Valley Forge Ins. v. Sam's Plumbing

• Decision Date: 19 March 2009
• Docket Number: No. 2 CA-CV 2008-0095.,2 CA-CV 2008-0095.
• Citation: Valley Forge Ins. v. Sam's Plumbing, 207 P.3d 765, 220 Ariz. 512 (Ariz. App. 2009)
• Parties: VALLEY FORGE INSURANCE COMPANY, Plaintiff/Appellant, v. SAM'S PLUMBING, LLC, an Arizona Limited Liability Company; and Samuel N. Thomas and Lois Thomas, husband and wife, Defendants/Appellees.
• Court: Arizona Court of Appeals

207 P.3d 765

220 Ariz. 512

VALLEY FORGE INSURANCE COMPANY, Plaintiff/Appellant, v. SAM'S PLUMBING, LLC, an Arizona Limited Liability Company; and Samuel N. Thomas and Lois Thomas, husband and wife, Defendants/Appellees.

No. 2 CA-CV 2008-0095.

Court of Appeals of Arizona, Division 2, Department B.

March 19, 2009.

Shughart Thomson & Kilroy, P.C. By Robert O. Dyer and Andrew S. Jacob, Phoenix, Attorneys for Plaintiff/Appellant.

Rai & Barone, P.C. By Rina Rai and Brian J. Schmidt, Phoenix, Attorneys for Defendants/Appellees.

OPINION

ECKERSTROM, Presiding Judge.

¶ 1 The plaintiff, Valley Forge Insurance Company, appeals from the trial court's entry of summary judgment in favor of defendants Sam's Plumbing, LLC, and Samuel and Lois Thomas (collectively, "Sam's Plumbing"). Valley Forge argues the trial court erred in finding its subrogated negligence claim barred by the economic loss rule. We agree and reverse and remand for the reasons set forth below.

Factual and Procedural Background

¶ 2 This case arose from a gas explosion in a shopping center building in Pinal County owned by Gustav Kuhn and insured by Valley Forge.¹ Viewing the facts in the light most favorable to Valley Forge, the party opposing summary judgment, see Grand v. Nacchio, 214 Ariz. 9, ¶ 3, 147 P.3d 763, 767 (App.2006), we accept for purposes of this appeal that the explosion was caused by negligent gas line work performed by Sam's Plumbing pursuant to its contract with a tenant leasing a space in the shopping center. The explosion "severely damaged" Kuhn's shopping center, but it neither caused him bodily injury nor damaged any of his personal property. Valley Forge paid more than $1.1 million to Kuhn "for property and business-interruption damages" caused by the explosion, which fully compensated Kuhn for the incident.² Valley Forge then asserted a subrogated negligence claim against Sam's Plumbing seeking to recover Kuhn's damages resulting from the explosion.

¶ 3 Sam's Plumbing filed a motion for summary judgment and argued the "economic loss rule" barred Valley Forge's claim and therefore any claim against it sounded in the law of contract rather than the law of tort. The trial court, relying on Carstens v. City of Phoenix, 206 Ariz. 123, 75 P.3d 1081 (App. 2003), and Hayden Business Center Condominiums Ass'n v. Pegasus Development Corp., 209 Ariz. 511, 105 P.3d 157 (App.2005), disapproved of in part by Lofts at Fillmore Condominium Ass'n v. Reliance Commercial Construction, Inc., 218 Ariz. 574, 190 P.3d 733 (2008), applied the "Economic Loss Doctrine" to the case and found the damage to the building itself was not "qualifying property damage for the purpose of bringing a negligence claim." The court thus concluded Valley Forge's negligence claim was barred as a matter of law and granted summary judgment in favor of Sam's Plumbing. Following the entry of a final judgment pursuant to Rule 54(b), Ariz. R. Civ. P., Valley Forge filed this timely appeal.

Discussion

¶ 4 Valley Forge argues the "economic loss rule" does not apply to this case because Sam's Plumbing's negligence did not simply cause physical harm to the piping system—the "subject of th[e] bargain" with the tenant—but instead caused extensive damage to the shopping center building owned by Kuhn. On appeal from summary judgment, we determine de novo whether genuine issues of material fact exist and whether the trial court erred in its application of the law. See Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, ¶¶ 13-14, 38 P.3d 12, 20 (2002). We conclude the trial court erred in finding Valley Forge's negligence claim barred as a matter of law.

