Attorneys for Appellants Attorneys for Appellees
David W. Stone IV Glenn L. Duncan
Anderson, Indiana Jacob S. Frost
Indiana Supreme Court
and Judy Lynn Gunkel,
Appellants (Plaintiffs below),
and J & N Stone, Inc.,
Appellees (Defendants below).
Appeal from the Steuben Circuit Court, No. 76C01-0010-CT-754
The Honorable Allen N. Wheat, Judge
On Petition To Transfer from the Indiana Court of Appeals, No. 76A01-0306-CV-206
February 1, 2005
We hold that damages recoverable in tort for a defective product or service
are governed by the economic loss doctrine whether or not the product or
service is supplied in a transaction subject to either the Products Liability Act
or the Uniform Commercial Code, or both. Under the doctrine, physical injuries
and damages to other property are recoverable in tort, but damages to the
defective product itself are not. Whether damaged property is other property turns
on whether it was acquired by the plaintiff as a component of the
defective product or was acquired separately.
Factual and Procedural Background
In March 1999, the Gunkels contracted with Renovations, Inc., for the construction of
a $435,000 three-story residence in Fremont, Indiana. Six months later, J &
N Stone, Inc. was hired by the Gunkels to install a stone and
masonry exterior on the home. Shortly after the stone façade was installed,
water began to enter through gaps in the façade and substantial moisture problems
arose. The Gunkels claim that walls, ceilings, floors, drywall, carpet, and carpet
padding were damaged. The Gunkels claim that the defective façade required removing
and replacing the masonry, repainting of the interior of the home, clearing and
recoating the roof, replacing exterior doors and windows, reframing some of the exterior
door and window openings, removing mold, and replacing exterior electrical outlets.
In October 2000, the Gunkels filed suit against Renovations for breach of contract
and fraud seeking compensation for the lost use of their home and repair
costs. The Gunkels then amended their complaint adding J & N as
a defendant and asserted negligence and breach of contract claims against J &
N. J & N moved for partial summary judgment as to the
contract claim, arguing that it was not a party to the contract between
the Gunkels and Renovations and that there was no separate contract between the
Gunkles and J & N. The trial court granted J & Ns
motion as to the contract claim. According to J & N, the
Gunkels sought to position J & N as a subcontractor of Renovations in
order to bolster their claim against Renovations. Whether for that reason or
not, the Gunkels elected to forego any contract claim against J & N
and relied solely on J & Ns alleged negligence. J & N
next moved for summary judgment as to the negligence claim on the ground
that the Gunkels sought purely economic damages, which are not available under a
negligence theory. The trial court granted summary judgment for J & N
and certified the order for immediate appeal pursuant to Trial Rule 54(B).
The Court of Appeals held that the Gunkels were seeking only economic losses
and therefore had no tort claim. Gunkel v. Renovations, Inc., 797 N.E.2d
841, 845 (Ind. Ct. App. 2003). We granted transfer. Gunkel v.
Renovations, Inc., 812 N.E.2d 799 (Ind. 2004).
Standard of Review
On appeal, the standard of review of a summary judgment ruling is the
same as that used in the trial court: summary judgment is appropriate
only where the evidence shows there is no genuine issue of material fact
and the moving party is entitled to a judgment as a matter of
law. Ind. Trial Rule 56(C); Shell Oil Co. v. Lovold Co., 705
N.E.2d 981, 983-84 (Ind. 1998). All facts and reasonable inferences drawn from
those facts are construed in favor of the non-moving party. Colonial Penn
Ins. v. Guzorek, 690 N.E.2d 664, 667 (Ind. 1997). The review of
a summary judgment motion is limited to those materials designated to the trial
court. T.R. 56(H); Rosi v. Bus. Furniture Corp., 615 N.E.2d 431, 434
(Ind. 1993). We must carefully review decisions on summary judgment motions to
ensure that the parties are not improperly denied their day in court.
