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Economic Damages and Contractual Privity Pt. IV: What Are Economic Losses Anyway?

January 27, 2023 General News

Our previous three blog posts focused on negligence claims between non-contracting parties for purely economic losses. The distinction between economic loss and non-economic loss is important because: (1) contracting parties are barred from bringing tort claims for purely economic losses, Flagstaff Affordable Housing, LP v. Design Alliance, Inc., 223 Ariz. 320, 323 (2010); and (2) the test for finding a duty to prevent economic losses between non-contracting parties is stricter than for non-economic loss. Cal-Am Props. Inc. v. Edais Engineering Inc., 2022 WL 1613497, *3-*4 (2022).

The Arizona Supreme Court defines economic loss as “pecuniary or commercial damage” including “repair costs, diminished value, or lost profits.” Flagstaff Affordable, 223 Ariz. at 323; Salt River Project Agricultural Improvement and Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 380 (1984). Cal-Am was a clear example of economic loss. There, a faulty survey eliminated a row of RV parking spaces, depriving the owner of future revenue from the lost spaces. 2022 WL 1613497 at *4.

Other situations are less clear. Consider a fireplace. The cost to repair a collapsed fireplace is economic; whereas the cost to repair or replace other property, such as furniture or decorations, stemming from a fireplace collapse is non-economic. See Woodward v. Chirco Constr. Co., 141 Ariz. 514, 516 (1984). Or consider a truck frame. The cost to repair a truck’s cracked frame is economic, whereas a personal injury sustained in an accident caused by the compromised frame is non-economic. See Industrial Unified Rental Co. v. Int’l Harvester Co., 61. Phila. 141 (C.P. Phila. 1981). What about a defective engine? Diminution in an engine’s value due to a defect is economic loss; whereas damage to other property stemming from the defect, for instance an explosion, is non-economic loss. See Arrow Leasing Corp. v. Cummins Ariz. Diesel, Inc., 136 Ariz. 444, 448-49 (App. 1983) (citing N. Power and Engineering Corp. v. Caterpillar Tractor Co., 623 P.2d 324, 329-30 (Alaska 1981)). In each case, losses represented by costs to repair or replace the defective conditions were economic; whereas costs to repair other property were not.

Beyond costs to repair defective conditions, non-physical damages that arise as a consequence of defective conditions are economic as well. Such damages were at the heart of Cal-Am, where the RV park owner lost future profits from a defective design. Likewise, Adams v. Star Enterprise teaches that diminution in a property’s value due to a nearby oil spill is economic loss so long as the oil makes no direct physical impact on the property. 51 F.3d 417, 424 (4th Cir. 1995). But what if the oil spill does have a direct physical impact on the neighboring property? Is the resulting lost profit and diminution in value economic loss? Or does the physical intrusion upon the property make the damage non-economic?