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New Florida Supreme Court Decision Expands Tort Liability for Pure Economic Harm

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In many instances, in tort law, if the defendant causes no physical harm to the plaintiff's person or property, there is no tort liability. Thus, if Danny Defendant negligently hits a bridge, damaging it, he is liable to the bridge's owner (typically a government) for repairs -- but he is not liable to Peter Plaintiff's restaurant (located 1/2 mile away "on the wrong side of the bridge"), which lost trade during bridge repairs. Similarly, in products liability, if a defectively designed car crashes, its manufacturer is liable for all injuries; but if it doesn't crash but is worth less as a trade-in, traditional doctrine holds that there is no liability for diminished resale value (a pure economic harm).

In the bridge case, as my former colleague Bill Bishop has pointed out [JSTOR access or fee], restaurant trade has likely shifted to other locales, and there is no social loss caused by the alleged tortfeasor other than the cost of repairs to the bridge. In the defective car case, this is deemed to be an issue better dealt with via contract -- and there is typically [there are notable exceptions!] no contractual guarantee of any given resale value.

A recent Florida Supreme Court decision has narrowed the boundaries of the economic loss doctrine in an interesting case, Tiara Condominium Association v. Marsh & McClennan Companies, Inc. et al.. The facts are a bit complicated, but (I think) worth understanding. In brief:

Tiara retained Marsh as its insurance broker, and Marsh secured windstorm coverage through Citizens Insurance, which issued a policy with loss limit of about $50 million. In 2004, Tiara's condos were hit by both hurricanes Frances and Jeanne. Tiara was allegedly "assured by Marsh that the loss limits coverage was per occurrence ... rather than coverage in the aggregate." Tiara thus felt that it could spend up to $100 million in repairs, and proceeded to do so. When Tiara sought payment from Citizens Property, however, Citizens claimed that the policy's loss limit was $50 million total, not per occurrence. Ultimately, Tiara and Citizens settled for approximately $89 million -- Tiara was left in the red for about $11 million. Tiara claimed it would not have made such expensive repairs had it not been told that they were covered by insurance.

Tiara sued Marsh in federal court for this amount, invoking a litany of named torts. The District court granted summary judgment to Marsh on all claims. Tiara appealed to the Eleventh Circuit, which reversed as concerned Tiara's negligence and breach of fiduciary duty claims. On those two counts, the Court certified to the Florida Supreme Court the question whether Florida's economic loss doctrine barred recovery.

The majority decision in the Florida Supreme Court noted that its economic loss doctrine was initially a products liability rule designed to limit an undue incursion by tort on what were traditionally contract law damages. [p.4] Thus, if a product is so poorly designed that its life span is less than expected, there is no tort recovery -- only warranty law in contract will apply. But the court ruled that prior caselaw expansion of the economic loss rule to cases of malpractice by insurance agents had been an overextension of the rule. [pp. 16, 18] Two Justices, including the Chief Justice, dissented, bemoaning that tort had again cannibalized contract law, and that Florida precedent had been too cavalierly overturned by the majority (to the detriment of legal certainty). [pp. 26, 28].

I won't comment much on the Common Law precedent issue here (I'll just say that I am sympathetic to the dissenters' general viewpoint -- among other things, liability insurance premiums obviously rely on stability in legal expectations). On the substantive issue, I think it clear that when the parties are in contractual privity liability should be determined by contract law, at least when there is no bodily injury or property damage.

Note that Tiara apparently spent ONE HUNDRED MILLION DOLLARS without getting legal advice about the extent of its insurance coverage. [Lawyers' advice, by the way, would have been excepted from the economic loss rule in Florida due to a "professional services" exception -- insurance salesmen had previously been held to not be covered by this exception, but that caselaw was overturned in the Tiara case.] Instead, Tiara relied on the word of an independent insurance broker (who was not the insurer's agent). Was that prudent? What did Tiara's contract with Marsh provide as regards any damage limitation (the decision is not clear on this, and rightly so, since the Supreme Court was merely answering a referral from the federal circuit court, not deciding a case)? And in closing I cannot resist asking: was Marsh engaged in the illegal practice of law when it allegedly gave its advice to Tiara? :)

1 Comment

Tiara's claim doesn't really make much sense. If the $11 million in repairs wasn't worth the $11 million they paid for them, they should not have allowed them to proceed regardless of who was paying for them.

Say Tiara claims a $3 million loss in the suit. That would mean Tiara paid $11 million for repairs that were only worth $8 million, forcing a needless $3 million loss on their insurance company that could trivially been avoided by Tiara agreeing with the insurance company to pay them $8 million in compensation instead of $11 million in damages.

It sounds like Tiara spend $100 million on repairs they knew were not worth $100 million because they believed someone else was picking up the check. That doesn't sound like something they can blame on anyone else.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


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The Manhattan Insitute's Center for Legal Policy.