State Farm Mut. Auto. Ins. Co. v. Ford Motor Co.

Citation225 Wis.2d 305,592 N.W.2d 201
Decision Date04 May 1999
Docket NumberNo. 97-2594,97-2594
Parties, Prod.Liab.Rep. (CCH) P 15,511 STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff-Appellant, v. FORD MOTOR COMPANY, Defendant-Respondent, Neenah Menasha Ford, ABC Company, a fictitious company, and ABC Insurance Company, a fictitious insurance company, Defendants.
CourtUnited States State Supreme Court of Wisconsin

For the plaintiff there were briefs by Patrick J. Coffey and Menn, Nelson, Sharratt, Teetaert & Beisenstein, Ltd., Appleton and oral argument by Patrick J. Coffey.

For the defendant respondent there was a brief by Peter J. Hickey, Jeffrey T. DeMeuse and Everson, Whitney, Everson & Brehm, Green Bay and Karen Kies DeGrand, Mark M. Burden and Donohue, Brown, Mathewson & Smyth, Chicago, IL and oral argument by Terry E. Johnson of Peterson, Johnson & Murray, S.C., Milwaukee.

¶1 WILLIAM A. BABLITCH, J

It is established law in Wisconsin that the economic loss doctrine bars tort recovery for economic loss suffered by commercial entities. This case requires us to determine whether the economic loss doctrine also applies to consumer transactions. The circuit court concluded that the economic loss doctrine bars tort damages for purely economic losses in consumer transactions. State Farm Mutual Automobile Insurance Company (State Farm) requests that this court reverse the order of the circuit court entering summary judgment in favor of Ford Motor Company (Ford) on State Farm's negligence and strict liability claims to recover payments it made to its insured for an economic loss. Because we conclude that the same policies that justify applying the economic loss doctrine to commercial transactions apply with equal force to consumer transactions, we hold that the economic loss doctrine applies to consumer transactions and bars State Farm's tort claims for purely economic loss. Therefore, we affirm the circuit court's order entering summary judgment in favor of Ford.

¶2 For purposes of this appeal, the facts are not in dispute. In 1992 James Renberg (Renberg) purchased a used 1990 Ford Bronco 4x4 "as is" from Neenah-Menasha Ford, a Ford dealership. Along with the vehicle, Renberg purchased an extended service warranty from Ford for the vehicle. Renberg also insured the vehicle with State Farm.

¶3 On July 31, 1996, Renberg drove his 1990 Ford Bronco to work. At the end of his shift, Renberg approached his vehicle to find that a fire had occurred within the vehicle although the vehicle was still locked and the windows were rolled up. Unfortunately for Renberg, his extended service warranty had expired. Renberg filed a claim with his insurance company, State Farm. State Farm conducted an investigation of Renberg's claim and concluded that the fire in Renberg's vehicle was caused by a defective ignition switch. On August 8, 1996, State Farm paid $11,602.40 pursuant to its contract of insurance with Renberg, an amount which represented the fair market value of the vehicle.

¶4 In September 1996, Renberg received a recall notice from Ford stating that 1988 through 1991 model Bronco and F-series trucks could develop a short circuit in the ignition switch, causing overheating, smoke and possibly fire in the steering column. The recall notice stated that the short circuit could develop when the vehicle was in use or unattended.

¶5 State Farm was notified of this recall notice and thereafter initiated this subrogation action against Ford to recover money it had paid to its insured, Renberg. State Farm based its action on theories of negligence, strict liability and breach of contractual duties including express and implied warranties. State Farm later voluntarily dismissed its contractual causes of action because the sales contract for the vehicle was "as is" and the extended service warranty had expired at the time of the fire.

¶6 In its answer Ford raised the economic loss doctrine as an affirmative defense, asserting that the doctrine bars State Farm's tort claims of negligence and strict liability. Ford also moved for summary judgment.

¶7 The Outagamie County Circuit Court, the Honorable Dee R. Dyer presiding, granted Ford's motion for summary judgment, agreeing that the economic loss doctrine barred State Farm's tort claims.

¶8 State Farm appealed. The court of appeals certified the appeal to this court pursuant to Wis. Stat. § (Rule) 809.61 (1993-94), 1 and this court accepted the certification.

¶9 State Farm's claim to recover the payment it made for damage only to the Ford Bronco was based on theories of negligence and strict liability. The issue presented by this case, and as certified by the court of appeals, is whether the economic loss doctrine applies to consumer transactions 2 to bar tort recovery for purely economic loss. In other words, we must determine whether State Farm may rely on tort theories to recover damages resulting from a defect that causes harm only to the product itself. We conclude that the economic loss doctrine applies to consumer transactions. Therefore, State Farm's tort claims for purely economic loss are barred.

