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Legal Facts: The Economic Loss Doctrine in Hawaii

— September 8, 2015

Many are familiar with lawsuits when a car accident damages someone’s car while also causing medical expenses. But what happens if a product only causes economic loss by damaging itself instead of damaging other property? For instance, the generator in a $300,000 luxury motor home produces arcing which ignites engine oil and the resulting fire soon destroys the entire vehicle. Or a property owner purchases a new home or building and the structure begins to leak because of alleged defects in the roofing, siding, and/or windows. As a result, mold begins to grow. The mold damages interior walls and ceilings and requires the owner to repair and replace these building components. Although no one is sick, a $300,000 home must be repaired, and you’re left holding the resulting insurance claim. All of the above could have being real claim scenarios. Maybe you would think that in any of this scenarios, just like a car accident, hold a potential for a claim. Unfortunately, that is not the case. In each of the above scenarios the damage occurred only to the product itself, there was no injuries or damages to any other property. Therefore, the defendant manufacturer would be able to avoid liability due to the economic loss doctrine.

While the examples above are more extreme, economic loss is generally defined as damages resulting from inadequate value because the product is inferior and does not work for the general purposes for which it was manufactured and sold. The Hawai’i Supreme Court first adopted the economic loss doctrine “insofar as it applies to claims for relief based on a product liability or negligent design and/or manufacture theory” in State ex rel. Bronster v. U.S. Steel Corp., 82 Hawai’i 32, 40, 919 P.2d 294, 302 (1996). In Bronster, the Hawaii Supreme Court ruled that “ economic loss doctrine, prohibits a tort recovery (negligence, strict liability, etc.) when a product defectiveness or failure causes damage to itself, resulting in only economic loss, but does not cause personal injury or damage to any other property other than itself. The economic loss rule also bars claims for relief based on possible future injury.” Ass’n of Apt. Owners v. Venture 15, Inc., 115 Haw. 232 (Haw. 2007). Keep in mind that the definition of “economic loss” usually includes the cost of repair or replacement of the defective product. To determine what constitutes “the product” and what constitutes “other property,” the court must analyze the object of the bargain “between the parties”.

Hawaii Supreme Court has explained the distinction that the law draws between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the “luck” of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his or her products. Damage to a product itself is most naturally understood as a warranty claim. Such damage means simply that the product has not met the customer’s expectations, or, in other words, that the customer has received “insufficient product value.” A manufacturer in a commercial relationship has no duty under either a negligence or strict products liability theory to prevent a product from injuring itself. Ass’n of Apt. Owners v. Venture 15, Inc., 115 Haw. 232 (Haw. 2007)

The Hawaii Supreme Court created few exceptions to the economic loss doctrine in order to better protect consumers’. These exceptions permits a plaintiff to bring forth a tort case even if the product damaged only itself. The Court noted the economic loss doctrine may not apply when the plaintiff alleges that the defendant breached a duty independent and separate from its contractual obligations. In Newtown Meadows, 115 Hawai’i at 295, 167 P.3d at 288 the Supreme Court accepted the first exception to the rule. “A builder may be liable to a home buyer in tort despite the fact that the buyer suffered only “economic losses” where: (1) the builder has violated an applicable building code; (2) the builder has deviated from industry standards; or (3) the builder has constructed housing that he knows or should know will pose serious risks of physical harm.

In Bronster, the Supreme Court applied this exception when it found that misrepresentation was based upon an independent duty and was therefore not barred by the economic loss rule. The defendant in Bronster was a construction company that created a steel stadium that was represented to be steel resistant to the plaintiffs. The stadium proceeded to rust the court held that the construction company was liable for damages even though only the stadium was damaged. Leis Family L.P. v. Silversword Eng’g, 126 Haw. 532 (Haw. Ct. App. 2012)

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