On March, 11, 2010, a Michigan appellate court dealt a significant blow to Ford Motor Company and a major victory for subrogated insurers litigating product liability cases in that state. In State Farm Fire & Casualty Co. v. Ford Motor Company, __ N.W.2d __, Case no. No. 287512 (MI Ct. App. March 11, 2010), the Michigan Court of Appeals reversed summary judgment granted to Ford on a case involving $123,926 in damages to a car, the car next to it, and the entire house and its contents from a fire originating in the speed control deactivation switch of a used 1994 Ford F-150 while parked in the garage. Because the case involves the nuances of the economic loss rule, a refresher on the rule is in order.
The Economic Loss Rule/Doctrine
What is often referred to as the "economic loss rule" is found in no rulebook. More aptly named the economic loss doctrine, it is a court-created principle of law limiting recovery for product liability damages pursued under tort theories (e.g., negligence or strict liability claims) where the only thing damaged is the product itself. The easy example is when a car breaks down on the side of the road and the only damage is to the car itself. In that circumstance, the manufacturer will seek to bar all theories of liability other than breach of express warranty, especially where the express warranty has expired or has limitations, as the effect is to bar the entire case.
The "Other Property" Exception
The main exception recognized by most courts pertains to "other property." The general rule bars recovery to the product itself, but it does not bar tort recovery for property other than the product. However, in many cases, it is difficult to separate the "product" from other property. For example, if a light fixture in a commercial building malfunctions and sets fire to the fixture and to the building, is the building "other property" in relation to the fixture? It depends on the view of that particular state and particular facts of the case.
The "Integrated Systems" Approach and "Contemplated Damages" Approach
To assist in distinguishing a product from other property, many courts have adopted the "integrated systems approach." Under this approach, the court looks to the physical integration of "the product" and the purported "other property." When a defective product such as an engine is physically integrated into a system, such as a boat, the system is not "other property" and the rule thus bars damage not only to the engine but also to the boat. This approach is the majority view, but a few courts have adopted a contemplated damages approach. Under that approach, property that is physically distinct from the product is nonetheless not "other property" if such property was anticipated and contemplated as property that would be damaged in the event of a malfunction. Michigan is one of the few states to adopt the contemplated damages approach, providing the background for State Farm v. Ford Motor Company.
State Farm v. Ford
In State Farm v. Ford, the Michigan Court of Appeals considered an order by the trial judge that granted full summary judgment to Ford for all damages claimed. The trial judge held that the Uniform Commercial Code (UCC), which governs warranty claims in nearly all states, is the exclusive remedy for product liability claims, even when the transaction is a consumer transaction as opposed to a commercial transaction. The trial court held further, that because no UCC remedies were available in this particular case as to the car itself, given the age of the car, all tort claims were barred for damages pertaining to the car. The trial court then considered the property surrounding that car. If during the purchase of the car that property was reasonably anticipated and contemplated to be damaged, such property was barred under Michigan law. The trial judge took the view that because car owners park their cars in their garage, they reasonably anticipate and contemplate that such property will be damaged if the car malfunctions sitting parked with the key out of the ignition. Thus, the trial court barred tort recovery not just for the car but for everything around it.
In reversing this decision, the appellate court acknowledged the contemplated damages approach of Neibarger v Universal Coops, Inc, 439 Mich 512, 515; 486 NW2d 612 (1992) and that the economic loss doctrine applies to consumer transactions as held in Sherman v Sea Ray Boats, Inc, 251 Mich App 41; 649 NW2d 783 (2002). However, the court distinguished both cases from this particular case.
The court disagreed that the contemplated damages approach barred recovery for the surrounding property damages, or even for the vehicle itself, given the extreme nature of failure scenario – a fire in a house. The reasoning for the court is instructive and useful for the subrogation professional that faces this argument. The court stated:
Here, as opposed to the anticipatable and foreseeable mastitis resulting from the alleged defective milking systems in Neibarger, it cannot reasonably be argued that a consumer purchaser of a motor vehicle would anticipate and contemplate fire damages as a possible consequence of ownership of the vehicle, even a defective vehicle, let alone that the purchaser would be leery of or concerned about fire damages to a garage, home, and other property. Therefore, the potential for fire-related damages would not have been the subject of negotiations on a vehicle purchase agreement. It would defy logic to conclude that a "common problem" for motor vehicle purchasers is destruction by fire resulting from a vehicle defect. Our conclusion is buttressed by additional language in Neibarger, where the Court expressed that "[d]amage to property, where it is the result of a commercial transaction otherwise within the ambit of the UCC, should not preclude application of the economic loss doctrine where such property damage necessarily results from the delivery of a product of poor quality." Neibarger, supra at 531 (emphasis added). The delivery of a vehicle of poor quality does not necessarily result in a fire and one's garage and home burning down.3 Indeed, it is highly doubtful that a prospective vehicle purchaser, concerned about the quality and possible defects of an automobile, would be contemplating the ramifications of a fire in negotiating a transaction.
