  Tiara sought payment of the policy limits from Citizens who claimed the loss limit was $50 million in the aggregate, not per occurrence.  Tiara and Citizens settled for approximately $89 million, leaving Tiara responsible for the money spent making the remainder of the repairs.  Tiara then proceeded with suit against Marsh to recoup the approximately $11 million representing the difference between the Marsh’s assured policy limits and the money actually obtained from Citizens.  Id at 1.

In October of 2007 Tiara filed suit against Marsh alleging (1) breach of contract, (2) negligent misrepresentation, (3) breach of the implied covenant of good faith and fair dealing, (4) negligence, and (5) breach of fiduciary duty.  The trial court granted summary judgment in favor of Defendant March on all counts and Tiara appealed to the Eleventh Circuit.  The Eleventh Circuit upheld the summary judgment as to counts 1, 2 and 3; however, it did not affirm the summary judgment on counts 4 and 5, negligence and breach of fiduciary duty and certified a question to the Florida Supreme Court to determine whether the economic loss rule (“ELR”) prohibits recovery in this matter.  The Florida Supreme Court accepted the certification from Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Co., Inc., 607 F.3d 742 (11th Cir. 2010).  The original questions certified by the Eleventh Circuit was “Does an insurance broker provide a ‘professional service’ such that the insurance broker is unable to successfully assert the economic loss rule to tort claims seeking economic damages that arise from the contractual relationship between the insurance broker and the insured?”  However, the Court in Tiara Condominium, restated the certified question as, “Does the economic loss rule bar an insured’s suit against an insurance broker where the parties are in contractual privity with one another and the damages sought are solely for economic losses?”  Tiara Condominium, WL 828003 Fla., 2013 at 1.  The Court answered the certified question in the negative and held that, “the application of the economic loss rule is limited to products liability cases.  Therefore, we recede from prior case law to the extent that it is inconsistent with this holding”  Id.

The Court in Tiara Condominium, reviewed the history of the ELR and noted that, “its exact origins are subject to debate and its application and parameters are somewhat ill-defined.”  Moransais v. Heathman, 744 So. 2d 973, 979 (Fla. 1999).  In its simplest form, the ELR first appeared in both Federal and State courts in products liability cases.  Id at 979.  The Court noted that it had previously recognized the ELR in Casa Clara Condominium Ass’n, Inc. v. Charley Toppino and Sons, Inc., 620 So. 2d 1244 (Fla. 1993), and held the ELR as “the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others.” Id at 1246.  In Casa Clara, the Court defined economic losses as “damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits – without any claim of personal injury or damage to other property.” Id at 1246.  In simpler terms, the ELR is a judicially created doctrine setting forth circumstances in which tort actions are prohibit if the only damages suffered are economic losses.  The Court in Tiara Condominium, noted that, “despite its underpinnings in the products liability context, the economic loss rule has also been applied to circumstances when the parties are in contractual privity and one party seeks to recover damages in tort for matters arising from the contract.”  Tiara Condominium, WL 828003 Fla., 2013 at 2.

In the contractual privity context, the ELR has been used as a prohibition against parties to a contract from circumventing the allocation of losses set forth in the contract by bringing an action for purely economic losses in tort.  Ginsberg v. Lennar Fla. Holdings, Inc., 645 So. 2d 490, 494 (Fla. 3d DCA 1994).  As such, courts have expanded the ELR to the point of barring tort actions, “where a defendant has not committed a breach of duty apart from a breach of contract.”  Id.  The ELR has not been held as a bar to actions such as fraud in the inducement and negligent misrepresentation in contractual settings.  Tiara Condominium, WL 828003 Fla., 2013 at 3.

The Florida Supreme Court originally adopted the ELR in relation to products liability actions in Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla. 1987) and noted that the ELR precluded recovery of economic damages in tort where there is no property damage to property other than the product itself and no personal injury.  In Indem. Ins. Co. of N. Am. v. Am. Aviation, Inc., 891 So. 2d 532, 541 (Fla. 2004), the Court held, “the products liability economic loss rule articulated in Seely and East River, and adopted by this Court in Florida Power, applies even in the absence of privity of contract.”  The Court in Tiara Condominium, went on to outlined what it termed, “A Legacy of Unprincipled Expansion” of the ELR and its attempts in recent years to curb its expansion and return the use of the rule to products liability actions as the original intent had been which was outlined in Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965) and East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986), which were adopted in Florida Power.  The Court noted several decisions in recent years that have attempted to limit the expansion of the ELR such as Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999) (the Court refused to expand the application of the rule to actions based on fraudulent inducement and negligent representation cases) and American Aviation stating,

Several justices on this Court have supported expressly limiting the economic loss rule to its principled origins.  In Moransais, Justice Wells stated ‘directly that it is [his] view that the economic loss rule should be limited to cases involving a product which damages itself by reason of a defect in the product.” Moransias, 744 So. 2d at 984 (Wells, J., concurring). Two justices subsequently joined Justice Wells when he reiterated this position in Comptech International, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999).  See id. at 1227 (Wells, J., concurring with an opinion in which Justice Lewis and Pariente joined).

