Gunkel v. Renovations, Inc.

• Decision Date: 01 February 2005
• Docket Number: No. 76S01-0403-CV-133.,76S01-0403-CV-133.
• Citation: 822 N.E.2d 150
• Court: Indiana Supreme Court
• Parties: Lawrence GUNKEL and Judy Lynn Gunkel, Appellants (Plaintiffs below), v. RENOVATIONS, INC. and J & N Stone, Inc., Appellees (Defendants below).

822 N.E.2d 150

Lawrence GUNKEL and Judy Lynn Gunkel, Appellants (Plaintiffs below), v. RENOVATIONS, INC. and J & N Stone, Inc., Appellees (Defendants below).

No. 76S01-0403-CV-133.

Supreme Court of Indiana.

February 1, 2005.

Rehearing Denied May 25, 2005.

David W. Stone IV, Anderson, IN, Christopher Wheeler, Angola, IN, Attorneys for Appellants.

Glenn L. Duncan, Jacob S. Frost, Elkhart, IN, Attorneys for Appellees.

BOEHM, Justice.

We hold that damages recoverable in tort for a defective product or service are governed by the "economic loss" doctrine whether or not the product or service is supplied in a transaction subject to either the Products Liability Act or the Uniform Commercial Code, or both. Under the doctrine, physical injuries and damages to other property are recoverable in tort, but damages to the defective product itself are not. Whether damaged property is "other property" turns on whether it was acquired by the plaintiff as a component of the defective product or was acquired separately.

Factual and Procedural Background

In March 1999, the Gunkels contracted with Renovations, Inc., for the construction of a $435,000 three-story residence in Fremont, Indiana. Six months later, J & N Stone, Inc. was hired by the Gunkels to install a stone and masonry exterior on the home. Shortly after the stone facade was installed, water began to enter through gaps in the facade and substantial moisture problems arose. The Gunkels claim that walls, ceilings, floors, drywall, carpet, and carpet padding were damaged. The Gunkels claim that the defective facade required removing and replacing the masonry, repainting of the interior of the home, clearing and recoating the roof, replacing exterior doors and windows, reframing some of the exterior door and window openings, removing mold, and replacing exterior electrical outlets.

In October 2000, the Gunkels filed suit against Renovations for breach of contract and fraud seeking compensation for the lost use of their home and repair costs. The Gunkels then amended their complaint adding J & N as a defendant and asserted negligence and breach of contract claims against J & N. J & N moved for partial summary judgment as to the contract claim, arguing that it was not a party to the contract between the Gunkels and Renovations and that there was no separate contract between the Gunkles and J & N. The trial court granted J & N's motion as to the contract claim. According to J & N, the Gunkels sought to position J & N as a subcontractor of Renovations in order to bolster their claim against Renovations. Whether for that reason or not, the Gunkels elected to forego any contract claim against J & N and relied solely on J & N's alleged negligence. J & N next moved for summary judgment as to the negligence claim on the ground that the Gunkels sought purely economic damages, which are not available under a negligence theory. The trial court granted summary judgment for J & N and certified the order for immediate appeal pursuant to Trial Rule 54(B). The Court of Appeals held that the Gunkels were seeking only economic losses and therefore had no tort claim. Gunkel v. Renovations, Inc., 797 N.E.2d 841, 845 (Ind.Ct.App.2003). We granted transfer. Gunkel v. Renovations, Inc., 812 N.E.2d 799 (Ind.2004).

Standard of Review

On appeal, the standard of review of a summary judgment ruling is the same as that used in the trial court: summary judgment is appropriate only where the evidence shows there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law. Ind. Trial Rule 56(C); Shell Oil Co. v. Lovold Co., 705 N.E.2d 981, 983-84 (Ind.1998). All facts and reasonable inferences drawn from those facts are construed in favor of the non-moving party. Colonial Penn Ins. v. Guzorek, 690 N.E.2d 664, 667 (Ind.1997). The review of a summary judgment motion is limited to those materials designated to the trial court. T.R. 56(H); Rosi v. Bus. Furniture Corp., 615 N.E.2d 431, 434 (Ind.1993). We must carefully review decisions on summary judgment motions to ensure that the parties are not improperly denied their day in court. Estate of Shebel v. Yaskawa Elec. Am., Inc., 713 N.E.2d 275, 277 (Ind.1999).

