Client Alerts
March 06, 2017

Sixth Circuit Rules Kentucky’s Economic Loss Doctrine Inapplicable to Consumer Transactions

Stites & Harbison Legal Update, March 6, 2017

Last month, in State Farm Mutual Automobile Insurance Co. v. Norcold, Inc., the Sixth Circuit predicted that the Kentucky Supreme Court would decline to extend the “economic loss rule” to consumer transactions. The rule prevents a plaintiff from recovering tort damages for a defective product when the damages caused by the defect are purely economic. When the rule applies, recovery of damages is limited to actions for breach of contract or breach of warranty. In 2011, the Kentucky Supreme Court in Giddings & Lewis, Inc. v. Industrial Risk Insurers held that the economic loss rule applies to commercial transactions.

Norcold concerned an RV refrigerator that caught fire. The fire did not cause any personal injuries but did destroy the RV and its contents. The RV’s owner bought the vehicle used, and the refrigerator’s three-year warranty had already expired. The RV was insured through State Farm, and the RV’s owner recovered nearly $150,000 under that policy. State Farm filed suit against the refrigerator’s manufacturer to recover the amount that it paid to the RV’s owner. The manufacturer stipulated that it owed State Farm the $150,000 if the economic loss rule did not apply.

In a 2-1 decision, the Sixth Circuit ruled for State Farm. When compared to commercial purchasers, the Sixth Circuit found that consumers generally cannot negotiate effectively to allocate the economic risk of a product’s failure to perform as expected. Analyzing State Farm’s claim using the criteria applied in Giddings & Lewis, Inc. v. Industrial Risk Insurers, the appellate court predicted Kentucky would not extend the doctrine to consumer purchases. Demonstrating unusual certainty about its prediction, the Sixth Circuit also refused to certify the question to the Kentucky Supreme Court.

In dissent, Judge Gilman pointed out that Norcold did not involve a David-and-Goliath fight between an unsophisticated consumer and a corporate powerhouse—rather, the case involved a commercial insurance company suing a commercial manufacturer. He also argued that consumers are indeed able to allocate the risk of economic loss by purchasing insurance or extended warranties, just as the RV owner did by purchasing the State Farm policy. A footnote in the Kentucky Supreme Court’s decision in Giddings & Lewis suggests this outcome.

The Sixth Circuit’s decision is a minority view, as most states apply the economic loss rule to commercial and consumer transactions alike. The rule’s classic formulation is that a manufacturer in a commercial relationship has no duty under either negligence or products liability theories to prevent a product from injuring itself. In a subsequent case, the Kentucky Supreme Court could prove the Sixth Circuit wrong. However, unless and until that happens, manufacturers and sellers of consumer products in Kentucky should be aware that warranties do not necessarily provide the outer limits on liability for a product’s malfunction. To read the Sixth Circuit’s entire opinion, click here.