Tn Farmers Mutual v. Ford Motor ( 2001 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
SEPTEMBER 17, 2001 Session
TENNESSEE FARMERS MUTUAL INSURANCE COMPANY, AS
SUBROGEE OF DWIGHT E. PASCHAL v. FORD MOTOR COMPANY
An Appeal from the Circuit Court for Carroll County
No. 3759, Julian P. Guinn, Judge
No. W2001-00046-COA-R3-CV - Filed June 17, 2002
This is a consolidated appeal of three products liability cases. Three vehicles manufactured by the
defendant automobile company were destroyed by spontaneous combustion, allegedly caused by a
defective steering column. No personal injuries resulted from the fires, and no other property was
damaged. The plaintiff insurance company, which insured the cars, paid the owners the value of the
vehicles. The insurance company, as subrogee for the insureds, then filed the actions below, seeking
to recoup the payments from the defendant automobile manufacturer to the insureds on a theory of
products liability. The trial court dismissed the actions, holding that the economic loss doctrine
precluded recovery in tort, because the product damaged only itself in each case. The plaintiff
insurance company now appeals. The appeals were consolidated for purposes of our review. We
affirm the trial court in all respects, finding that the economic loss doctrine precludes recovery in
these cases.
Tenn. R. Civ. P. 3; Judgment of the Circuit Court is Affirmed
HOLLY K. LILLARD, J., delivered the opinion of the court, in which ALAN E. HIGHERS, J., and DAVID
R. FARMER , J., joined.
Stephen D. Jackson, Jackson, Tennessee, for the appellant Tennessee Farmers Mutual Insurance
Company.
Jonathan Cole and Sandi L. Pack, Nashville, Tennessee, for the appellee, Ford Motor Company.
OPINION
This is a consolidated appeal of three products liability cases. Plaintiff/Appellant Tennessee
Farmers Mutual Insurance Company (“Tennessee Farmers”) provided automobile insurance to the
three insureds involved in these cases: Dwight E. Paschal, Bill Craig, and Billy M. Crum.1 All of
these insureds owned vehicles manufactured by the Defendant/Appellee, Ford Motor Company
(“Ford”).
At different times in 1996 and 1998, the Ford vehicles owned by the insureds spontaneously
ignited, allegedly due to a malfunction or defect in the vehicles’ steering columns. Each vehicle was
totally destroyed by the fire. It is undisputed that none of the fires caused any personal injury or
damage to property other than damage to the vehicle itself. Tennessee Farmers paid each insured
the value of his vehicle and is subrogated to the rights of each insured as authorized in each
individual policy and by Tennessee Code Annotated § 56-7-1204.
Tennessee Farmers filed a lawsuit against Ford as subrogee of each of the insureds under
legal theories of negligence and strict liability in tort.2 In the cases involving Paschal and Craig,
Ford responded by filing a motion to dismiss; in the case relating to Crum, Ford filed a motion for
summary judgment. In each case, Ford asserted that the economic loss doctrine, as adopted by the
Tennessee Supreme Court in Ritter v. Custom Chemicides, 912 S.W.2d 128 (Tenn. 1995), restricted
the plaintiff’s recovery to contract damages, since the product at issue damaged only itself. On
December 8, 1998, the trial court entered orders granting the two motions to dismiss in the Paschal
and Craig cases, and on November 29, 2000, the same court entered an order granting the motion
for summary judgment in the Crum case. Tennessee Farmers appealed the trial court’s decision in
each case. Those appeals have been consolidated for purposes of our review.
On appeal, Tennessee Farmers argues that the economic loss doctrine does not prevent its
recovery in these cases because (1) the economic loss doctrine does not apply to a products liability
case; (2) the doctrine does not apply to a consumer transaction; and (3) the destruction of each
vehicle constituted “property damage,” rather than economic loss. Each issue will be addressed in
turn.