Estate of Shebel v. Yaskawa Elec. Am., Inc., 713 N.E.2d 275, 277 (Ind.
Other Property for Purposes of the Economic Loss Doctrine
Under the economic loss doctrine, contract is the sole remedy for the failure
of a product or service to perform as expected. We agree with
the Seventh Circuit that economic loss is not a helpful term in understanding
the doctrine. See Miller v. United States Steel Corp., 902 F.2d 573,
574 (7th Cir. 1990) (Damage to a product is called economic loss.
A better term for injuries other than to the plaintiffs person or other
property is commercial loss, . . . because tort law is a superfluous
and inapt tool for resolving purely commercial disputes). Despite its imprecision, the
term economic loss has been adopted by courts in this and most other
jurisdictions and we use it here with the caveat that it does not
necessarily lead to a proper understanding of the scope and applicability of the
This doctrine was first applied in Indiana before the Products Liability Act was
amended to govern negligence claims as well as strict liability. Reed v.
Central Soya Co., Inc., 621 N.E.2d 1069 (Ind. 1993), modified on other grounds,
644 N.E.2d 84 (Ind. 1994), was a Products Liability Act case. The
Products Liability Act at that time excluded recovery for economic damage. See
Ind. Code § 33-1-1.5-2 (1988). Reed explained that under this doctrine, contract
is the only available remedy where the loss is solely economic in nature,
as where the only claim of loss relates to the products failure to
live up to expectations, and in the absence of damage to other property
or person. Id. at 1074-75. This was reiterated in Martin Rispens
& Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind. 1993), which involved
claims under the Products Liability Act and also claims for breach of contract
and negligence. In addressing the negligence claim we held that: Economic
losses are not recoverable in a negligence action premised on the failure of
a product to perform as expected unless such failure causes personal injury or
physical harm to property other than the product itself. Id. at 1091.
Accord W. Page Keeton et al., Prosser and Keeton on Torts §
101, at 708 (5th ed. 1984). The same doctrine has since been
applied to claims governed by the current version of the Indiana Products Liability
Act. In Progressive Insurance Co. v. General Motors Corp., 749 N.E.2d 484,
491 (Ind. 2001), we held that the Products Liability Act does not support
an action based on a defect in a product where the only damage
is to the product itself. In Fleetwood Enterprises, Inc. v. Progressive Northern
Insurance Co., 749 N.E.2d 492 (Ind. 2001), a defect in a motor home
caused the motor home to be engulfed in flames. We held that
although damage to the motor home itself was ninety-six percent of the claim,
personal injury and damage to other property from [the] defective [motor home] [were]
actionable under the [Products Liability] Act, but their presence [did] not create a
claim under the Act for damage to the product itself. Id. at
In sum, Indiana law under the Products Liability Act and under general negligence
law is that damage from a defective product or service may be recoverable
under a tort theory if the defect causes personal injury or damage to
other property, but contract law governs damage to the product or service itself
and purely economic loss arising from the failure of the product or service
to perform as expected. In this respect, Indiana law is consistent with
See footnote and the law of most other states.See footnote Economic losses occur
when there is no personal injury and no physical harm to other property.
See W. Prosser, Handbook on the Law of Torts § 101, at
665 (4th ed. 1971). Rather these losses are viewed as disappointed contractual
or commercial expectations. Am. United Logistics, Inc. v. Catellus Dev. Corp., 319
F.3d 921, 926 (7th Cir. 2003). Thus, economic loss has been defined
by Indiana courts as the diminution in the value of a product and
consequent loss of profits because the product is inferior in quality and does
not work for the general purposes for which it was manufactured and sold.
Economic loss includes such incidental and consequential losses as lost profits, rental
expense and lost time. Reed, 621 N.E.2d at 1074 (citations omitted).
Damage to the product itself, including costs of its repair or reconstruction, is
an economic loss even though it may have a component of physical destruction.
Progressive Ins., 749 N.E.2d at 488.
