Picture this: You just purchased a brand-new toaster oven. It did not come with a warranty, but you have heard great things about this brand and know several people who own the same model, so you trust it will work just fine. The toaster oven works great for a while, but one day, it explodes. The toaster did not hurt anyone or damage anything else, but you spent a lot of money on it! However, you probably cannot sue the manufacturer. Why?
What is the Economic Loss Rule?
Depending on which state’s law applies to your case, you will most likely be barred from tort recovery in this scenario. Recovery in tort will be barred because of a legal principle called the economic loss rule. For a defective product– like the toaster oven in our example– there are three types of damages: personal injury, property damage, and economic loss.[1] Personal injury, in this context, is when a product causes an injury to a person.[2] Property damage is when a product causes injury to property.[3] Economic loss is defined as financial loss resulting from harm.[4] Economic loss has also been described as “the costs of repairing or replacing a defective product and consequent loss of use of the product,” or disappointed economic expectations.[5]
The economic loss rule varies from state to state, but stated generally, the rule is this: you cannot sue a manufacturer in tort for damages to a product if the damages incurred were only to the product itself.[6] If the only damages were to the product itself, your only pathway to recovery is through a contract suit.[7] On the other hand, if the product caused injuries to a person or other property, you can sue the manufacturer in tort.[8] Essentially, if the only damages you incurred were economic in nature, the economic loss rule prevents you from recovering tort damages. A majority of states have adopted this rule in some form.[9] The only states that have not recognized some form of the economic loss rule are Arkansas and Louisiana.[10]
History of the Economic Loss Rule
The doctrine was first introduced in the Supreme Court of California case Seely v. White Motor Co. In Seely, the purchaser of a truck sued the manufacturer for damages caused by a defect in the truck.[11] The California Supreme Court held that “even in actions for negligence, a manufacturer’s liability is limited to damages for physical injuries and there is no recovery for economic loss alone.”[12]
The purpose of the economic loss rule is to keep the legal areas of torts and contracts separate.[13] This separation is necessary because “tort law exists to protect public safety, while contract law serves to define and protect ‘expectation interests.’”[14] Most courts have recognized that warranty claims under contract law are the most natural pathway to recovery for buyers whose losses are purely economic.[15]
To determine whether the economic loss rule applies to your claim, you should consult with an attorney. The rule and its application vary state-to-state, so it is advised that you consult an attorney licensed in your state.
Written by:
Bailey VanNatta
Associate Attorney
WATTS GUERRA LLP
Four Dominion Drive, Bldg. Three, Suite 100
San Antonio, Texas 78257
Phone: (210) 447-0500
Frank Guerra
Board Certified – Personal Injury Law
Texas Board of Legal Specialization
WATTS GUERRA LLP
Four Dominion Drive, Bldg. Three, Suite 100
San Antonio, Texas 78257
Phone: (210) 447-0500
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