"Other Property" for Purposes of the "Economic Loss" Doctrine

Under the "economic loss" doctrine, contract is the sole remedy for the failure of a product or service to perform as expected. We agree with the Seventh Circuit that "economic loss" is not a helpful term in understanding the doctrine. See Miller v. United States Steel Corp., 902 F.2d 573, 574 (7th Cir.1990)

(Damage to a product is called "economic loss." A "better term" for injuries other than to the plaintiff's person or "other property" is "commercial loss, ... because tort law is a superfluous and inapt tool for resolving purely commercial disputes"). Despite its imprecision, the term "economic loss" has been adopted by courts in this and most other jurisdictions and we use it here with the caveat that it does not necessarily lead to a proper understanding of the scope and applicability of the doctrine.

This doctrine was first applied in Indiana before the Products Liability Act was amended to govern negligence claims as well as strict liability. Reed v. Central Soya Co., Inc., 621 N.E.2d 1069 (Ind.1993), modified on other grounds, 644 N.E.2d 84 (Ind.1994),

was a Products Liability Act case. The Products Liability Act at that time excluded recovery for "economic damage." See Ind.Code § 33-1-1.5-2 (1988). Reed explained that under this doctrine, contract is the only available remedy "where the loss is solely economic in nature, as where the only claim of loss relates to the product's failure to live up to expectations, and in the absence of damage to other property or person." Id. at 1074-75. This was reiterated in Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind.1993), which involved claims under the Products Liability Act and also claims for breach of contract and negligence. In addressing the negligence claim we held that: "Economic losses are not recoverable in a negligence action premised on the failure of a product to perform as expected unless such failure causes personal injury or physical harm to property other than the product itself." Id. at 1091. Accord W. Page Keeton et al., Prosser and Keeton on Torts § 101, at 708 (5th ed.1984). The same doctrine has since been applied to claims governed by the current version of the Indiana Products Liability Act. In Progressive Insurance Co. v. General Motors Corp., 749 N.E.2d 484, 491 (Ind.2001), we held that the Products Liability Act does not support an action based on a defect in a product where the only damage is to the product itself. In Fleetwood Enterprises, Inc. v. Progressive Northern Insurance Co., 749 N.E.2d 492 (Ind.2001), a defect in a motor home caused the motor home to be engulfed in flames. We held that although damage to the motor home itself was ninety-six percent of the claim, "personal injury and damage to other property from [the] defective [motor home] [were] actionable under the [Products Liability] Act, but their presence [did] not create a claim under the Act for damage to the product itself." Id. at 493.

In sum, Indiana law under the Products Liability Act and under general negligence law is that damage from a defective product or service may be recoverable under a tort theory if the defect causes personal injury or damage to other property, but contract law governs damage to the product or service itself and purely economic loss arising from the failure of the product or service to perform as expected. In this respect, Indiana law is consistent with admiralty law,¹ and the law of most other states.² "Economic losses" occur when there is no personal injury and no physical harm to other property. See W. Prosser, Handbook on the Law of Torts § 101, at 665 (4th ed.1971). Rather these losses are viewed as disappointed contractual or commercial expectations. Am. United Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921, 926 (7th Cir.2003). Thus, economic loss has been defined by Indiana courts as "the diminution in the value of a product and consequent loss of profits because the product is inferior in quality and does not work for the general purposes for which it was manufactured and sold. Economic loss includes such incidental and consequential losses as lost profits, rental expense and lost time." Reed, 621 N.E.2d at 1074 (citations omitted). Damage to the product itself, including costs of its repair or reconstruction, is an "economic loss" even though it may have a component of physical destruction. Progressive Ins.,749 N.E.2d at 488.

Because the "economic loss" doctrine permits tort recovery only for personal injury or damage to "other property," if property is damaged it is necessary to identify the product at issue which defines "other" property. The subject of "other property" has been approached in a number of different ways.³ Much of the law addressing the issue of what constitutes "other property" deals with whether the other property is a distinct item or merely a component of the overall defective product.⁴ Other courts have focused on whether "goods" are involved.⁵ Yet others have concluded that the economic loss doctrine precludes recovery for injury to "other property" if the injury was, or should have been, reasonably contemplated by the parties to the contract.⁶ Some have concluded that the "product" is the product purchased by the plaintiff, not the product sold by the defendant.⁷ The theory underlying the economic loss doctrine is that the failure of a product or service to live up to expectations is best relegated to contract law and to warranty either express or implied. The buyer and seller are able to allocate these risks and price the product or service accordingly. As explained in Reed,

The justifications for adhering to this rule are several. The law of

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