The trial court’s grant of a motion to dismiss is reviewed by taking all the allegations of fact
in the plaintiff’s complaint as true, and construing the facts liberally in favor of the plaintiff. Stein
v. Davidson Hotel Co., 945 S.W.2d 714, 716 (Tenn. 1997). In this case, the only issues on appeal
1
This appeal originally included two other lawsuits brought by Tennessee Farmers as subrogee for Ron D.
Jackson and Jerry L. Edwards. On July 19, 2001, however, the parties entered a joint stipulation for the dismissal of
those two actions.
2
In the case relating to Crum, Tennessee Farmers included a claim based on breach of implied warranty of
merchantability. That claim w as dismissed as being untimely, and Tennessee Farmers does not challenge that aspect
of the trial cou rt’s dec ision in this case .
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are questions of law; consequently, we review the trial court’s legal conclusions de novo, with no
presumption of correctness. Id. We also review the trial court’s grant of summary judgment de
novo, with no presumption of correctness. Warren v. Estate of Kirk, 954 S.W.2d 722, 723 (Tenn.
1997).
The seminal case applying the economic loss doctrine is East River Steam Ship Corp. v.
Transamerica Delaval, Inc., 476 U.S. 858 (1986), decided under admiralty law. In East River, a
shipbuilder had plans to build four oil-transporting supertanker ships. It contracted with the
defendant turbine manufacturer to design, manufacture, and supervise the installation of the turbines,
which are the ships’ main propulsion units.3 East River, 476 U.S. at 859. When each ship was
completed, it was chartered to a chartering company, which assumed the cost of any repairs to the
ships. Within months after the ships had set sail, each turbine malfunctioned and caused damage to
itself. Each of the ships were repaired and resumed travel. Id. at 860-61. The plaintiff chartering
company sued the defendant turbine manufacturer, alleging five counts of tortious conduct and
claiming damages for the cost to repair the ships and for income lost while the ships were out of
service. Though the initial complaint listed claims based on breach of contract and warranty, these
claims were eliminated as untimely. Id. at 861. Thus, the remaining complaint by the plaintiff
chartering company was based entirely upon tort theories of recovery.
The district court granted summary judgment in favor of the defendant turbine manufacturer,
and the Third Circuit Court of Appeals affirmed. The Supreme Court affirmed the decision of the
Third Circuit, holding that “a manufacturer in a commercial relationship has no duty under either
a negligence or strict products-liability theory to prevent a product from injuring itself.”4 Id. at 871.
The Court reasoned that, when a product injures itself, the plaintiff suffers only economic loss.
“[T]he commercial user stands to lose the value of the product, risks the displeasure of its customers
who find that the product does not meet their needs, or . . . experiences increased costs in performing
a service. Losses like these can be insured.” Id. (emphasis added). The Court then opined that
“[d]amage to a product itself is most naturally understood as a warranty claim,” because “[t]he
maintenance of product value and quality is precisely the purpose of express and implied
warranties.” Id. at 872. The Court stated that contract law is “well suited” to a commercial
controversy in which the product injures only itself because warranties can be negotiated, and the
price of the product may be reduced based on the fact that it does not have a warranty. Id. at 872-73.
Also, a warranty has a built-in limitation on liability, whereas a tort action could involve unlimited
liability. Id. at 874. Thus, in East River, because the turbines injured only themselves, a strict
products liability cause of action was unavailable to the plaintiffs. Id. at 875.
3
Eac h sup ertanker w eighed 225,0 00 to ns an d cost $12 5 m illion. East River, 476 U.S. at 859.
4
Prior to East River, the circuits were sp lit on whether injury to a product itself could serve as the basis for an
action in tort, or whether a plaintiff’s cause of action was limited to an action for breach of contract, i.e., breach of
warranty. East River, 476 U.S. at 868 -70.
