Manufacturer’s Liability and the Economic Loss Doctrine

Historically, a manufacturer or seller of defective chattels was not liable to persons injured using the product unless a contractual relationship existed.  The rule originated in England and operated to limit a manufacturer’s liability to immediate purchasers if a product turned out to be defective, dangerous or hazardous to health.  The rule was known as the “privity limitation,” and was utilized in the U.S. until a famous New York court decision wiped it out in 1916.  That court opinion ushered in the so-called consumer movement.  Consumers could now sue manufacturers and hold them accountable for negligence in manufacturing faulty products as well as negligence in design.  But, there are at least three situations that a particular farmer or rancher may face in which they will be limited in their ability to sue a manufacturer on a product liability claim – (1) preemption under the Federal Insecticide, Fungicide and Rodenticide Act  (which applies to the use and application of registered pesticides); (2) when the buyer alters purchased products and alters them or when multiple component parts are purchased individually, but are then later combined to make a complete system; and (3) the “economic loss” doctrine.  It’s that last exception that has hit the courts again recently involving a Michigan farmer.

Under the “economic loss” doctrine, product defects that damage only the product itself, or make the product useless and the losses are purely economic are not within the domain of product liability law.  Most courts say that the rule applies equally to consumer as well as business purchasers.  Thus, these types of cases are to be decided under contract law, with contract-based damages.  The question is what the purchaser contracted for – if what was purchased was insured, the insurance company is liable for the loss. 

The “economic loss” doctrine has led to some interesting insurance cases involving agricultural products in recent years, and a new case illustrates that insurance companies are still trying to pass the buck to the product seller.  In one case from Kansas in 1999, a farmer bought a self-propelled combine and insured it against fire loss.  The combine engine malfunctioned, triggering a fire which destroyed the combine.  The farmer filed a claim with his insurance company and the company paid the claim, but then brought a subrogation action against the engine manufacturer to recover on the amount paid to the insured.  The insurance company (Kansas Farm Bureau) said they shouldn’t ultimately have to take the loss because the engine wasn’t a component part of the combine.  The trial court disagreed, holding that the engine in a self-propelled combine is a component part of the combine and that the insurer was liable on the claim.  The economic loss doctrine applied to bar the tort liability of the manufacturer.  The appellate court affirmed and the Kansas Supreme Court declined to hear the case. 

A brand new case involves the same basic set of facts.  A farmer bought a used John Deere tractor from an implement dealer and when he turned the cab’s exterior lights on, the tractor caught fire and was destroyed.  The farmer had insured the tractor with the plaintiff and the plaintiff paid the farmer $136,500 after the farmer paid his $1,000 deductible.  The plaintiff then sued John Deere to recover the money it had paid out under the policy.  John Deere argued that the “economic loss” doctrine barred the plaintiff’s suit, but the plaintiff claimed the doctrine didn’t apply to unsophisticated consumer purchasers who lacked privity with the manufacturer.  But, the court agreed with John Deere, noting that the “economic loss” doctrine applies based on the type of loss rather than whether privity is present.  The court also said the doctrine applies to consumer transactions.  So, the court dismissed the plaintiff’s complaints based in negligence and product liability with prejudice (that means that the plaintiff cannot file another case on those claims).  The plaintiff’s claim based on breach of warranty continues – that’s a contract-based claim.  Farm Bureau Insurance v. Deere Company, No. 1:08-CV-922, 2009 U.S. Dist. LEXIS 2595 (W.D. Mich. Jan. 14, 2009).