After years of ambiguous cases, the Kentucky Supreme Court recently clarified Kentucky’s position on the economic loss doctrine in Giddings & Lewis, Inc. v. Industrial Risk Insurers, Nos. 2009-SC-000485-DG, 2009-SC-000825-DG, 2011 WL 2436154 (Ky. June 16, 2011). When a defective product damages only itself, the economic loss doctrine bars tort claims, limiting recovery to contractual remedies. Economic losses primarily “deprive the purchaser of the benefit of his bargain,” and thus contract law is the appropriate remedy for such losses. Economic losses often include costs for repair or replacement of the product itself, lost profits, and other similar losses. On the other hand, when a defective product injures people or other property, tort claims remain appropriate remedies.
In Giddings & Lewis, Giddings & Lewis sold a Diffuser Cell System to the purchaser, who used the product to cut and shape metal parts. The product worked properly for seven years until the product malfunctioned, hurling large chunks of metal across the purchaser’s plant. While there was little to no damage to people or other property, the damages to the product itself amounted to $2.7 million. The purchaser filed a claim with its insurer, who compensated the purchaser for its loss. The insurer subsequently sued Giddings & Lewis to recover the damages suffered by the purchaser. Because the statute of limitations had run on the product’s warranty and contract claims, the insurer could only rely on tort claims to recoup its damages.
The insurer brought negligence, strict liability, negligent misrepresentation, and fraud by omission claims. The Kentucky Supreme Court expressly adopted a broad economic loss doctrine, rejecting two exceptions that would have allowed the insurer to recover. Accordingly, the Court held that the insurer could not recover from Giddings based on these tort claims because the damages were limited to the product itself.
The traditional economic loss doctrine case, including Giddings & Lewis, normally involves a commercial purchaser of a product suing in tort for damages caused by the product to itself. However, many courts have extended the doctrine to protect builders and design professionals from owners’ and their successors’ claims of defective construction and design services. Because the Kentucky Supreme Court so recently adopted the economic loss doctrine, its stance on the application of the doctrine to construction services is unknown.
In Presnell Construction Managers, Inc. v. EH Construction, LLC, 134 S.W.3d 575 (Ky. 2004), the concurring opinion of Justice Keller urged the adoption of the economic loss doctrine in the context of construction services. However, the majority opinion, without explanation, did not address the doctrine. While it is unclear why the majority opinion was hesitant to apply the doctrine in Presnell, construction project participants should take heed. Although contracts have always been important in construction projects, Kentucky’s newly adopted economic loss doctrine divests claimants of certain tort remedies. Consequently, Giddings puts even more emphasis on contract terms and remedies for construction contract participants. Now more than ever, each project participant should ensure that it is covered by a contract with strong contractual remedies and warranties.