The Economic Loss Doctrine: An Overview

“Economic losses” refer to financial loss and damage suffered by a person such as can be seen only on a balance sheet rather than as a physical injury to a person or property. For example, if a new car breaks down but nobody is injured and the only loss is the diminished value of the non-functioning vehicle, those are considered to be purely economic losses.

Usually, pursuant to the economic loss rule (or doctrine) economic losses sounding in tort, particularly in negligence, are not recoverable as damages or otherwise. Recovery is limited to an economic theory of recovery (usually breach of contract or similar), so damages will typically be the value of the bargain. The concept is that parties to a contract should be able to anticipate any potential injuries that may result from a breach of that agreement, and tort damages on top of contract damages should not be allowed. Indeed, damages in tort for such claims could be virtually unlimited in some circumstances, and without an economic loss rule, companies could be exposed to crushing liability stemming from a relatively minor defect.

A few state supreme courts in the United States have departed from the majority rule and authorized recovery for pure economic loss through tort causes of action (usually negligence). The first was California in 1979, followed later by New Jersey and Alaska.

These laws are changing on a regular basis, so if you have a question as to whether the economic loss rule may apply to you, then you should contact a local attorney who can advise you appropriately. In some cases, while injuries may be limited under one theory by the economic loss doctrine, another theory may allow it. So, be sure to seek advice of counsel if you are in doubt or you may end up shortchanging yourself.