In Business Transactions, Litigation, News & Updates, Property

In 1987, the Florida Supreme Court decided the seminal case of Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla. 1987), which marked the beginning of what would become nearly three decades of the application of the “Economic Loss Rule” (or Economic Loss Doctrine)(“ELR”) in Florida to bar tort claims for “purely economic losses” that were not accompanied by personal injury or damage to other property. As the Court would later explain in Casa Clara Condominium Ass’n, Inc. v. Charley Toppino And Sons, Inc., 620 So. 2d 1244, 1246 (Fla. 1993), purely economic losses are “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.” While application of the rule in Westinghouse began in the context of products liability–to bar FPL’s claims in negligence for defective steam generators designed, manufactured and furnished by Westinghouse–the Court quickly expanded its use to services in the case of AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So. 2d 180 (Fla. 1987)–to deny recovery in negligence for what amounted to a breach of contact by Southern Bell which used an incorrect phone number in an advertisement for AFM causing only economic damages.

The Florida Supreme Court later applied this doctrine in Casa Clara to deny recovery in tort to homeowners which had purchased newly constructed homes containing defective concrete. There, the Court rejected the homeowners’ claims against the manufacturer of the concrete even in the absence of privity where there was no personal injury or damage to property other than the defective concrete itself. Relying on the reasoning in Casa Clara, the Court in Airport Rent-A-Car v. Prevost Car, Inc., 660 So. 2d 628 (Fla. 1995), similarly held that the ELR barred a cause of action for negligence against the manufacturer of defective buses where the only damage was to the buses themselves. However, a year later, the Court noted that the ELR had not eliminated causes of action based on intentional or negligent conduct committed independently of a contractual breach, when it held that an action for fraudulent inducment was not barred by the ELR. See HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238 (Fla. 1996). Similarly, in PK Ventures, Inc. v. Raymond James & Assocs., 690 So. 2d 1296 (Fla. 1997), the Court held that the rule did not preclude a cause of action by the buyer of commericial property against the seller’s broker for negligent misrepresentation. Just four years later, acknowledging that its pronouncements on the ELR had not always been clear and had been the subject of “criticism and commentary”, the Court, in Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999), declined to extend the ELR to “professionals” whose negligent conduct caused economic harm even in the absence of privity. Reinforcing its desire to scale back the reach of the ELR, shortly after Moransais the Court issued its ruling in Comptech Int’l., Inc. v. Milam Commerce Park, LTD, 753 So. 2d 1219 (Fla. 1999), holding that the ELR did not bar free standing statutory causes of action (such as the one provided under section 553.84, Florida Statutes, for violation of the building code). Thereafter, the Court continued to chip away at the ELR by expressly limiting its application to parties in privity of contract or a manufacturer or distributor of a defective product that only damages itself. See Indemnity Ins. Co. of N. Am. v. Am. Aviation, Inc., 891 So. 2d 532 (Fla. 2004).

Despite the Court’s express limitations on the ELR in Indemnity, and still concerned with what it viewed as the “unprincipled expansion…of the rule beyond (the Court’s) original limited intent”, the Court has “now take(n) this final step” to eliminate the ELR except in cases involving products liability. See Tiara Condominium Association, Inc., v. Marsh & McLennan Companies, Inc., 38 Fla. L. Weekly S151a, Case No SC10-1022, filed March 7, 2013. In Tiara, the Court was called upon by the Eleventh Circuit Court of Appeals to answer a certified question concerning the applicabilty of the ELR to claims by a condominium association against its insurance broker. The broker allegedly incorrectly advised the association on the amount of insurance coverage available to pay for property damage from two hurricanes, causing the association to undertake more expensive repairs than it otherwise would have. In applying existing Florida Supreme Court precedent, the Eleventh Circuit upheld the trial court’s granting of summary judgment against the association on its claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation, but reversed summary judgment on the association’s remaining claims of negligence and breach of fiduciary. In reversing, the Eleventh Circuit certified a question to the Florida Supreme Court as to whether the ELR precluded recovery on the remaining claims or whether the broker fell within the “professional services exception” under the holding of Moransais. In response, the Florida Supreme Court expanded the narrow issue before it, rephrasing the certified question as follows: 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 DAMAGES?

In a 5-2 split decision, a majority of the Court answered the rephrased certified question in the negative and held that the ELR now applies only in the context of products liability. In so holding, the Court receded from its prior rulings to “return the economic loss rule to its origins in products liability” established nearly thirty years earlier in Westinghouse. With this ruling, it appears the Court has now opened the door to expanded tort recovery, which will undoubtedly result in the proliferation of construction defect (and other) claims once barred by the ELR.

Author(s): Gary L. Brown

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