¶ 5 Generally, one may recover in tort for negligently caused property damage. See Restatement (Second) of Torts § 281 (1965) (invasion of protected interest of another element of negligence action); see also Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 445, 690 P.2d 158, 164 (App.1984) ("`Property interests . . . have generally been found to merit protection from physical harm.'"), quoting Crowder v. Vandendeale, 564 S.W.2d 879, 882 (Mo.1978). However, when the property damaged is the subject of a contract or warranty, a typical feature of product liability and defective construction cases, the question arises whether the plaintiff's claims, if any, should sound in contract or tort. E.g., Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 375, 694 P.2d 198, 205 (1984), abrogated on other grounds by Phelps v. Firebird Raceway, Inc., 210 Ariz. 403, 111 P.3d 1003 (2005); Woodward v. Chirco Constr. Co., 141 Ariz. 514, 515, 687 P.2d 1269, 1270 (1984). This issue is resolved on a case-by-case basis with the court analyzing the purposes of the respective bodies of law and applying whichever law is most appropriate. Salt River, 143 Ariz. at 375-76, 694 P.2d at 205-06.

¶ 6 Contract law protects the expectation that the parties will receive the benefits of their bargain and encourages the efficient private ordering of liabilities by allowing parties to negotiate and distribute their respective responsibilities, while tort law promotes safety and protects personal and property rights by imposing a baseline duty of care. See id.; Carstens, 206 Ariz. 123, ¶ 10, 75 P.3d at 1084. Accordingly, in the context of property damage, contract law focuses on standards of quality as defined by the contracting parties; tort law on the objective reasonableness of certain conduct and the actual harm it causes. Carstens, 206 Ariz. 123, ¶ 10, 75 P.3d at 1084.

¶ 7 With these principles in mind, our supreme court has directed Arizona courts to consider three non-dispositive factors to determine whether tort or contract law should apply to a particular claim: (1) the nature of the defect causing loss, (2) how the loss occurred, and (3) "the type of loss for which the plaintiff seeks redress." Salt River, 143 Ariz. at 376, 694 P.2d at 206. The first factor turns on whether quality or safety concerns are primarily implicated. See id. at 376-77, 694 P.2d at 206-07. The second factor looks to whether the loss results from a slow deterioration or a sudden accident or calamity. See id. at 377-78, 694 P.2d at 207-08. The third factor examines the nature of the loss claimed as well as any other contemporaneous losses. See id. at 379, 694 P.2d at 209. If damage occurs suddenly and accidentally and the defect poses an unreasonable risk of danger to people or other property, the claim will sound in tort, even if, as in Salt River, the only property damaged is the defective product itself. See id.

¶ 8 Applying those principles here, we find no reason to bar Valley Forge's tort action. Sam's Plumbing contracted with the tenant to do limited work to the tenant's units, and the resulting explosion severely damaged not only those units, but other parts of the shopping center as well. The deficient work on the gas pipes did not simply fall below the quality standards specified in the tenant's contract, thereby disappointing the tenant's commercial expectations. Rather, that work presented an extreme risk of danger to everyone and everything around the piping. And, the explosion was the very type of "sudden calamity or . . . extraordinary event" that is the hallmark of tort liability. Id. at 378, 694 P.2d at 208. Finally, the record suggests the losses suffered went far beyond damage to the gas lines themselves and caused extensive damage to the shopping center. Thus, analysis of each of the criteria our supreme court established for determining whether a claim should sound in tort or contract clearly shows that the claim we consider here sounds in tort.

¶ 9 Although Salt River specifically addressed the application of tort and contract law in the products liability context, the economic loss rule contemplated in Salt River involves the same policy concerns as those present in defective construction cases. See Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L.Rev. 891, 897 (1989) (noting rationales for limiting tort claims and observing "[t]he economic loss doctrine often is described as a creature of product defect litigation"). And, we can find no basis for distinguishing Salt River from Woodward, a defective construction case decided by the supreme court approximately three months earlier. See Woodward, 141 Ariz. at 515-16, 687 P.2d at 1270-71 (recognizing both contract and tort claims may be available in construction defect cases). Woodward only briefly suggested what types of damages would be presumptively actionable under contract and tort law respectively and did so only in dicta. See id. at 516, 687 P.2d at 1271 ("For example, if a fireplace collapses, the purchaser can sue in contract for the cost of remedying the structural defects and sue in tort for damage to personal property or personal injury caused by the collapse."). That reasoning fell far short of concluding tort claims are categorically precluded when a claimant has exclusively suffered damage to property subject to warranty or contract. Indeed, in its far more comprehensive treatment of the topic in Salt River, the supreme court characterized the type of loss suffered as merely one of several factors to be considered when determining whether property damage is actionable in tort. 143 Ariz. at 376, 694 P.2d at 206. We therefore do not read Woodward, a construction defect case, as setting forth a different rule for resolving application-of-law questions than Salt River, a products liability case.

¶ 10 Nevertheless, Sam's Plumbing contends, and the trial court found, that controlling Arizona jurisprudence in the defective construction context has expressly barred recovery for property damages in tort when the plaintiff has suffered neither personal injury nor damage to personal property. Indeed, several court of appeals cases have...