Economic Loss Rule
The Economic Loss Rule is a doctrine that prohibits recovery for an economic loss resulting from a wrongful act or an infringement of a right, when unaccompanied by physical property damage or personal injury. Instead, only parties to the contract or contractual beneficiaries may recover economic losses. An economic loss refers to a financial loss and damages suffered by a person or entity, which arise from a defect in the qualitative nature of the product, service, or improvement that was bargained for. Generally, an economic loss is observed on assets rather than physical injury to a person or entity.
An economic loss is observed on assets
The doctrine has three (3) variations:
- Variation one prohibits recovery for an economic loss in tort (a wrongful act or an infringement of a right) where there is no personal injury or property damage, without regard to contract;
- Variation two prohibits recovery for an economic loss in tort where the loss is also compensable by a breach of contract claim; and
- Variation three prohibits recovery for an economic loss on both contract and tort theories unless the tort is separate and independent from the claimed contract breach.
The Ohio Supreme Court has held that the rules of warranty are best suited to govern the issue of recovery for commercial losses. Under Ohio law, “a product’s self-inflicted damage is by definition property damage.” In determining whether damage to a product constitutes and economic loss, Ohio focuses not on the nature of the product and its components, but rather on the relationship between the parties. Where there is privity of contract and the parties have negotiated that contract from comparative bargaining positions, the parties are able to allocate the risk of all loss. This includes allocating the loss of the product. The Economic Loss Rule can be a roadblock to subrogation. Exploration of exceptions to the doctrine can provide subrogation professionals with tools to navigate their way to recovery.