The Economic Loss Rule

The economic loss rule, also referred to as the economic loss doctrine,  is generally a bar to a party’s recovery in tort when the party’s only damages are economic—meaning the party’s person or property was not injured.

The economic loss doctrine applies specifically to negligence and products liability actions. It is a defendant’s tool that can prevent parties from being liable when losses arise from the failure of a product and the damage or loss is limited solely to the product.

For example, a manufacturer sells a buyer synthetic decking material. The decking material is defective because it flakes and prematurely fails. Buyer sues, claiming the defective decking caused it to suffer damages, specifically, the cost of replacing the decking material. The result:  The buyer’s negligence and product liability claims against the manufacturer are barred by the economic loss rule because the only claimed damages are damages caused to the defective product. The buyer will then have to pursue other avenues of recovery such as breach of warranty or breach of contract.

Moreover, the economic loss doctrine also prevents parties from recovering business interruption losses. Going back to the previous example, any associated business interruption claims derived from the allegedly defective decking material would be barred by the economic loss rule. This is because economic loss doctrine requires parties to suffer damages other than damage to the defective product itself as a prerequisite to recovering business interruption losses.

This illustration of the economic loss rule generally reflects the doctrine as it is often applied in Texas courts. However, there is not one true economic loss rule, but instead  multiple interpretations with varying rationale, so the term should be used carefully.

In potential subrogation situations where the only damage suffered is to the defective product itself, the economic loss rule is a major hurdle which can prevent recovery in subrogation actions based solely on massive product losses and will require utilization of another means of recovery.