Economic Loss Rule: The “Integral Part” Approach to the “Other Property” Exception
Few subjects generate more controversy and confusion than Florida’s ever-evolving version of the economic loss rule. The rule has been defined simply enough: “The ‘economic loss’ rule is a court-created doctrine which prohibits the extension of tort recovery for cases in which a product has damaged only itself and there is no personal injury or damage to ‘other property,’ and the losses or damage are economic damages.”1
The problem, however, is in the application. Despite concentrated efforts by the Florida Supreme Court to clarify other aspects of the economic loss rule in recent years,2 c onfusion still remains on how to distinguish “the product” from “other property” in order to determine whether the damage extends beyond the “product itself.”
One commentator has suggested resolution of the “other property” problem in the construction context by looking at the scope of the contractor’s work, such that anything constructed within the contract is “the product” and items not constructed under the contract are “other property.”3 E ven in the construction context, however, this proposal only applies to a limited number of fact patterns. It does not apply to used or leased property or to nonconstruction cases. As a hypothetical example, suppose an electrical appliance malfunctions and burns down a motor home. At first blush, the appliance would appear to be “the product” and the remainder of the home “other property.” However, now suppose the motor home was purchased used with the appliance bolted in place. The appliance manufacturer will argue that “the product” encompasses everything the owner purchased as a package, i.e., the entire motor home, such that there is no “other property” aside from loose contents in the motor home. Is this a winning argument?
This article proposes that, consistent with recent Florida case law, the question is answered by determining whether the object that caused the loss was an “integral part” of the surrounding property.
Current Status of the Economic Loss Rule
In Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999), and Comptech International, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999), the Florida Supreme Court limited the application of the economic loss rule to product liability “or similar” actions, receding from a body of case law that had expanded the doctrine to service contracts not involving physical loss of a product or structure.4
The need for limiting the application of the economic loss rule to product-type cases arose because of “confusion that has abounded in this area of the law”5 c aused by “pronouncements on the rule [that] have not always been clear and, accordingly, have been the subject of legitimate criticism and commentary.”6 B oth the Moransais and Comptech decisions emphasized that the original purpose of the rule was not to wipe out legitimate statutory or common law tort actions. Rather, the doctrine was originally intended to apply only in cases involving products for which economic remedies are generally governed by warranty law.7
In tracing the roots of the rule to product liability actions, the court in Comptech placed heavy emphasis on the seminal U.S. Supreme Court case of East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858 (1986):
In East River, the Court was concerned with the question of whether the purchaser of steam turbines could sue the manufacturer in negligence or strict liability, where a defective component of the turbine caused damage to the turbine but did not cause damage to the rest of the ship. See 476 U.S. at 858. In holding that the purchaser’s cause of action was one for breach of warranty, the Court discussed the policies underlying the application of the economic loss rule to situations where a product damages itself but no “other property.”
It seems abundantly clear that the Supreme Court was dealing with and concerned about a product that had malfunctioned, injuring itself but causing no injury to other property.8 T he court went on to note that Florida’s version of the economic loss rule similarly began in the product liability context, citing to Florida Power & Light Company v. Westinghouse Electric Corp. , 510 So. 2d 899 (Fla. 1987), a case involving damages to six generators but no damages to other surrounding equipment. “Here again, [in Florida Power, ] the economic loss rule was a bar to a tort cause of action where a product was involved, the product damaged only itself, and the losses were purely economic.”9
In limiting the economic loss rule to product liability situations, the court in Moransais held that an engineer’s inspection of a home prior to a real estate closing is a service not governed by the economic loss rule, such that plaintiff was allowed to proceed with a claim for professional negligence. Similarly, in Comptech, the court held that a lease agreement between landlord and tenant was a contract action involving “not a product but a service”10 a nd “is not a products liability or similar case.”11 T his was true even though the case involved construction renovations that caused damages to goods. Accordingly, the plaintiff in Comptech, a commercial tenant, was allowed to proceed with a claim in negligence for damages to computers caused by landlord’s negligent construction.
