After years of attempting to limit the expansion of the economic loss doctrine, the Supreme Court of Florida recently held that the doctrine applies only in product liability cases. As a result, in the absence of a product liability claim, mere contractual privity will no longer act as a shield against tort liability, increasing insureds’ and, by extension, their insurer’s exposure.
In Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Companies, Inc. No. SC10-1022 (Fla. March 7, 2013), the Eleventh Circuit certified a question to the Florida Supreme Court concerning whether an insurance broker fits within the professional services exception to the economic loss doctrine – i.e. can an insurance broker successfully assert the economic loss doctrine as a bar to tort claims seeking purely economic damages that arise from the contractual relationship between it and the insured? Frustrated with the unintended expansion of the economic loss rule, the Florida Supreme Court revised the question to cover all economic loss cases in which the parties are in contractual privity.
In Tiara, the insured, a condominium association (the “Insured”), retained Marsh & McLennan (“Marsh”) as its insurance broker and, in that capacity, Marsh was responsible for obtaining windstorm coverage for the condominium. After Marsh obtained a policy on the insured’s behalf, which included limits of $50 million per occurrence, the condominium sustained significant damage caused by two separate hurricanes. Marsh subsequently advised the insured that it would be entitled to $100 million on a two occurrence basis, rather than to an aggregate limit of $50 million. On that basis, the insured proceeded with more expensive remediation. However, inconsistent with Marsh’s advice, the insurer asserted a one occurrence position and the insured and insurer ultimately settled for $89 million, much less than the total costs of remediation. Thereafter, the insured filed suit against Marsh, alleging claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, and breach of fiduciary duty. After the trial court granted summary judgment to Marsh on all claims, the insured appealed to the 11th Circuit, which affirmed the grant of summary judgment on all but the negligence and breach of fiduciary duty claims. The 11th Circuit then certified the above-referenced question to the Florida Supreme Court.
The court began its analysis by pointing out that the economic loss rule originated in the product liability context, but had been continuously expanded to include circumstances where the parties are in contractual privity and one party seeks tort damages for purely economic losses. Frustrated with this expansion and its inability to limit the rule by creating exceptions (e.g. allowing tort recovery in cases involving neglect in providing professional services despite contract privity between the parties), the court determined that the only way it could properly constrain the application of the rule is to limit it to product liability cases. After describing its own prior decisions as the “unprincipled extension of the rule,” the court reversed its prior precedent applying the rule in pure contract privity cases, determining that reversal was “necessary to vindicate other principles of law or to remedy continued injustice.”
This decision is significant for anyone doing business in Florida. Insurers should also take the decision into account when setting reserves, as the court’s ruling could potentially impact an insured’s exposure under specialized policies or CGL policies providing coverage for tort claims that do not necessarily involve bodily injury or property damage (e.g. policies covering personal and advertising injury). It will be interesting to see if any other jurisdictions follow the Florida high court’s reasoning and similarly limit the application of the economic loss doctrine or if this decision will remain in the minority. Stay tuned as we will monitor the situation and follow up with any further developments.