In footnote 3, the court acknowledged that a prior Michigan case suggested that real property surrounding a product is "reasonably contemplated" even when the product catches fire, but distinguished that case from the case at hand. A key distinction was that the case at hand was a consumer transaction. The court stated:
We acknowledge this Court's decision in MASB-SEG Property/Casualty Pool, Inc v Metalux, 231 Mich App 393; 586 NW2d 549 (1998), wherein the plaintiff alleged that a defective fluorescent light fixture manufactured by the defendant caused a fire at a technology center. The Court held that the economic loss doctrine applied to the plaintiff's tort claim arising out of the fire damage, reasoning that "the potential failure of the capacitor within the light fixture . . ., and the damage caused by the resulting fire, were direct and consequential losses that were within the contemplation of the parties when they entered into the agreement for the sale of the light fixture." Id. at 403. We find MASB-SEG to be distinguishable, given that a fire caused by a light fixture could reasonably be anticipated and contemplated should the fixture be faulty or defective. We also note that the MASB-SEG panel emphasized in its analysis that the primary bases for its decision to invoke the economic loss doctrine were that the plaintiff purchaser was a sophisticated commercial entity with the knowledge and ability to allocate liability in the purchase and sale agreement and that the light fixture was used for a commercial purpose. Id. at 402. Here, we are addressing a vehicle purchase by consumers outside of a commercial context. While we recognize that Sherman held that the economic loss doctrine generally applies to consumer transactions, this does not mean that we are precluded from taking into consideration that consumers were involved in a transaction, as opposed to commercial entities or parties, when examining the question whether certain damages would have been contemplated during the negotiation of an agreement.
The court went further, finding that the economic loss doctrine not only allowed recovery for the property surrounding the car, but also allowed tort recovery for the vehicle itself. In language useful to the subrogation professional, the court distinguished the Sherman case, note above, because it involved a product, a boat, that damaged only itself through deterioration as opposed to a product one that suddenly caught fire and damaged other property. The court stated:
Turning to the case at bar, we first note that Sherman did not entail consideration of damage to "other property," which is a relevant matter here and one that we addressed above under Neibarger. However, the Ford F-150, which had the alleged defective cruise control deactivation switch, was itself damaged in the fire, requiring us to ascertain whether Sherman compels us to conclude, at a minimum, that damages associated with the F-150 alone needed to be litigated under the UCC. In Sherman, the Court emphasized that the plaintiff's losses arose out of her disappointed economic expectations relative to the useful life of a boat that simply did not stand the test of time and incurred decay. Such is not the situation here, where the F-150 became engulfed in a fire due to an alleged defect. This is not a case in which the vehicle merely failed to live up to economic expectations held by the purchasers. T he Sredzinskis would not be properly characterized as purchasers who were disappointed that the F-150 did not run for as many miles as hoped for when it was purchased due to wear and tear that occurred prematurely because of faulty craftsmanship. It would simply be inaccurate to describe State Farm's case as one in which the purchasers' expectations in the sale were frustrated because the F-150 did not work properly, Neibarger, supra at 520; the F-150 actually ignited. We also note that Neibarger stated that a consumer's tort remedy for products liability derives from a duty imposed by law or from policy considerations that allocate the risk of dangerous and unsafe products to the manufacturer rather than the consumer, thereby serving to encourage the design and production of safe products. Id. at 523. Allowing State Farm's action to proceed outside of the UCC would serve the purpose of encouraging the design and production of safer cruise control deactivation switches. Additionally, Neibarger suggested that contemplation of certain damages and the addressing of these potential damages through a negotiated agreement were principles equally applicable to assessing whether damage to the product itself implicated the UCC and not just when determining whether damages to "other property" implicated the UCC. See Neibarger, supra at 521. Furthermore, we note that Michigan law defines a "product liability action" as "an action based on a legal or equitable theory of liability brought for the death of a person or for injury to a person or damage to property caused by or resulting from the production of a product. MCL 600.2945(h) (emphasis added). Moreover, under statutory products liability law, "economic loss" is defined as including "loss of use of property" and "costs of repair or replacement of property." MCL 600.2945(c). Accordingly, the mere fact that only property was damaged, i.e., economic losses were incurred, does not mean that the case automatically became a UCC case to be removed from underneath the umbrella of products liability law. This case is a classic example of a products liability action, absent physical injury or death to a person. We conclude, for the reasons stated above, that the economic loss doctrine does not apply in this case as to any of the claimed damages. In sum, the trial court erred in finding that the UCC controlled this action and that the UCC's statute of limitations and accrual provisions dictated summary dismissal under the circumstances presented.
Impact
This decision helps stem the tide of cases that have expanded the economic loss doctrine and receded its exceptions. A number of states have held, for example, that the economic loss doctrine bars tort recovery even when the loss involved a sudden calamitous event, such as the fire involved here. While this decision does not explicitly adopt that as an exception in and of itself, it couples that circumstance with the fact of other property damage to take the claim outside the purview of "lemon laws" and other warranty claims set forth in the UCC. For the subrogation professional facing claims in Michigan and in states where the law is not well developed on this doctrine, State Farm v. Ford Motor Company provides yet another tool of recovery. A copy of the opinion is available upon request.
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