By Matthew Neff
In Tiara Condominium Association, Inc. v. Marsh & McLennan Companies Inc., (SC10-1022), the Supreme Court decided the issue of whether the economic loss rule bars an insured’s suit against an insurance broker when the parties are in contractual privity with one another and the damages are sought solely for economic losses. The Court held that the economic loss rule, which prohibits damages in tort for purely economic losses, only applies in the product liability context and thus answers the certified question in the negative.
Marsh & McLennan Companies Inc. (Marsh) was Tiara Condominium Association, Inc.’s (Tiara) insurance broker. One of Marsh’s responsibilities was to secure insurance coverage for Tiara. Marsh secured windstorm coverage through Citizens Property Insurance Corporation. The policy contained a loss limit of nearly $50 million dollars. When Tiara was damaged by hurricanes Frances and Jeanne, Marsh assured them that the loss limit coverage was per occurrence and thus they would receive $100 million total. However, Citizens claimed the limit was $50 million in the aggregate and eventually the two settled for about $89 million dollars, $11 million less than the amount spent by Tiara on the repairs. Tiara filed suit in federal court for breach of contract, negligent misrepresentation, negligence, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. The trial court granted summary judgment in favor of Marsh on all claims and Tiara appealed to the Eleventh Circuit Court of Appeals. The appeals court affirmed every claim except those of breach of fiduciary duty and negligence. The Eleventh Circuit certified to the Supreme Court the question of whether the economic loss rule bars recovery for the negligence and breach of fiduciary duty claims.
The judicially created economic loss rule “sets forth the circumstances under which tort action is prohibited if the only damages suffered are economic losses.” The principal policy behind the rule is to provide a “boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care.” The Court does not want parties to a contract to bring a claim of economic loss in tort and thus circumvent the allocation of losses within the contract. The root of the rule is found in the product liability context and is designed to “protect manufacturers from liability for economic damages caused by a defective product beyond those damages provided by warranty law.”
After examining the earlier cases expanding the economic loss rule, the Court returned the economic loss rule to its original intent thus limiting its applicability to the product liability context. Justice Labarga, writing for the majority, recognized that when two parties are in contractual privity, and the only losses are economic, the traditional remedies of contract law are more appropriate than those in tort law. However, the economic loss rule does not prohibit a cause of action for torts committed independent to the contractual breach. The Court receded from prior case law expanding the economic loss rule and limited its applicability to product liability cases with the rationale being that “contract principles are more appropriate than tort principles for resolving economic loss without an accompanying physical injury or property damage.” The economic loss rule was thus limited to cases involving product liability to protect manufacturers from liability for damages arising purely from economic losses. The Supreme Court didn’t apply the economic loss rule to the case at hand and instead remanded the case to the Eleventh Circuit Court of Appeals.