Because the economic loss doctrine permits tort recovery only for personal injury or
damage to other property, if property is damaged it is necessary to identify
the product at issue which defines other property. The subject of other
property has been approached in a number of different ways.
See footnote Much of
the law addres
sing the issue of what constitutes other property deals with whether
the other property is a distinct item or merely a component of the
overall defective product.
See footnote Other courts have focused on whether goods are involved.See footnote
Yet others have concluded that the economic loss doctrine precludes r
injury to other property if the injury was, or should have been, reasonably
contemplated by the parties to the contract.
See footnote Some have concluded that the
product is the product purchased by the plaintiff, not the product sold by
the defendant.See footnote
The theory underlying the economic loss doctrine is that the failure of a
product or se
rvice to live up to expectations is best relegated to contract
law and to warranty either express or implied. The buyer and seller
are able to allocate these risks and price the product or service accordingly.
As explained in Reed,
The justifications for adhering to this rule are several. The law of
sales set out in Article 2 of the Uniform Commercial Code governs the
economic relations between buyer and seller; the dissatisfied buyer may avail himself of
those statutory remedies fashioned by the legislature. Allowing a buyer to recover
in tort where he has suffered only economic loss allows him to circumvent
the sellers effective limitation or exclusion of warranties under the U.C.C., and subjects
manufacturers to liability for damages of unknown and unlimited scope. . . .
Contract law remains the appropriate vehicle to redress a purchasers disappointed expectations
when a defect renders a product inferior or unable adequately to perform its
621 N.E.2d at 1075. Reed dealt with a sale of goods subject
to the Uniform Commercial Code and therefore expressed the rationale in those terms,
but the concepts expressed in Reed apply equally in other contexts. The
central theory underlying economic loss is that the law should permit the parties
to a transaction to allocate the risk that an item sold or a
service performed does not live up to expectations. The source of the
economic loss doctrine did not limit it to sale of goods. The
seminal case on this issue is Justice Traynors opinion in Seely v. White
Motor Co., 403 P.2d 145 (Cal. 1965), which speaks in terms of warranty
and does not mention the U.C.C. Similarly, the doctrine was explained shortly
after it arose as: [T]he manifest intent of the parties should ordinarily
control the nature and extent of the obligations of the parties to a
contract of sale, either of real or personal property or a contract of
service. Keeton, supra, § 92, at 657. Indeed, in Progressive Insurance
we observed that viewing losses as purely economic loss and not personal or
property damage loss is consistent with Indiana law in the context of claims
for negligent construction such as we have here. 749 N.E.2d at 488
(citing Choung v. Iemma, 708 N.E.2d 7, 13-14 (Ind. Ct. App. 1999) (negligent
construction)). Construction claims are not necessarily based on defective goods or products,
but nonetheless are subject to the economic loss doctrine. In general, a
claim that a product or service did not perform as expected is best
left to contract law remedies.
We think that the theory supporting the economic loss doctrine supplies the answer
to whether damage to other property is involved. Only the supplier furnishing
the defective property or service is in a position to bargain with the
purchaser for allocation of the risk that the product or service will not
perform as expected. If a component is sold to the first user
as a part of the finished product, the consequences of its failure are
fully within the rationale of the economic loss doctrine. It therefore is
not other property. But property acquired separately from the defective good or
service is other property, whether or not it is, or is intended to
be, incorporated into the same physical object. Although we express our reasoning
slightly differently, we align ourselves with the courts that have concluded that the
product is the product purchased by the plaintiff, not the product furnished by
the defendant. The cases that have used this formulation have typically involved
claims by a first user
See footnote of a finished product that includes a component
supplied by the defendant where the purchaser had no dealings with the defe
A frequently cited example is King v. Hilton-Davis, 855 F.2d 1047 (3d
Cir. 1988), where a farmer sued the manufacturer of a chemical used to
treat the seed potatoes that the farmer purchased from a supplier. The
Third Circuit applied Pennsylvania law but followed the United States Supreme Courts reasoning
in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986),
finding that there was no reason to give purchasers a broader tort remedy
against the remote supplier than the purchaser could assert against the manufacturer of
the assembled defective product. Id. at 1051. Similarly, a purchaser of
a complete aircraft is remitted to warranty remedies and has no tort remedy
against a component supplier even if the entire aircraft is damaged by a
defective component. Airlift Intl, Inc. v. McDonnell Douglas Corp., 685 F.2d 267 (9th
Cir. 1982) (California law).