Comptech ’s Treatment of “Other Property” Exception
Even though the court in Comptech deemed the economic loss rule to be inapplicable to the nature of the transaction between the landlord and tenant, the court took pains to clarify that even if the economic loss rule had been implicated, the damages to the tenant’s computers would be nonetheless recoverable as “other property”:
[T]his case does not involve “other property,” as that term was used in East River and Florida Power. The term is not truly applicable to a situation such as the one before us where the subject of the contract is a service. However, to the extent the warehouse is the object of the contract, the computers in the warehouse are indeed “other property.” Therefore, recovery for damages to the computers is not precluded under the economic loss rule.12
Receding from “Finished Product” Approach
Prior to Comptech, the court in Casa Clara Condominium Assn. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993), had developed what appeared to be a “finished product” test for distinguishing “the product” from “other property.” Casa Clara was an action brought by condominium unit owners who claimed economic damages to the value of their units caused by defective concrete walls within the building. In holding that the condominium units were not “other property” relative to the defective walls, the court noted that the “the finished products” purchased by the plaintiffs were the entire units, not the components of those units: “These homeowners bought finished products—dwellings—not the individual components of those dwellings. They bargained for the finished products, not their various components. The concrete became an integral part of the finished product and, thus, did not injure ‘other property.’”13
The “finished product” language became the basis for the holding in Fishman v. Boldt, 666 So. 2d 273 (Fla. 4th DCA 1996), denying a homeowner’s claim for damages to a pool, patio, and home caused by the collapse of a defective seawall. Despite the fact that a seawall is physically distinctive and geographically separate from a pool, patio, and home, the court narrowly construed the “finished product” language in Casa Clara, stating: “[T]he ‘product’ purchased by the appellants was the home with all of its component parts, including the seawall, pool, and patio.” Accordingly, the pool, patio, and home were deemed not to be “other property” in relation to the seawall for the sole reason that all of these things were purchased as a package.
The Comptech decision, however, receded from this narrow reading of the “finished product” language in Casa Clara. The court began by citing with approval the recent case of Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875 (1997), in which the U.S. Supreme Court deemed after-market equipment added to a ship to be “other property” even though the plaintiff had purchased the ship used with those additions already in place. Decided under maritime law, Saratoga Fishing involved fire damages to a fishing vessel allegedly caused by the negligent design of the ship’s hydraulic system. The plaintiff in Saratoga Fishing claimed damages to the boat itself and also to the skiff, fishing nets, and other parts added after the purchase of the original boat as outfitted by the manufacturer. The Court was faced with the question of whether these added parts were “other property” within the meaning of the economic loss rule as announced in East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858 (1986), barring recovery for physical damage to the defective product itself but allowing recovery for “other property.” The defendant argued that because the plaintiff purchased the boat with the additions already in place, the additions had become part of “the product” itself and were not “other property.” In rejecting that argument, the Supreme Court held that equipment and parts added after the original product enters the stream of commerce are “other property” regardless of whether the plaintiff added them or a prior owner added them. Accordingly, plaintiff in Saratoga Fishing was not barred from recovering for the damages to the after-market additions.
Saratoga Fishing clearly rejected the severe “finished product” approach taken in Fishman v. Boldt. Instead, the Court took what can be described as a “stream of commerce” approach, under which the question of whether an item is “other property” in relation to “the product” is answered by comparing the product upon its initial entry into the stream of commerce with its condition at the time of the loss, such that those items added after initial sale are “other property.” As stated by the High Court: “[T]he case law does suggest a distinction between the components added to a product by a manufacturer before the product’s sale to a user. . . and those items added by a user to the manufactured product. . . , and we would maintain that distinction.”14
Under this test, the answer to the hypothetical question posed at the outset—whether a used motor home is “other property” vis a vis a malfunctioning appliance—depends on whether the appliance was added by a user after the motor home was first placed on the market.