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Tennessee adopted the economic loss doctrine in Ritter v. Custom Chemicides, Inc., 912
S.W.2d 128 (Tenn. 1995). In Ritter, the plaintiffs were commercial tomato growers who used
Frostguard, a product intended to help protect crops from the harmful effects of frost. Frostguard
was manufactured by the defendant chemical company. However, Frostguard did not protect the
plaintiffs’ tomato crops, and they suffered extensive frost damage. This resulted in economic loss
to the plaintiffs. Ritter, 912 S.W.2d at 129. The plaintiff tomato growers sued the defendant
chemical company under a theory of negligent misrepresentation based on the defendant’s published
advertisements and oral assurances that Frostguard would be “effective.” The tomato growers sued
only for economic damages resulting from lost profits. The Tennessee Supreme Court held that the
plaintiffs could not maintain an action based on negligent misrepresentation, concluding that the
alleged injury was caused by a defective product, not a misrepresentation. Id. It stated that
“Tennessee has joined those jurisdictions which hold that product liability claims resulting in pure
economic loss can be better resolved on theories other than negligence. . . . In Tennessee, the
consumer does not have an action in tort for economic damages under strict liability.” Id. at 133.
Tennessee Farmers first argues that the reasoning in Ritter does not apply in a products
liability case. However, the Ritter Court stated that “product liability claims resulting in pure
economic loss can be better resolved on theories other than negligence.” Id. Thus, Ritter makes it
clear that the economic loss doctrine applies to a products liability case. Moreover, East River was
a products liability case, albeit under maritime law. In East River, the United States Supreme Court
specifically limited the plaintiffs’ claims to breach of contract when they alleged only economic loss.
Therefore, based on the reasoning in both Ritter and East River, we must conclude that the economic
loss doctrine applies in a products liability case.
Tennessee Farmers next argues that the economic loss doctrine should not apply to a case
involving a consumer transaction. Tennessee Farmers asserts that the reasoning in both Ritter and
East River applies only where the purchaser of the product intends to use it for a commercial
purpose, and that the reasoning in those cases would not apply when the purchaser of the defective
product is a consumer. Tennessee Farmers notes that the United States Supreme Court stated in East
River that, “[s]ince a commercial situation generally does not involve large disparities in bargaining
power, we see no reason to intrude into the parties’ allocation of the risk.” East River, 476 U.S. at
872 (emphasis added). The East River Court also stated that “a manufacturer in a commercial
relationship has no duty under either negligence or strict products liability theory to prevent a
product from injuring itself.” Id. at 871 (emphasis added). Tennessee Farmers claims that when the
purchaser of a defective product is a consumer, there is no risk that the purchaser’s customer will
be displeased, no risk of increased costs in performing a service, and no risk of lost profits due to
a defective product. Rather, the only loss would occur to the product itself, which Tennessee
Farmers claims should be considered property damage. In support, Tennessee Farmers cites a
decision from Maryland, in which the Maryland court held that the rule in East River did not apply
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to consumer transactions. See Sherman v. Johnson & Towers Baltimore, Inc., 760 F. Supp. 499(D. Md. 1990).5
From our review of the pertinent case law, it is clear that a majority of cases addressing the
issue have concluded that no legal distinction should be made between an action brought by a
consumer and an action involving a commercial transaction. See Somerset Marine, Inc. v. Forespar
Prods. Corp., 876 F. Supp. 1114, 1115 (D. Cal. 1994); Karshan v. Mattituck Inlet Marina &
Shipyard, Inc., 785 F. Supp. 363, 365-66 (E.D.N.Y. 1992); Sisson v. Hatteras Yachts, Inc., No. 87
C 0652, 1991 U.S. Dist. LEXIS 4020, at *4-*5 (N.D. Ill. April 2, 1991); Lewinter v. Genmar
Indus., 32 Cal. Rptr. 2d 305, 308 (1994); State Farm Mutual Auto. Ins. Co. v. Ford Motor Co., 572
N.W.2d 321, 324 (Minn. Ct. App. 1997). The court in Somerset Marine explained that, while East
River could be read as limiting its holding to cases involving commercial transactions, several courts
have rejected that distinction because of the East River Court’s concern with keeping contract and
products liability claims separate. Somerset Marine, 876 F. Supp. at 1115. The Somerset Marine
court also noted that an action based on damage to the product itself remains “the essence of a
warranty action,” whether or not the product was used “commercially.” See Karshan, 785 F. Supp.
