Virginia Clarifies Economic Loss Rule, and Why This Case May Matter
A decision issued this month by the Supreme Court of Virginia, Kaltman v All American Pest, answers a question often debated by Virginia lawyers regarding the economic loss rule. The case also may contain a hidden Trojan horse to contract defenses that everyone should pay attention to.
As we have discussed here on several occasions, the economic loss rule is a critical concept in Virginia construction law. Stated simply, a party cannot sue under Virginia law for economic losses without establishing they have a contract. Another case and its progeny, Richmond v. McDevitt Street, ruled that a plaintiff cannot sue in tort for a duty assumed solely by contract.
In Kaltman, a worker failed to properly clean his equipment after a commercial job. The next day, he used the same equipment on a residential home, including on porous surfaces. The result was a high-powered commercial pesticide was used on home despite it being inappropriate for residential use. Despite multiple rounds of cleaning, the owners could not remove the pesticide smell from the home. The owners claimed personal injuries and property damage from their home being rendered uninhabitable by the smell.
The defendants request that the trial court dismiss the case based on the economic loss rule barring tort claims. The court agreed. On appeal, the Supreme Court reversed and found that the owners could allege an independent tort duty to protect against personal injury and property damage. While the court threw out the willful and wanton conduct allegations, it allowed both negligence and negligence per se to survive.
Why does it matter if you can sue in both contract and tort? I can think of several strategic and practical reasons:
- The tort claims may more easily trigger insurance coverage;
- The tort claims may escape the net of contractual notice of claims provisions; and
- The tort claims may escape the restrictions of limitations of liability clauses.
- The tort claims may allow broader damages more easily than contract claims.
Image by US Air Force
The economic loss rule is the apotheosis of risk-limiting rules that do not vary irrespective of the context, the competing interests, or the appropriateness of the setting. The latest precedent holds out promise that the Virginia Supreme Court has recognized that the rule is a judicial invention of relatively recent vintage, that standards make more sense than rules, and that there is nothing magic about a contract claim or tort claim that justifies such sharply different treatment. It would be nice to see the Virginia Supreme Court do more of the same.
Thanks for your comment Michael.
Not surprisingly if you read the other post, I look at it a little differently. Especially in construction where so much time and effort are spent allocating risks contractually, limiting parties to contract remedies in accordance with those agreements makes sense. I also think it is consistent with long-standing Virginia contract and tort law, and that erosion of the separation of tort and contract is more the recent vintage and more akin to California jurisprudence than Virginia.
That being said, I think the court here got it right. Common law duties against personal injuries can co-exist with contract duties of performance as the court ruled here. I am not a fan of the all too common attempts to convert everything into torts to avoid the pitfalls of a less than favorable contract though.