ECONOMIC LOSS RULE KNOCKS OUT PORTION OF CONTRIBUTION CLAIM

June 22, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

The second contribution question presented by the case of the moldy house was whether a contribution claim was barred by the economic loss rule. Muirfield Village-Vernon Hills LLC. v. K. Reinke Jr. and Co., No. 2-03-0116 (2d Dist, May 13).

Monday's Trial Notebook looked at some highlights of Justice Jack O'Malley's analysis of the problem caused by a settlement agreement that failed to allocate payments among the settling defendants.

On the second issue, O'Malley concluded that the trial judge erred in ruling that the entire contribution claim -- which the general contractor and developer filed after negotiating a settlement with home buyers Kerry and Jodi Strain -- was barred by the economic loss rule. Here are some highlights of his analysis (with various omissions not noted in the quoted text):

"[P]laintiffs [the general contractor, Muirfield LLC, and the developer, Muirfield Village-Vernon Hills LLC ] argue that the trial court erroneously relied on the economic loss rule (see Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69 (1982)) to conclude that plaintiffs were not able to plead the existence of damages.

"Plaintiffs contend that the trial court erred in holding that their damages were barred by the economic loss rule. Briefly stated, recovery for solely economic losses in relation to a product may not be had upon a tort theory of negligence.

"The rationale for the economic loss rule is that the manufacturer of the product should not be held liable for downstream losses caused by the product failing to meet the purchaser's specific business expectations.

" 'Economic loss' has been defined as damages for inadequate value, costs of repair and replacement of the defective product, or the consequent loss of profits, as well as the diminution of value of the product due to its inferior quality. Redarowicz v. Ohlendorf, 92 Ill.2d 171, 177 (1982).

"The economic loss rule is not without exceptions. It will not be applied in three circumstances: (1) where the plaintiff has sustained personal injury or property damage resulting from a sudden or dangerous occurrence; (2) where the plaintiff's damages are proximately caused by the defendant's intentional false representation; and (3) where the plaintiff's damages are proximately caused by the defendant's negligent misrepresentation where the defendant is in the business of supplying information to guide others in their business transactions. In re Chicago Flood Litigation, 176 Ill.2d 179, 199 (1997).

"Here, the trial court dismissed plaintiffs' third amended complaint based on the application of the economic loss rule. Plaintiffs argue that the economic loss rule does not apply to their circumstances. They argue that the Strains were private citizens without the expectation of commercial benefit accruing from the purchase of their residence.

"Plaintiffs argue that the Strains experienced a sudden and calamitous event, effectively causing the loss of their house as well as the loss of a large amount of personal property. Because the Strains experienced property damage in addition to the loss of the house as a result of the mold, plaintiffs argue that the economic loss rule does not operate to bar their claim. We agree in part with plaintiffs' contention.

"Redarowicz and Chicago Flood settled the question of whether the economic loss rule will bar recovery in tort for the loss of a plaintiff's house or property.

"In Redarowicz, the plaintiff purchased a house from the original owners about a year after the house had been completed by the builder. The plaintiff noticed that the chimney and adjoining wall were beginning to pull away from the rest of the house. The plaintiff sued the builder and sought recovery in tort for the repair and replacement of the defectively constructed chimney.

"The court held that the plaintiff could not recover those damages in a defective construction case because they were precisely the type of damages precluded by the economic loss rule.

"The court stated: 'This is not a case where defective construction created a hazard that resulted in a member of the plaintiff's family being struck by a falling brick from the chimney. The plaintiff is seeking damages for the costs of replacement and repair of the defective chimney, adjoining wall and patio. While the commercial expectations of this buyer have not been met by the builder, the only danger to the plaintiff is that he would be forced to incur additional expenses for living conditions that were less than what was bargained for.'

"In Chicago Flood, the plaintiffs sued the City of Chicago for damages incurred when the city's freight tunnel network was flooded following damage to one of the tunnels after wood pilings in the Chicago River had been replaced, but not in the location specified by the city.

"The court held that 'those plaintiffs who did not incur personal injury or property damage may not recover solely economic losses.' The court cautioned, however, that the economic loss rule applied 'even to plaintiffs who have incurred physical damage to their property if the damage is caused by disappointed commercial expectations, gradual deterioration, internal breakage or other non-accidental causes, rather than a dangerous event.'

"The court also noted, with regard to destroyed inventory, that these damages did not run afoul of the economic loss rule because the plaintiffs were not seeking 'damages for the loss of continuous electrical service, which is a disappointed commercial expectation,' but were seeking 'damages for property loss, in the form of lost perishable inventory, as a result of a tortious event.'

"The court held that 'these losses fall outside the definition of economic loss and are recoverable in tort.'

"Redarowicz and Chicago Flood require that damages beyond the disappointed commercial expectations be alleged. Redarowicz held that repair and replacement damages arising from defective construction were barred by the economic loss rule.

"Chicago Flood elaborated the rule to bar recovery of economic losses, but allowed for the recovery of property damages apart from those of the damaged structure. Thus, here, plaintiffs cannot recover contribution for damages accruing from the loss of the Strains' house, as that is a classic economic loss.

"However, plaintiffs can recover contribution for the losses to the Strains' personal property. Therefore, the trial court correctly dismissed that portion of the third amended complaint seeking contribution based on the loss of the house but should not have dismissed that part of plaintiffs' claim seeking contribution based on the personal property damages incurred by the Strains.

"This does not fully resolve the issue. Defendants contend that the mold grew over a lengthy period of time. This, according to defendants, means that the losses occurred as a result of a gradual deterioration and not a sudden and calamitous event. As a result, defendants conclude that the losses do not fall under the exception to the economic loss rule for personal injury and property damage resulting from a sudden or dangerous occurrence. We disagree.

"While the growth of the mold and bacteria occurred gradually, it is still a sudden and calamitous event for purposes of analyzing the application of the economic loss rule.

"As this court has stated: 'Damages which are the proximate result of a sudden and calamitous occurrence that causes harm to other property are compensable in tort. The type of harm attendant to a sudden and calamitous event does not flow from disappointed commercial expectations; rather, it arises from '[h]azards peripheral to the product's [intended] function.'

"When characterizing an event as sudden and calamitous the focus is upon 'the suddenness of the occurrence of an event -- the point when the injury occurs -- where such occurrence causes personal injury or damage to property external to the defective product which exposes a party to an unreasonable risk of injury to himself or his property, rather than the suddenness or length of time within which the defect or cause of the occurrence develops and manifests itself in the sudden and calamitous occurrence.' American Xyrofin Inc. v. Allis- Chalmers Corp., 230 Ill.App.3d 662, 669 (1992).

"The circumstances of this case qualify as a sudden and calamitous event. The mold and bacterial infestation grew gradually, but its manifestation was sudden and calamitous, damaging the Strains' personal property and requiring them to flee their house or experience the likelihood of personal injury.

"Properly viewed from the point of injury, and not from the development of the mold and bacterial infestation, the occurrence was sufficiently sudden and calamitous to place it under the exception to the economic loss rule for property damage resulting from a sudden or dangerous occurrence.

"To sum up, then, we find that the trial court properly dismissed with prejudice plaintiffs' contribution claim arising from the damage to the Strains' house, but erred in dismissing with prejudice plaintiffs' contribution claim arising from damage to the Strains' personal property. That portion alone of the third amended complaint should have been dismissed without prejudice."

Back to Trial Notebook Main page