¶10 The question of whether the economic loss doctrine applies to consumer transactions, given the undisputed facts presented by this case, is a question of law that this court reviews de novo. Sunnyslope Grading v. Miller, Bradford & Risberg, Inc., 148 Wis.2d 910, 915, 437 N.W.2d 213 (1989) (citing First Nat. Leasing Corp. v. Madison, 81 Wis.2d 205, 208, 260 N.W.2d 251 (1977)).

¶11 Economic loss is "the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold." Northridge Co. v. W.R. Grace & Co., 162 Wis.2d 918, 925-26, 471 N.W.2d 179 (1991) (citing Comment, Manufacturers' Liability to Remote Purchasers for "Economic Loss" DamagesTort or Contract?, 114 U. Pa. L.Rev. 539, 541 (1966)). See also, Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 401, 573 N.W.2d 842 (1998). Economic loss has also been defined as "damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits--without any claim of personal injury or damage to other property...." Note, Economic Loss in Products Liability Jurisprudence, 66 Colum. L.Rev. 917, 918 (1966). See also Daanen, 216 Wis.2d at 401, 573 N.W.2d 842.

¶12 Because economic losses are those associated with a defective product or a product that does not meet a purchaser's expectations, causing damages that are meant to be addressed through the law of contract and warranties, Wisconsin has joined a majority of jurisdictions which have held that in the commercial transaction setting, damages for economic losses are recoverable only in contract and not in tort. See Sunnyslope, 148 Wis.2d at 921, 437 N.W.2d 213. This rule has become known as the "economic loss doctrine." "The economic loss doctrine is a judicially created doctrine providing that a commercial purchaser of a product cannot recover from a manufacturer, under tort theories of negligence or strict products liability, damages that are solely 'economic' in nature." Daanen, 216 Wis.2d at 400, 573 N.W.2d 842.

¶13 Three policies support applying the economic loss doctrine to commercial transactions: 1) it maintains the historical distinction between tort and contract law; 2) it protects parties' freedom to allocate economic risk by contract; and 3) it encourages the party best situated to assess the risk of economic loss, usually the purchaser, to assume, allocate or insure against that risk. Daanen, 216 Wis.2d at 403, 573 N.W.2d 842. Our review of these policies convinces us that each policy applies with equal force to consumer transactions.

¶14 The first and most compelling policy supporting application of the economic loss doctrine to commercial transactions is that it maintains the distinction between tort and contract law. Daanen, 216 Wis.2d at 403, 573 N.W.2d 842. It is important to maintain this distinction because the two theories serve very different purposes.

¶15 "Tort law is rooted in the concept of protecting society as a whole from physical harm to person or property." Daanen, 216 Wis.2d at 405, 573 N.W.2d 842 (citing East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 866, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986), and Keeton, Prosser and Keeton on Torts § 1 (5 th ed.1984)). See also Northridge, 162 Wis.2d at 933, 471 N.W.2d 179. "It is society's interest in human life, health, and safety that demands protection against defective products, and imposes a duty upon manufacturers of those products." Daanen, 216 Wis.2d at 405, 573 N.W.2d 842 (citing Northridge, 162 Wis.2d at 933, 471 N.W.2d 179). Tort law was designed to protect people from unexpected losses that amount to an overwhelming misfortune that a person may be unprepared to meet. East River, 476 U.S. at 871, 106 S.Ct. 2295 (citing Escola v. Coca Cola Bottling Co., 24 Cal.2d 453, 150 P.2d 436, 441 (1944) (concurring op.)). See also Christopher Scott D'Angelo, The Economic Loss Doctrine: Saving Contract Warranty Law from Drowning in a See of Torts, 26 U. Tol L.Rev. 591, 594 (1995). "The manufacturer is deemed best able to bear the cost of such unexpected personal injury or property damage since, at least in theory, it can spread its loss throughout society in the form of higher prices." 26 U. Tol. L.Rev. at 594 (referring to East River, 476 U.S. at 872, 106 S.Ct. 2295). Tort extends to all reasonably foreseeable parties; it may encompass unforeseen damages as well as those reasonably contemplated because it is circumscribed only by proximate cause. Note, 66 Colum. L.Rev. at 947. Tort law provides redress for safety hazards, Northridge, 162 Wis.2d at 934, 471 N.W.2d 179, and embodies risk sharing, id. at 938, 471 N.W.2d 179.

¶16 Contract law, on the other hand, is based on obligations imposed by bargain, and it allows parties to protect themselves through...

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