Here we have the obverse situation. The Gunkels did deal directly with J
& N. The same formulation of the demarcation between contract and tort
remedies is controllingproperty acquired by the plaintiff separately from the defective goods or
services is other property whose damage is recoverable in tort. That formulation
excludes from other property other parts of a finished product damaged by components
supplied to the seller by other manufactures and imported into the sellers product.
But it does make property acquired separately other property for purposes of
the economic loss rule even if the defective product is to be incorporated
into a completed product for use or resale.
The Court of Appeals held that here the product is the entire house
on which the stone façade was installed. Under this view, the damage
caused to other parts of the house by the alleged defect in the
façade is damage to the product itself and is barred by the economic
loss rule. As will be seen from the foregoing, we disagree.
The economic loss rule does not bar recovery in tort for damage that
a separately acquired defective product or service causes to other portions of a
larger product into which the former has been incorporated. See, e.g., Jimenez
v. Superior Court, 58 P.3d 450, 457 (Cal. 2002) (holding that the manufacturer
of a defective window installed in a mass-produced home may be held liable
in tort for damage that the windows defect causes to other parts of
the home in which it is installed). The product or service purchased
from J & N was the façade added to the exterior of the
Gunkels home by J & N. J & N installed the façade
under an arrangement with the Gunkels that was independent of the contract with
Renovations to build the home. Therefore, the economic loss rule precludes tort
recovery for damage to the façade itself, but tort recovery for damage to
the home, and its parts, caused by the allegedly negligent installation of the
façade is not limited by the economic loss rule.
Summary judgment as to the negligence claim is reversed. This case is
remanded for further proceedings consistent with this opinion.
Shepard, C.J., and Dickson, and Rucker JJ., concur.
Sullivan, J., dissents, believing the analysis and conclusion of the Court of Appeals
in this case, 797 N.E.2d 841 (Ind. Ct. App. 2003), is correct.
See, e.g., Saratoga Fishing Co. v. J. M. Martinac & Co., 520
U.S. 875 (1997) (allowing recovery in tort for other property which included extra
equipment added to the ship). Thus, the United States Supreme Court held
the economic loss rule did not bar recovery under admiralty tort law for
damages to other property where a defective hydraulic system caused an engine room
fire and flood that led to the sinking of a fishing vessel.
The plaintiff sought recovery for damages to the ship (the product) and extra
equipment (other property), which included a skiff, a fishing net, and spare parts.
The Court affirmed its holding in East River Steamship Corp. v. Transamerica
Delaval, Inc., 476 U.S. 858, 859 (1986), that an admiralty tort plaintiff cannot
recover for the physical damage the defective product causes to the product itself.
Saratoga, 520 U.S. at 877. Since the hydraulic system was a
component of the damaged ship recovery was withheld. Id. However, the
plaintiff was permitted to recover for physical damage to the other equipment even
though it had been affixed to the vessel. Id.
See, e.g, Carstens v. City of Phoenix, 75 P.3d 1081, 1083 (Ariz.
Ct. App. 2003) (the economic loss rule bars a party from recovering economic
damages in tort unless accompanied by physical harm, either in the form of
personal injury or secondary property damage); Jimenez v. Superior Court, 58 P.3d 450,
457 (Cal. 2002) (allowing recovery for defects to parts of the home other
than the window which was alleged to be negligently installed); Northwest Ark. Masonry,
Inc. v. Summit Specialty Prod., Inc., 31 P.3d 982, 987 (Kan. Ct. App.
