July 11, 2013
Jeremy Taylor, Senior Attorney, National Legal Research Group
The Court of Appeals of Wisconsin recently applied the economic loss rule in a products liability action by a homeowner's property insurer against the manufacturer of an allegedly defective water softener that leaked and damaged drywall, flooring, and woodwork in the home. See State Farm Fire & Cas. Co. v. Hague Quality Water, Int'l, 2013 WI App 10, 826 N.W.2d 412. The insurer, State Farm, brought only tort claims against the manufacturer. The manufacturer defended on the basis that Wisconsin's economic loss doctrine precluded recovery under the plaintiff's theories. The trial court granted the manufacturer's motion for summary judgment. The court of appeals rejected the manufacturer's argument, holding that the insurer was entitled to proceed under its tort theories.
At the threshold, the court of appeals noted that the economic loss doctrine bars recovery of purely economic losses through tort remedies when the only damage is to the product purchased by the consumer. Hence, the doctrine does not apply when a defect in the product causes personal injury or damage to "other property." It was the "other property" exception with which the court was concerned in the case at hand.
The court noted that Wisconsin engages in a two-part analysis to determine whether damaged property constitutes "other property," so as to allow the pursuit of tort remedies. First, courts consider whether the defective product and the damaged property are part of an "integrated system." If they are, then the damaged property is considered to be the product itself and is not "other property." If they are not, the court then examines the expected function of the product and asks whether the purchaser should have foreseen that the product could cause the damage at issue. If so, then the damaged property is not "other property." In order to be "other property," the damaged property must survive both tests.
As to the integrated-system test, the court of appeals concluded that the consumer's water softener was not part of an integrated system, because it had a function apart from the drywall, flooring, and woodwork in the home. In other words, in order to come within the economic loss doctrine, a defective product must be part of a larger system, and if it lacks a function apart from its value in such a system, it is not "other property" for damage to which an action will lie in tort. The court noted that property has been deemed to be part of an integrated system precluding a tort recovery when, for example, it consisted of cement that was part of pavers that had been damaged, a replacement gear in a printing press, and windows in a home.
As to the disappointed-expectations test, the court found that such test did not preclude the insurer's recovery under its tort theories. This was so, according to the court, because the water softener was neither expected nor intended to interact with the drywall, flooring, and woodwork in the consumer's home. The alleged failure of the water softener did not have anything to do with the purpose for which it was purchased. The court observed that under the disappointed-expectations test, the economic loss doctrine precludes recovery if prevention of the risk at issue was one of the contractual expectations impelling the purchase of the defective product. Because the water softener was not reasonably expected by the consumers to interact with the drywall, flooring, and woodwork of their home, the damage caused by the product was not merely disappointed expectations, and the economic loss rule did not preclude a tort recovery. In this regard, the court stated that, although foreseeable interaction between the purchased product and the damaged property may be considered as a factor in the disappointed-expectations test, without more it is insufficient to bar a tort recovery.