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John Chapman Law Articles

Business & Estate Litigation

Florida Supreme's Effectively Gut the Economic Loss Rule

If your practice even touches on civil litigation, you are no doubt aware of the Economic Loss Rule ("ELR") and its implications. Throughout the 90's, it seemed like not a month went by without another appellate decision on the ELR. However, in its decision in Tiara Condominium Association, Inc. v. Marsh McClennan Companies, Inc., 38 Fla. L. Weekly S 151 (2013) WL828003 (Fla. 2013), the Florida Supreme Court significantly limited the application of the ELR, and in doing so, specifically receded from most of the cases of which we are all familiar.

In Tiara, a condominium association sued its insurance broker for various causes of action, including breach of contract and negligence, after the association opted to incur additional expenses to remedy hurricane damage, based on the insurance broker's representations as to the limits of coverage. The federal district granted summary judgment in favor of the broker. On appeal, the Eleventh Circuit certified a question to the Florida Supreme Court, essentially asking whether or not the broker could be considered a "professional" so as to come under the recognized exception to the ELR. However, rather than answering the certified questions, the Florida Supreme restated the question as follows:

Does the Economic Loss Rule bar an insured's suit against an insurance broker where the parties are in contractual privity with one another and the damages sought are solely for economic losses?

The Supreme Court answered the certified question in the negative, and further held that the ELR is limited to products liability cases.

Writing for the majority, Justice LaBarga discussed the origins of the rule and what later became the two versions of the rule - the contractual privity ELR and the products liability ELR. The contractual privity rule applies when the parties are in privity and one party seeks to recover damages and tort for matters arising out of the contract, as shown by AMF Corp. v. Southern Bell Telephone and Telegraph Co., 515 So.2d 180 (Fla. 1987) where the court held that the ELR barred a negligence claim for an incorrect Yellow Page telephone listing. The exceptions to the contractual privity ELR included professional negligence, fraudulent inducement, and freestanding statutory causes of action.

The products liability rule is where when there is a defect in the product that causes damage to the product itself, but causes no personal injury or damage to other property. This was demonstrated inFPL v. Westinghouse Electric Corp., 510 So.2d 899 (Fla. 1987) where FPL sued Westinghouse under a negligence theory for defective generators. Here the court held that, even in the absence of privity, the manufacturer has no duty under a theory of negligence to prevent a product from injuring itself and that the law of warranty was the sole remedy for frustrated economic expectations.

The court next discussed its prior holding of Indemnity Ins. Co. of North America v. American Aviation, Inc., 891 So.2d 532 (Fla. 2004), where the court attempted to clarify its prior decisions and expressly limited the ELR to where the parties were in contractual privity, or the defendant was a manufacturer of a product and no exception existed. Stated another way, the ELR did not apply service context unless a contract existed. Next the court discussed what it characterized as "a legacy of unprincipled and principled expansion," and discussed cases where it suggested that the court had indicated its desire to limit the ELR, however while leaving "intact a number of exceptions that continue the rules and principle expansion." In receding from many years of established case law, however, including the 2004 American Aviation case, the court here held that the ELR only applies in the products liability context, specifically rejecting the contractual privity ELR rule.

In his fierce dissent, Justice Polston argued that the court's controlling precedent would have mandated answering the original certified question in the negative, but, he states, without any justification, the majority greatly expanded the use of tort law at a cost of Florida law in virtue of its decision. Likewise, Justice Kannady, also dissenting, characterized the majority's decision as a repudiation of existing case law and setting a new course for the expansion of tort law, pointing out that as recently 2010, in its decision in Curd v. Mosaic Fertilizer, LLC, 39 So.3d 1216 (Fla. 2010), the court continued to recognize the efficability of the ELR where the parties are in contractual privity and one party seeks to recover damages and tort for matters arising out of contract.

In her concurring opinion, Justice Parente attempts to counter the dissenting opinions, suggesting that the majority's decision would not cause a substantial unsettling of existing case law, stating that, even with the rejection of the contractual privity ELR, common law principles of contract would still mandate that one party may not seek to obtain a better bargain than a made by turning a breach of contract into a tort for economic loss.

Your humble author believes that Justice Parente is missing the point, and concurs with the dissenting opinions. The case before the court was a situation where parties to a contract noncontractual cause of action, including negligence, in addition to a breach of contract claim. Further, because the professional negligence exception did not apply, the lower court correctly dismissed those causes of action. Irrespective of Justice Parente's pronouncement that common law principles, rather than the ELR, would continue to limit causes of action founded in negligence by those in privity of contract, one can reasonably assume that claims against another party to a contract which are founded in negligence, once clearly barred by the ELRL, would now be routinely asserted in conjunction with breach of contract actions.

John W. Chapman, Jr. is board certified as a specialist in business litigation by the Florida Bar and practices primarily in the areas of construction, commercial, probate/trust and ad valorem tax litigation. Mr. Chapman is admitted to practice in all Florida state courts, the United States District Courts for the Middle and the Southern Districts of Florida, and the United States Court of Appeals, Eleventh Circuit. He offers representation in all types of business disputes.

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