The Economic Loss Rule

The economic loss rule is a Court created rule of law that prohibits an action based upon tort when the damages are limited to economic losses arising out of a contractual relationship and there is no independent tort. The seminal case in Florida adopting this rule is Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla. 1987). That case adopted the California Supreme Court opinion in Seely v. White Motor Co., 403 P. 2d 145, 149 (Cal. 1965) and the United States Supreme Court decision of East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871 (1986).

The theory behind the economic loss rule is that when parties’ contract and a cause of action accrues for breach of contract such as a breach of a warranty, contractual law should apply because the parties negotiated their rights under the contract. Therefore, Courts have prohibited extending liability beyond the contract action to include negligence or other tort claims.

In Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Co., Inc., 38 Fla. L. Weekly S151 (Fla. March 7, 2013), the Supreme Court of Florida revisited the application of the economic loss rule. Reviewing the history of that rule, the Court determined that while the underpinnings of the rule were created through product liability law, a number of decisions by the Supreme Court and lower courts have extended the economic loss rule far beyond its product liability origins. Thus, for example, in AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So. 2d 180 (Fla. 1987), the Court held that no cause of action in tort existed under the theory of negligence when Southern Bell listed an incorrect telephone number for AFM.

In reviewing that case, as well as many others, the Court explained that the reason the economic loss rule existed in the first place was to protect manufacturers in product liability cases from extending their warranties well beyond that intended by the parties. That consideration does not apply outside the product liability context. The Tiara case related to the liability of an insurance broker for failing to obtain adequate hurricane coverage, clearly not a product liability situation. Utilizing those facts to recede from prior case law extending the economic loss rule beyond the context of product liability, the Court definitively pulled back the application of the economic loss rule solely to product liability cases.

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At 154 the Court holds:

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.

Our experience with the economic loss rule over time, which led to the creation of the exceptions to the rule, now demonstrates that expansion of
the rule beyond its origins was unwise and unworkable in practice. Thus, today we return the economic loss rule to its origin in products liability.

There are myriad cases extending the economic loss rule beyond the realm of product liability. These cases no longer provide authority for application of the economic loss rule in Florida.

Originally printed September 2013