The Tiara case itself was not particularly novel. The Tiara Condo Association used Marsh & McLennon as its insurance broker. Marsh procured a property insurance policy for the Association with a $50 million coverage limit. The Association's property was substantially damaged in 2004 by two hurricanes, and the Association filed claims. Marsh (apparently) assured the Association that the policy had a "per occurrence" coverage of $50 million, such that the Association would have as much as $100 million in coverage because the damages had been sustained in two hurricanes. The Association therefore proceeded with extensive repairs, and presented a substantial claim to its insurer. The insurer took the position that the coverage was limited to $50 million in the aggregate. The Association settled with the insurer, resulting in a net loss (to the Association) of approximately $11 million. The Association then sued Marsh (in federal court) on a variety of theories, both tort- and contract-based.
The federal district court dismissed all of the claims against Marsh. The Eleventh Circuit upheld the dismissal of most of the claims, but certified a question to Florida's Supreme Court: did Florida's version of the economic loss rule bar the Association's tort-based claims, or does an insurance broker fall within the "professional services" exception to the economic loss rule that Florida has created, such that the Association's claims would not be barred?
The certified question touched on an issue that has long been a sore spot for designers in Florida. The Florida courts have long held that negligence actions against "professionals" (including both architects and engineers) are not barred by the economic loss rule. Therefore, in Florida, it has long been common for subcontractors and suppliers to bring claims against designers arising out of alleged errors and omissions in the plans and specs.
The Florida Supreme Court's answer to the Eleventh Circuit's certified question will allow many other industries to feel designers' pain. For, after a long analysis of the origins and evolution of Florida's economic loss rule, the Florida Supreme Court concluded:
"Having reviewed the origin and original purpose of the economic loss rule, and what has been described as the unprincipled extension of the rule, we now take this final step and hold that the economic loss rule applies only in the products liability context. We thus recede from our prior rulings to the extent that they have applied the economic loss rule to cases other than products liability."
It is not the author's place to comment on the effects this holding will have in other industries in Florida. But it is certainly the case that there will be impacts in the construction industry. Third-tier subcontractors who feel that the prime contractor's project management caused the cost of their work to increase can now sue the prime contractor directly. If the prime defends by saying that it was the owner's fault, the third-tier subcontractor can sue the owner directly--not as a pass-through claim, but in its own name and right. Designers may also be equipped with a sword of their own: imagine a dispute about whether a submitted product meets the design. The designer says no and rejects the submittal. The subcontractor sues for the higher cost of the approved product. The designer should now be able to counterclaim for its own administrative time and effort dealing with the wrongful product submission.
It will take some time to see what the impact truly is. But the warm, wet Southeast may start to resemble the high and dry Wild, Wild West of yore when disputes break out on construction projects.
Interesting post, Ben. The economic loss rule, of course, is a confused and confusing concept in many jurisdictions. I think the Florida Supreme Court is correct that this concept first arose from Products Liability cases. In fact, I believe it arose as a limitation on strict products liability damages, in Seely v. American Motors, back in the good old days when the CA Supreme Court used to be an influential institution. Sigh. How far the mighty have fallen.
ReplyDeleteTo have a category based limitation on certain damages in strict products liability makes sense. When it comes to whether a subcontractor should be able to sue an architect, construction manager, or general contractor for damages absent privity of contract, I think the better approach is not to rely on the "economic loss rule" to limit such damages, but to rely instead on the good old fashioned duty analysis for tort. In other words, in the construction context, where parties have detailed and sophisticated contractual relationships, does it make sense for the courts (society) to make available tort claims outside the contractual line of privity.
If there is a societal reason for courts to afford a tort remedy (which necessarily entails a balancing of social factors) it makes no sense to arbitrarily preclude "economic losses." On a construction project, outside of worker injuries, all damages are economic after all. Whether there is a need for a tort remedy, or whether parties should be left to provide for their remedies in contract and be forced to stick to the contractual chain of privity to recover damages--that's the real question.