at 366, cited in Somerset Marine, 876 F. Supp. at 1115. Some cases focus on the availability of
insurance and the fact that, with respect to boats, non-commercial vessels are ordinarily insured, as
are commercial vessels. See Somerset Marine, 876 F. Supp. at 1115. Thus, the Somerset Marine
court followed the majority of jurisdictions and held that East River applies in a non-commercial
context. Id. at 1116.
While the Supreme Court in East River applied the economic loss doctrine to a commercial
transaction, the reasoning employed in East River applies with equal force to cases involving
consumer transactions. The East River Court expressed concern that, if a products liability claim
were permitted, “contract law would drown in a sea of tort.” East River, 476 U.S. at 866. This
concern would apply whether a consumer or commercial transaction is involved. Consumers are
“perfectly capable of negotiating the terms” of an automobile purchase. See Somerset Marine, 876
F. Supp. at 1115. In addition, automobiles purchased by consumers are typically insured, as are
commercial ships and vehicles. Moreover, it must be noted that the conclusion in Sherman, on
which Tennessee Farmers relies, has been called into question by a subsequent panel of that court.
See Reliance Ins. Co. v. Carver Boat Corp., No. WMN-96-194, 1997 U.S. Dist. LEXIS 16658, *4-
*6 (D. Md. May 29, 1997) (applying the rule in East River in a non-commercial context). Overall,
we must agree with the majority view, and therefore conclude that the economic loss doctrine as
described in East River applies in cases involving consumer transactions as well as commercial
transactions.
5
Tennessee Farmers also cited Uta h Int’l, Inc. v. Caterpillar Tractor Co., 775 P.2d 74 1 (N.M . Ct. App. 1989),
for the same proposition. That case, how ever, invo lved a co mm ercial transaction, an d the co urt expre ssly reserved
judgment on whether the rule in East River would apply to non-comm ercial transactions. See Utah Int’l, 775 P.2d at
744 .
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Finally, Tennessee Farmers argues that, even if this court finds the economic loss doctrine
to be applicable in the instant cases, the doctrine would not bar Tennessee Farmers’ recovery because
the total loss of the vehicles constitutes “property damage” rather than economic loss, because the
fires were caused by a malfunction of only one component part. Tennessee Farmers asserts that
economic losses include indirect expenses which flow from damage to property, such as loss of use,
loss of value, cost of replacement parts, and loss of profits. See McCrary v. Kelly Technical
Coatings, Inc., 1985 Tenn. App. LEXIS 3133 (Tenn. Ct. App. Aug. 28, 1985). In contrast,
Tennessee Farmers maintains, property damages are direct costs incurred from damage to the
property itself. Because it seeks recovery only for damage to the property itself, Tennessee Farmers
argues that the economic loss doctrine should not preclude it from bringing an action for strict
liability in tort.
