What happens in a subrogation claim that only involves damage to a product? Can you pursue the manufacturer for tortious negligence, or are you limited to warranties and contracts? In this episode of On Subrogation: Economic Loss Doctrine, Rathbone Group attorney Jason Sullivan explains the Economic Loss Doctrine and why the jurisdiction in which a product defect subrogation case is brought is key.
The Economic Loss Doctrine applies to the field of product liability and is used to limit a party’s subrogation rights to pursue a tort claim. Under this theory, if a party suffers damage to a product only, they can’t pursue the subrogation claim in tort. Instead, potential subrogation claims are limited to contract and warranty claims.
The Economic Loss Doctrine still uses the standard threshold for breach of duty and negligence, but the courts want parties to deal with it through terms of purchase, contract or warranty of the defective product.
Why the Economic Loss Doctrine Matters in Subrogation
The big reason this doctrine is important in product damage subrogation lawsuits is those ever-looming statutes of limitations. While tort claims tend to have two to three-year deadlines, warranty claims can be limited to six months to one year before subrogation rights are effectively waived.
So, if you had a product with a 1-year warranty that fails after 18 months, you can’t pursue the manufacturer under a warranty claim. A subrogation lawyer would look to pursue a claim under a tort theory, but if the Economic Loss Doctrine applies, you are out of luck.
It’s important to note that this doctrine applies when the only loss was the defective product. If other property is damaged or personal injury exists, a plaintiff can pursue a tort claim.
State Subrogation Laws Vary on Economic Loss Theory
Not all is lost, because not only does the Economic Loss Doctrine not apply in every state, but also because there are exceptions to the doctrine even in states that do apply it. Currently, 28 states recognize the Economic Loss Doctrine. That means that, no matter what, in a defect case where only the product was damaged, there is no right to subrogate in tort.
There are 17 states that apply a more flexible approach to this doctrine. As a general rule, the Economic Loss Doctrine applies, but in these states, there are rules and exceptions that may void its application.
The remaining 5 states do not apply the Economic Loss Doctrine, which means that even if a product defect only results in damage to that product, the right to pursue subrogation recovery under a tort theory remains.
Exceptions & Modifiers to the Economic Loss Doctrine
In the 17 states that take an intermediate approach to the Economic Loss Doctrine, there are exceptions to the doctrine, as well as arguments against said exceptions:
- Dangerous Defect Exception: If the product was unreasonably dangerous or causes an unforeseen, sudden loss, the right to subrogate a claim via tort remains.
- Independent Duty Rule: This exception regards the relationship between parties and the behavior of the manufacturer. If the damage caused to the product was due to fraud and/or misrepresentation, the subrogating carrier can pursue the claim in tort.
Then, there are two additional rules on which courts remain at-odds in many product defect cases:
- Disappointed Expectations Exception: If the loss/damage was foreseeable, there is no right to subrogate under a tort theory.
- Integrated System Rule/Final Product Test: In a product with multiple, integrated components, any damage to the rest of the final product is considered the same product as the defective product.
We can see clearly why a subrogation lawyer must know the ins and outs of the relevant state’s insurance and subrogation laws in order to effectively navigate around the Economic Loss Doctrine and the strict statutes of limitations in warranty and contract claims.
Illustrating Subrogation When the Economic Loss Doctrine May Apply
Jason offers a case study and subsequent hypothetical to illustrate how these rules and exceptions interplay in product defect subrogation:
Dangerous Defects vs. Disappointed Expectations
As you recall, the Dangerous Defect Exception requires an unforeseeable cause of damage. If the damage was foreseeable, Disappointed Expectations applies, and so does the Economic Loss Doctrine. The Illinois Supreme Court dealt with the definition of unforeseeable vs. foreseeable damage with an analogy of defective fire smoke alarm:
Say the defect in the fire smoke alarm causes only economic loss of the defective product. If the fire alarm does not go off when it’s supposed to, that is a foreseeable cause, because it’s a straightforward defect – it failed to perform the function it was promised to. Economic Loss would apply.
However, if the defect resulted in the fire smoke alarm catching on fire, that is an unforeseeable cause that could have also caused harm to a person. The last thing on earth that a smoke alarm should ever do is catch on fire. In that case, courts would likely not limit the subrogation recovery pursuit to the Economic Loss Doctrine.
Independent Duty: Failure vs. Fraud
The application of the Independent Duty Rule in subrogation is worth discussing. Consider you order 10 appliances from an appliance manufacturer which are promised to meet a certain standard. You finalize the order and pay the invoice. However, when the 10 appliances arrive, they are a lesser model than the ones you ordered and paid for.
If the manufacturer had called you immediately upon finding the appliance model you ordered was unavailable, notified you of a cost-equivalent solution and received your consent; or if a mistake on the invoice caused the wrong appliances to be shipped, this is a failure. Honest mistakes are not tortious.
However, if the manufacturer surreptitiously charged and shipped to you appliances they knew were not the model/standard you ordered, they have misrepresented the product. This is a form of fraud. The Independent Duty Rule would apply, and the right to pursue subrogation through tort law would be allowed.
Integrated Systems, Final Products, & “Other” Property
Recall that the Economic Loss Doctrine does not apply if there is other property damage associated with the product failure. The question is, what is “other” property? Consider a car – it comprises thousands of integrated components. If one part somewhere fails, it could cause damage to other parts of the car. Are those other parts considered other property, too?
The Final Product Test states that every part of a final product is considered the same product; damage to any component means damage to that property. That means the Economic Loss Doctrine would apply, and there would be no subrogation rights in a tort context. But that only matters if your subrogation case is in a state that uses the Final Product Test.
Hypothetical for the Application of the Integrated Systems Rule
Jason offers a hypothetical of a new homeowner. The house they purchased included a dishwasher. A defect in the dishwasher causes it to fail:
If only the dishwasher is damaged, states that use the Economic Loss Doctrine will relegate the subrogation claim to contract or warranty disputes. If the dishwasher floods and ruins all the cabinetry around it, Economic Loss would not apply, because there was additional property damage.
However, the homeowner purchased the home. If the courts apply the Final Product Rule to the home, then damage to the dishwasher is the same as damage to the home, and Economic Loss would apply.
If all of this also happened 2 years after the house was purchased, this would be a situation where there is no subrogation potential in any forum, as the statute of limitations for warranty/contract subrogation claims would have expired.
Best Strategies for Subrogation of Product Defect Lawsuits
This type of subrogation requires a proactive approach to case management. Jason summarizes his discussion by sharing best practices for subrogation lawyers with claims involving product defects.
- Does the state strictly apply the Economic Loss Doctrine?
- Does the state provide exceptions?
- Examine damages:
- Is there damage to other property?
- If not, will another exception allow pursuit of a tort claim?
This is especially important if the warranty or contract terms have already expired, as statute of limitations are so short. If there’s not a timely approach to submitting a subrogation demand on the damaged product, you could leave potential subrogation recovery on the table simply by missing a deadline.
Maximizing subrogation recovery requires skilled attorneys knowledgeable in how state subrogation laws vary, as well as the best subrogation strategies for complex cases. Rathbone Group helps clients across the nation recover losses using all available avenues to resolution.
Want to learn more about important topics in subrogation and tips on insurance litigation? Visit Rathbone Group’s YouTube channel and podcast library for more On Subrogation, where our lawyers discuss difficult topics in digestible talks. Have a subject or question we haven’t yet answered? Reach out at video@rathbonegroup.com or podcast@rathbonegroup.com to see your suggestion featured on a future episode of On Subrogation.