The “Integral Part” Test
The court in Comptech, while citing Saratoga Fishing with approval, did not expressly adopt its stream of commerce test. Nor did it expressly disapprove of Casa Clara ’s “finished product” language. Rather, the court struck a middle ground, stating, “ Even under a Casa Clara analysis, the computers are ‘other property’ and not subject to the economic loss rule.”15 B efore quoting Casa Clara ’s “finished product” paragraph, cited above, the court in Comptech noted that its holding in Casa Clara was based only “ in part on the concept of what was purchased by the homeowners.”16 W hen quoting Casa Clara ’s “finished product” language, the Comptech court included the sentence reading, “The concrete became an integral part of the finished product and, thus, did not injure ‘other property.’”17 A pplying that sentence to the case before it, the court then stated that “[t]he computers were not an integral part of the product and were therefore ‘other property” under the Casa Clara rationale.”18
The Comptech decision thus deemphasized the “finished product” analysis that had been rejected in Saratoga Fishing, focusing more on an “integral part” approach.
Precedent for the “Integral Part” Test
The “integral part” approach preceded both Comptech and Casa Clara. In Aetna Life & Casualty Co. v. Therm-O-Disc, Inc., 511 So. 2d 992 (Fla. 1987), plaintiff sued defendant Therm-O-Disc, Inc. for damages caused by defective switches which—subsequent to Therm-O-Disc’s sale—had been incorporated by another company into heat transfer units. The damages were to not only the switches themselves but also to other parts of the heating units. Given the integration of the switches into the units, the Florida Supreme Court concluded that the units were not “other property” in relation to the switches. Similarly, in American Universal Group v. General Motors Corp. , 578 So. 2d 451 (Fla. 1st DCA 1991), the court held that an oil pump which burned up an engine on a fishing boat was an “integral or component part of the engine manufactured by General Motors and thus the damage to the engine caused by this component part was not damage to separate property.”19
The “integral part” test had also been applied just one month prior to Comptech in an unpublished order from the Middle District of Florida. In McAteer v. Black & Decker, Inc. , Docket No. 98-303-Civ-Oc-10A (M.D. Fla., Ocala Division, September 13, 1999), the court considered a motion for summary judgment filed by the manufacturer of an automatic-drip, under-counter coffee maker that had caught fire, burning down a motor home. In arguing for summary judgment, the defendant posited that because the finished product purchased by plaintiff had included the coffee maker (which had been bolted into place), the motor home was “the product” of which the coffee maker was a mere component, such that the motor home was not “other property” in relation to the coffee maker. In rejecting this argument, the trial court emphasized the physical nature of the coffee maker in relation to the property surrounding it, rather than the mere fact that the coffee maker came with the home:
[T]he coffee pot is not a “component” of the home. The mere fact that an allegedly defective product is placed in the home, even before a home is purchased, does not necessarily render the product a component of the home. The result of such reasoning would be to bar recovery of damages that occur to other property as a result of the defective product.
Applying the “Integral Part” Test
Comptech provides little guidance on the types of items that will be considered “integral parts” of their surrounding property. As of the date of this writing, there exists little case law further developing the issue. Without a body of case law to rely upon, a court’s answer to the above hypothetical—whether an appliance is an “integral part” of a motor home—is difficult to predict. It appears clear, however, that the answer will depend upon the particular nature of the product in relation to the surrounding property. Some cases will be easy to decide, as in Casa Clara ’s concrete wall. Others will be “close calls,” as in certain plumbing or large appliance losses.
In those “close call” cases, this author suggests the use of certain factors to assist the factfinder in deciding whether “the product” is truly an “integral part” of the surrounding property. Suggested factors include: 1) the degree to which the allegedly defective item is affixed to its surrounding property; 2) the degree of difficulty in installing and/or replacing the defective item; 3) the functional significance of the defective item to the overall surrounding property; and 4) physical and geographical distinctions between the defective item and the overall surrounding property.