American Aviation, 891 So. 2d at 542.  Accordingly, the Court in Tiara, noted, “Thus in Moransais, Comptech, and American Aviation, this Court clearly expressed its desire to return the economic loss rule to its intended purpose – to limit actions in the products liability context.  In each instance, however, we left intact a number of exceptions that continue the rule’s unprincipled expansion.  We simply did not go far enough.”  Tiara Condominium WL 828003 Fla., 2013 at 7.  (emphasis added).  The Court went on to take the “final step” and “hold that the economic loss rule applies only in the products liability context.”  Id.  Finally, the Court noted that their experience with the ELR demonstrates that the expansion of the rule beyond its origins was unwise and unworkable in practice and therefore in Tiara they “return the economic loss rule to its origin in products liability.”  Id.

The majority opinion in Tiara Condominium, authored by Justice Labarga and joined by Justices Pariente, Lewis, Quince and Perry was met with criticism in Justices Polston and Canady who each authored dissenting opinions.  Justices Polston and Canady concurred with each other’s dissenting opinions.  Justice Pariente authored a substantial concurring opinion which was joined by Justices Lewis and Labarga.  Justice Polston, in his dissenting opinion, argued that the majority should have simply answered the original certified question in the negative and relied on prior controlling precedent.  Despite Justice Pariente’s concurring opinion, Polston noted the majority’s opinion “obliterates the use of the doctrine when the parties are in contractual privity, greatly expanding tort claims and remedies available without deference to contract claims [and that] Florida’s contract law is seriously undermined by this decision.”  Tiara Condominium WL 828003 Fla., 2013 at 11.

Justice Canady’s dissenting opinion agrees strongly with Justice Polston’s dissenting opinion and notes that Florida’s contract law is seriously undermined.  Justice Canady goes on to cite various cases in which the Court previously held the ELR applied to contractual privity cases and feels that the decision in Tiara Condominium, reverses them.  He notes that under Tiara Codominium, “we face the prospect of every breach of contract claim being accompanied by a tort claim.”  Id at 13.  Justice Canady’s opinion does not address Justice Pariente’s concurring opinion.

Justice Pariente wrote to address Justice Canady’s “assertion in dissent that the Court’s decision represents a ‘dramatic unsettling of Florida law.’” Id.  She went on to cite the continuous efforts of the Court to curb the expansion of the ELR and return it to its origins as cited in the majority opinion.  Justice Pariente points out that common law principals already restrict the remedies available to parties who have specifically negotiated for those remedies and the majority opinion does nothing to alter the common law concepts.  She notes that in order to bring a valid tort claim, a party must demonstrate that all elements of the claim are met and show that the tort is independent of any breach of contract claim.  See Lewis v. Guthartz, 428 So. 2d 222, 224 (Fla. 1982) (holding that there must be a tort “distinguishable from or independent of [the] breach of contract” in order for a party to bring a valid claim in tort based on a breach in a contractual relationship).   The concurring opinion states in pertinent part,

While the contractual privity form of the economic loss rule has provided a simple way to dismiss tort claims interconnected with breach of contract claims, it is neither a necessary nor a principled mechanism for doing so.  Rather, these claims should be considered and dismissed as appropriate based on basic contractual principles – a proposition we reaffirmed in American Aviation, where we stated that “when the parties have negotiated remedies for nonperformance pursuant to a contract, one party may not seek to obtain a better bargain than it made by turning a breach of contract into a tort for economic loss.” Am. Aviation, 891 So. 2d at 542.  The majority’s decision does not change this statement of law, but merely explains that it is common law principles of contract, rather than the economic loss rule, that produce this result.” 

Id at 8.  Additionally, Justice Pariente’s concurring opinion states,

We have repeatedly explained that the expansion of the economic lass rule beyond products liability to cover situations in which the parties are in privity of contract is best illustrated by AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So. 2d 180, 181 (Fla. 1987), where the Court held that there was ‘no basis for recovery in negligence’ since the plaintiff could not prove that ‘a tort independent of the breach [of contract] itself was committed.’  The Court subsequently indicated, however, that its decision in AFM ‘may have been unnecessarily over-expansive’ in its ‘reliance on the economic loss rule as opposed to fundamental contractual principles.’ Moransais, 744 So. 2d at 981.  In 2004, we receded from AFM ‘to the extent that it relied on the principles adopted by this Court in Florida Power.’  Am. Aviation, 891 So. 2d at 542.  Therefore, since we essentially receded in American Aviation from this overexpansion of the rule, we need not specifically overrule any case today in order to explicitly clarify that the economic loss rule applies only to products liability cases.

Id at 9.

So, where do we stand now?  One thing that is clear following the decision in Tiara Condominium, is that the ELR is now limited to product liability actions.  However, despite Justice Pariente’s concurring opinion noting that common law principles can still be used to prevent tort causes of action in contractual privity cases where the claimed damages are solely economic, the majority opinion does not conclusively state same.  It will be interesting to see where courts come down on these issues moving forward and one could bet with certainty that the issue of a common law bar to tort actions in cases involving contractual privity will be making their way to the Florida Supreme Court shortly.  Until then, there is room to argue the tort actions are barred just as there is room to argue such bar no longer exists.

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