Economic Loss Rule
What is the Economic Loss Rule?
The economic loss rule bars tort recovery for purely economic losses (lost profits, diminished value) absent physical injury to person or property. Such losses must be pursued through contract or warranty law.
Source: East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986)
Definition
The economic loss rule is a judicially created doctrine that prevents a plaintiff from recovering purely economic losses (such as lost profits, lost business opportunities, or the diminished value of a product) through a negligence or strict liability tort claim when no physical injury to person or other property has occurred. The rule requires plaintiffs to pursue such claims through contract or warranty law instead, preserving the boundary between tort and contract.
The rule was definitively established for products liability in East River Steamship Corp. v. Transamerica Delaval, where the Supreme Court held that a manufacturer's defective product that damages only itself (without causing personal injury or damage to other property) is recoverable only under warranty law, not in tort. The rationale is that contract law, including the UCC's warranty provisions, is better suited to allocate risk for purely commercial losses between parties who had the opportunity to negotiate and allocate those risks by agreement.
The rule has been extended beyond products liability to other negligence contexts, though its scope varies significantly by jurisdiction. Some states apply the rule broadly to bar all negligence claims for purely economic harm, while others recognize exceptions for professional malpractice, negligent misrepresentation (under Restatement (Second) of Torts section 552), and cases involving special relationships. The rule has been particularly controversial in construction defect cases, environmental contamination cases, and cases involving negligent provision of information. The Third Restatement acknowledges the rule but treats it as a general principle with recognized exceptions rather than an absolute bar.
Key Elements
- 1The plaintiff suffered purely economic losses (lost profits, diminished value, etc.)
- 2No physical injury to the plaintiff's person occurred
- 3No physical damage to the plaintiff's other property (beyond the defective product itself) occurred
- 4The economic loss is the type of harm that contract or warranty law is designed to address
- 5No recognized exception to the rule applies (such as negligent misrepresentation or professional malpractice)
Landmark Cases
East River Steamship Corp. v. Transamerica Delaval, Inc.
476 U.S. 858 (1986)
Established the economic loss rule in products liability, holding that a manufacturer's liability for a defective product that damages only itself is governed by warranty law, not tort.
Robins Dry Dock & Repair Co. v. Flint
275 U.S. 303 (1927)
An early articulation of the rule, holding that a tort plaintiff cannot recover for purely economic losses without physical damage to person or property.
People Express Airlines, Inc. v. Consolidated Rail Corp.
100 N.J. 246 (1985)
Created an exception to the economic loss rule for identifiable plaintiffs who suffer foreseeable economic harm from the defendant's negligence.
Moorman Manufacturing Co. v. National Tank Co.
91 Ill.2d 69 (1982)
Applied the economic loss doctrine in Illinois to bar tort claims for disappointed economic expectations, limiting the plaintiff to contract remedies.
Exam Tips
- Determine whether the plaintiff suffered physical injury or property damage in addition to economic loss — if so, the rule does not apply and tort recovery is available.
- Look for exceptions: negligent misrepresentation under section 552, professional malpractice, and special relationships may allow tort recovery for economic losses.
- In products cases, ask whether the defective product damaged only itself or also damaged other property — damage to other property moves the claim into tort territory.
- Note that the scope of the rule varies dramatically by jurisdiction — always specify the applicable rule.
Common Mistakes to Avoid
- Applying the economic loss rule to personal injury cases — the rule only bars recovery for purely economic losses without physical harm.
- Ignoring the exception for negligent misrepresentation, which allows tort recovery for economic losses caused by false information provided by professionals.
- Failing to distinguish between damage to the product itself (economic loss) and damage to other property (tort claim allowed).
Memory Aid
No body, no building, no tort. Economic loss without physical harm stays in contract court.