The efficacy of these factors to the hypothetical case is demonstrated by adding further facts. For example, under one set of facts, the product may be a portable, after-market air-conditioning unit that was rarely used because the owner liked the heat. An argument can be made that such item is not an integral part of the motor home because it is 1) minimally affixed, 2) easily installed and replaced, 3) functionally ancillary/insignificant to the overall function of the entire motor home, and 4) confined to a very small location within the motor home. Alternatively, the item may be an air-conditioning system (unit, ductwork, vents, control panel) that had been incorporated into the motor home by the original manufacturer and was deemed essential to the owner for living in the home. Such product is arguably 1) significantly incorporated, 2) not easily installed or replaced by a user, 3) functionally significant to the overall function of the motor home, and 4) distributed to a wide area within the motor home.
Distinguishing the “the product” from “other property” should not resolved by simply looking at the two items and asking whether the owner purchased them at the same time. Though such an approach would have bright-line application, it would necessarily lead to absurd results. For example, suppose our above hypothetical fact pattern involved a small battery-operated fan that the owner of the used motor home discovered hidden in a closet, left by the prior owner. Narrow application of Casa Clara ’s “finished product” language would deem “the product” to be not the fan but the entire home including the fan despite no physical integration between the two.
The Comptech decision implicitly rejects such a narrow analysis by citing Saratoga Fishing with approval and relying upon the “integral part” language of Casa Clara that looks at actual physical connection between the two items. Although the “integral part” test will not always provide a ready answer to the “other property” problem, the factors suggested above provide a useful guideline. As demonstrated by the hypothetical fact pattern, under the “integral part” approach one appliance may be a defective “product” distinct from its surrounding property while another is integrally connected to the surrounding property. In either case, the matter of “other property” is properly answered only after careful consideration of the physical, functional, and geographic distinctions between the item that failed and the property surrounding it.
1 Moransais v. Heathman , 744 So. 2 d 973, 979 (Fla. 1999), quoting Southland Construction, Inc. v. Richeson Corp ., 642 So. 2d 5, 7 (Fla. 5th D.C.A. 1994).
2 Moransais , 744 So. 2d 973; and Comptech International, Inc. v. Milam Commerce Park, Ltd. , 753 So. 2d 1219 (Fla. 1999).
3 H. Hugh McConnell, The “Other Property” Problem: Applying the Economic Loss Rule to Construction Contracting Claims , 74 Fla. B.J . 87–89 (June 2000).
4 E.g., AFM Corp. v. Southern Bell Tel. & Tel. Co. , 515 So. 2d 180 (Fla. 1987) (purchase of services); Palau International Traders, Inc. v. Narcam Aircraft, Inc ., 653 So. 2d 412 (Fla. 3d D.C.A. 1995) (negligent performance of services); Sandarac Association v. W.R. Frizzell Architects, Inc. , 609 So. 2d 1349 (Fla. 2d D.C.A. 1992) (architectural services).
5 Comptech, 753 So. 2d at 1224.
6 Moransais , 744 So. 2d at 980.
7 Comptech , 753 So. 2d at 1224; Moransais , 744 So. 2d at 982.
8 Comptech , 753 So. 2d at 1224.
10 Id. at 1226.
13 Casa Clara, 620 So. 2d at 1247.
14 Saratoga Fishing , 117 S. Ct. at 1788 (citations omitted).
15 Comptech , 753 So. 2d at 1226 (emphasis added).
16 Id . (emphasis added).
17 Id. at 1226, quoting Casa Clara , 620 So. 2d at 1247.
18 Comptech, 753 So. 2d at 1226–27 (emphasis added).
19 See also Pulte Home Corp. v. Osmose Wood Preserving, Inc. , 1992 U.S. Dist. LEXIS 19441 (M.D. Fla. 1992) (“[O]nce the roofs were installed, they became an integral part of the housing units. Accordingly, any costs incurred as a result of damage to those roofs, or as a result of damages to the structure of the units, would not fall within the ambit of damages recoverable in tort.”).
John W. Reis is a partner with the national law firm of Cozen O’Connor. He received his A.B. from Duke University in 1988 and his J.D., cum laude , from the University of Miami School of Law in 1992. Based in Charlotte, N.C., Mr. Reis litigates large property loss cases throughout Florida and the southeastern United States.
This column is submitted on behalf of Trial Lawyers Section, Dominic M. Caparello, chair, and Thomas P. Barber, editor.