2001) (recovery for physical damage [to] a product caused to other property is
not precluded by the economic loss doctrine); A.J. Decoster Co. v. Westinghouse Elec.
Corp., 634 A.2d 1330, 1334 (Md. 1994) (allowing recovery in tort for chickens
lost after a ventilation system failure). But see Am. Xyrofin, Inc. v.
Allis-Chalmers Corp., 595 N.E.2d 650, 656 (Ill. App. Ct. 1992) (although blade failure
in centrifugal compressor unit caused damaged to product itself and surrounding premises, absent
additional factual circumstances sufficient to implicate legitimate safety/insurance concerns, the sole existence of
damage to other property, in and of itself, is insufficient to allow recovery
in tort); Citizens Ins. Co. v. Osmose Wood Preserving, Inc., 585 N.W.2d 314,
316 (Mich. Ct. App. 1998) (holding that economic loss doctrine applied to damages
for roof collapse even though court determined that it was other property); Selzer
v. Brunsell Bros., Ltd., 652 N.W.2d 806, 817 (Wis. Ct. App. 2002) (disallowing
the other property exception if, at bottom, the claim involves disappointed performance expectations).
See Myrtle Beach Pipeline Corp. v. Emerson Elec. Co., 843 F. Supp.
1027, 1057-62 (D.S.C. 1993) for an extensive discussion of the subject.
See, e.g., Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F.2d 925,
929-30 (5th Cir. 1987) (the steering gear engine was not a component distinct
from the shipping vessel); Am. Home Assurance Co. v. Major Tool & Mach.,
Inc., 767 F.2d 446, 447-48 (8th Cir. 1985) (damage from defective turbine parts
to remainder of turbine was not damage to other property); Washington Courte Condominium
Assn-Four v. Washington-Golf Corp., 501 N.E.2d 1290, 1293-94 (Ill. App. Ct. 1986) (water
damage to insulation, walls, and electrical outlets caused by defective windows and exterior
sliding glass doors was not damage to other property but merely consequential economic
loss not recoverable in tort).
See, e.g., Theuerkauf v. United Vaccines Div. of Harlan Sprague Dawley, 821
F. Supp. 1238, 1241 (W.D. Mich. 1993) (no damages in tort for the
death of minks from vaccination by defendants product because the damage arose out
of a commercial sale of goods).
See, e.g., Neibarger v. Universal Coops., Inc., 486 N.W.2d 612, 620 (Mich.
1992) (in a commercial transaction between two sophisticated parties where the gravamen of
the complaint is that the purchased product is of a lesser quality than
warranted, the purchaser cannot bring a tort action for foreseeable injury to other
See, e.g., Easling v. Glen-Gery Corp., 804 F. Supp. 585, 590 (D.N.J.
1992) (building damage caused by defective bricks not barred as economic loss because
plaintiffs purchased completed apartment complex, not a load of bricks); Casa Clara Condominium
Assn, Inc. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244, 1247
(Fla. 1993) (rejecting homeowners argument that damages caused to a condominium by defective
concrete was damage to other property because plaintiffs purchased finished homes, not component
parts); Oceanside at Pine Point Condominium Owners Assn v. Peachtree Doors, Inc., 659
A.2d 267, 271 (Me. 1995) (no recovery for damages caused by defects in
windows because the plaintiffs purchased finished condominium units, not individual components of the
Under admiralty law, the United States Supreme Court concluded that separately acquired
perty added by a first user to a ship retained its character as
other property for purpose of the economic loss doctrine even though the plaintiff
acquired the ship after the added property had been attached. Saratoga, 520
U.S. at 876. This is not consistent with the formulation that the
test is the product purchased by the plaintiff, but is consistent with our
conclusion that at least in the hands of a first user, separately acquired
goods or services are other property. We are not presented with the
issue raised by a sale subsequent to the addition of other property and
express no opinion as to it.