Michigan Court Limits Application of the Economic Loss Doctrine
by Emma L. Gaddipati | 9.20.2010
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The recent Michigan appellate court decision of State Farm Fire & Casualty Company v. Ford Motor Company[i] suggests a new exception to the economic loss doctrine – namely, plaintiffs in product liability actions arising out of consumer transactions may now be able to recover unanticipated economic loss.
State Farm is one of many cases involving a Ford vehicle fire allegedly caused by a defective cruise control deactivation switch. In this particular case, State Farm insured a Ford F-150, a residence, and other personal property that was destroyed or damaged by a fire. State Farm’s investigators concluded that the fire originated in the engine compartment of the Ford F-150 and was caused by a defective cruise control deactivation switch. State Farm subsequently asserted claims of negligent design, manufacturing defect, and breach of express and implied warranties by Ford. In connection with the foregoing claims, State Farm sought to recover the amounts paid to its insured for fire damage to the insured’s vehicle, residence, and other personal property.
Ford moved for summary judgment, in part, on the ground that the economic loss doctrine foreclosed the tort relief sought by State Farm. State Farm countered that the economic loss doctrine only applies to commercial transactions. The trial court entered summary judgment against State Farm, ruling that under Sherman v. Sea Ray Boats, Inc.[ii], the economic loss doctrine applies to both commercial and consumer transactions.
Although the Michigan appellate court likewise found that the economic loss doctrine applies to both commercial and consumer transactions, the appellate court reversed the trial court’s entry of judgment against State Farm on the basis of a newfound exception to the economic loss doctrine. Specifically, the court held that the economic loss doctrine does not apply to tort claims for unanticipated economic loss:
The economic loss doctrine does not bar State Farm’s products liability (tort) claims because, at the time the [insureds] purchased the Ford F-150, or even when a previous owner first purchased the vehicle from Ford, losses incurred by fire were certainly not anticipated or contemplated.
. . .
Therefore, the potential for fire-related damages would not have been the subject of negotiations on a vehicle purchase agreement.
. . .
This is not a case in which the vehicle merely failed to live up to economic expectations held by the purchasers. … Allowing State Farm’s action to proceed outside of the UCC would serve the purpose of encouraging the design and production of safer cruise control deactivation switches.[iii]
In so doing, the majority in State Farm, as Judge Zahra notes in his concurrence, “carve[d] out yet another exception to the economic loss doctrine.”[iv]
The impact of this decision on subrogation professionals is that it provides an exception to Michigan’s long-standing and otherwise broad rule disallowing tort actions against the seller of a product in a commercial or consumer transaction, specifically where the damages were not of the type anticipated by the parties at the time of the transaction.
[i] No. 287512, 2010 WL 866149 (Mich. Ct. App. March, 11 2010).
[ii] 649 N.W.2d 783 (Mich. Ct. App. 2002).
[iii] State Farm Fire & Cas. Co., 2010 WL 866149 at **2-6.
[iv] Ibid. at *6 (J. Zahra, concur.)