In response, Ford asserts that the Supreme Court in East River rejected the argument that
injury to a component part constitutes damage to property other than the product itself. Ford points
out that the East River Court held that, because the turbines were supplied as an integrated package,
each package should be regarded as a single unit. East River, 476 U.S. at 867. When the unit is
damaged by a defective component part, the result is economic loss. Quoting an Alaska case, the
East River Court reasoned that “[s]ince all but the very simplest of machines have component parts,
[a contrary] holding would require a finding of ‘property damage’ in virtually every case where a
product damages itself. Such a holding would eliminate the distinction between warranty and strict
products liability.” Id. (quoting Northern Power & Eng’g Corp. v. Caterpillar Tractor Co., 623
P.2d 324, 330 (Alaska 1981)). Ford notes that the United States Supreme Court in Saratoga Fishing
Co. v. J. M. Martinac & Co., 520 U.S. 875 (1997), reiterated that, when a manufacturer places an
item in the stream of commerce by selling it to an initial user, that item as a whole is the “product
itself.” Damage that is caused to the “product itself” by a defective component part constitutes
economic loss for which recovery in tort is not allowed. Saratoga Fishing, 520 U.S. at 879-80.
In Saratoga Fishing, a fishing vessel was destroyed by a defectively designed hydraulic
system. Id. at 877. The question in that case was whether fishing nets and other spare parts that had
been added to the vessel constituted “other property” or whether they were part of the “product
itself.” Id. In addressing that issue, the Court determined that the entire vessel was, in fact, the
“product itself” because the vessel as a whole was placed in the stream of commerce when it was
sold to the initial user. Id. at 879. Because the nets and other parts had been added after the product
had been placed in the stream of commerce, those items were considered to be “other property,” and
the plaintiffs could recover in tort for damage to those items. Id. at 884-85. The Court reasoned that
the parties can contract for appropriate sharing of the risk of harm through warranty contracts when
the product is introduced into commerce. Id. at 882. Though a reseller of a product might also offer
a warranty, such is not ordinary business practice. Id.
The reasoning in Saratoga Fishing was applied in a case decided on facts similar to those
in the instant case, Radford v. Daimler Chrysler Corp., 168 F. Supp. 2d 751 (N.D. Ohio 2001). In
Radford, the plaintiff owned a Dodge Stratus automobile that spontaneously ignited and was totally
destroyed. The fire was caused by an allegedly defective instrument panel. Radford, 168 F. Supp.
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2d at 752. The district court dismissed the plaintiff’s products liability action, based on the
economic loss doctrine. The court held that “[b]ecause the destruction of the car is damage to the
allegedly defective product, not other property, no claim exists under the [Ohio] Products Liability
Act.” Id. at 753. In reaching that conclusion, the Radford court relied on the decisions in East
River and Saratoga Fishing. The Radford court analogized the facts in that case to the facts in
Saratoga Fishing, stating that “[i]n Saratoga Fishing, it was an entire ship, not just the defective
hydraulic system, which was the product at issue.” Id. Thus, because the only damage was to the
“product itself,” Radford could not recover under a theory of products liability.
Other courts considering the issue have determined that a vehicle constitutes the “product
itself” when a defective component part destroys the entire vehicle. See, e.g., Dairyland Ins. Co.
v. General Motors Corp., 549 So. 2d 44, 46 (Ala. 1989); Progressive Ins. Co. v. General Motors
Corp., 749 N.E.2d 484, 487-88 (Ind. 2001); State Farm Mutual Auto. Ins. Co. v. Ford Motor Co.,
572 N.W.2d 321, 325 (Minn. Ct. App. 1997); Jones v. General Motors Corp., 631 A.2d 665 (Pa.
Super. Ct. 1993). We are persuaded by the reasoning in these cases. We conclude that each vehicle
involved in the instant appeal, destroyed by the spontaneous combustion of a component part,
constituted the “product itself” for the purpose of determining whether the insureds suffered only
economic loss. Consequently, the economic loss doctrine limits the plaintiff’s recovery to an action
based in contract, and it cannot maintain an action in tort. Thus, we affirm the trial court’s decision
to dismiss these cases based on the economic loss doctrine.
Accordingly, we affirm the decision of the trial court in each of the three consolidated cases.
Costs are to be taxed to the appellant, Tennessee Farmers Mutual Insurance Company, and its surety,
for which execution may issue, if necessary.
___________________________________
HOLLY K. LILLARD, JUDGE
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