The Economic Loss Rule in Texas is oblique, presenting a bar to property subrogation practitioners in the state. There are various versions of the rule, each concerning related, but distinct circumstances. The Northern District of Texas has actually described the cornerstone case on the subject (Signal Oil) as confusing. Golden Spread Cooperative, Inc. v. Emerson Process Mgmt. Power & Water Solutions, Inc., 360 F. Supp. 3d 494, 524 (N.D. Tex. 2019). Subrogation counsel often faces this defense when a product fails, causing damage to itself. In 2007, the Texas Supreme Court summarized the Economic Loss Rule as follows:
The economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. The rule does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer in addition to causing damage to the product itself.
Equistar Chemicals, L.P., 240 S.W.3d at 867 (citing Signal Oil, 572 S.W.2d at 322-23) (emphasis added).
The Texas Supreme Court’s opinion in Signal Oil, 572 S.W.2d at 322-23, cited in the 2007 Equistar opinion, typically controls the analysis. In Signal Oil, the plaintiff paid for the construction of an isomax unit and hydrogen plant at its plant in Houston. Id. The isomax reactor had gas burners surrounded by steel tubes through which oil flowed, and the tubes were supported by tube guides. Id. at 323. The design specifications required the tube’s guides be anchored by 25-12 bolts, but the contractor instead used less heat resistant B-7 bolts. Id. Less than three months after the installation, a steel tube ruptured, and the unit caught fire and damaged itself and other surrounding property in the facility. Id. The plaintiff brought suit alleging defects in the unit caused the fire.
The economic loss rule did not bar a recovery in strict liability because the defective unit damaged other property. For that reason, the plaintiff could recover for both the damaged unit itself and the collaterally damaged property:
In the instant case [the plaintiff] has alleged property damages in the form of damages to the product itself, as well as to other surrounding property…
When such collateral property damage exists in addition to damage to the product itself, recovery for such damages are recoverable under Section 402A of the Restatement (Second) of Torts as damage to property or under the Texas Business and Commerce Code, Section 2.715, as consequential damages for a breach of an implied warranty. To the extent that the product itself has become part of the accident risk or the tort by causing collateral property damage, it is properly considered as part of the property damages, rather than as economic loss.
Id. at 325.
The Fifth Circuit Court of Appeals has relied upon and reiterated this holding. See Mercer v. Long Mfg., N.C., Inc., 665 F.2d 61, 69 (5th Cir. 1982). In Two Rivers Co. v. Curtiss Breeding Service, 624 F.2d 1242 (5th Cir. 1980), the Fifth Circuit closely analyzed four separate types of property loss that are recognized in Texas, explaining that a different legal analysis attaches to each type of loss. The third and fourth categories concern the economic loss doctrine’s applicability to a product damaging itself:
- “A third type of loss consists of economic loss to the purchased product itself.” Id.
- “The fourth type of loss is a hybrid involving physical harm to a plaintiff’s other property as well as to the product itself.” Id. at 1246-1247.
According to the Fifth Circuit, under the third category, when a product damages only itself, these damages may not be recovered in tort because this type of loss represents a mere loss of the benefit of the bargain. Id. at 1246 (“This is because the damage to the product is merely a loss to the purchaser of the benefit of the bargain with the seller”) (citing Mid Continent Aircraft Corp. v. Curry County Spraying Service, 572 S.W.2d 308 (Tex.1978)).
However, the Fifth Circuit went on to explain that when a property loss falls into the fourth category, such that damages are sustained to the product itself as well as other property, public policy requires a different result. Id. at 1246-1247. In such a circumstance, where “both the product and other property are damaged, a plaintiff has a cause of action under strict liability and the U.C.C.” Two Rivers Co., 624 F.2d at 1245 (citing Signal Oil, 572 S.W.2d at 325). The application of Section 402A of the Restatement (Second) of Tortsrequires this different result because when the damage caused by a defective product moves beyond injury to the product itself to damage other property, the nature of the injury changes from mere contractual loss to the realm of products liability in tort – a realm designed to provide the public more protection from dangerously defective products than is available under the law of contracts. Signal Oil, 572 S.W.2d at 325 (citing Dean Keeton, in an Annual Survey of Texas Law on Torts, Southwestern Law Journal, Volume 32 (1978), at 5); Section 402A of the Restatement (Second) of Torts.
Thus, according to the Fifth Circuit and Texas Supreme Court, when the product itself has become part of the accident risk or the tort by causing collateral property damage, it is properly considered as part of the property damages, rather than as economic loss. Two Rivers Co., 624 F.2d at 1245 (citing Signal Oil, 572 S.W.2d at 325); James v. Bell Helicopter, 715 F.2d 166, 171 (5th Cir. 1983) (“In a case decided the same day as Mid Continent, the court allowed recovery for damages to the product itself in a products liability action if the product damaged other property”) (emphasis in original); Mercer v. Long Mfg., N.C., Inc., 665 F.2d 61, 68 (5th Cir. 1982) (“losses involving physical injury to the property itself if accompanied by damage to other property of the user were recoverable under section 402A”); Two Rivers Co., 624 F.2d at 1245.
Just over a decade ago, in 2007, the Texas Supreme Court reaffirmed this analytical framework and its Signal Oil holding, stating:
The economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. The rule does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer in addition to causing damage to the product itself.
Equistar Chemicals, 240 S.W.3d at 867 (citing Signal Oil, 572 S.W.2d at 325) (emphasis added). On this basis, the Austin Court of Appeals reaffirmed the economic loss analysis, finding a claim barred. There, the Court of Appeals succinctly explained that the economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. U.S. Steel Corp. v. John H. Young, Inc., No. 03-16-00206-cv, 2018 WL 911861, at *1 n.2 (Tex. App.—Austin Feb. 16, 2018, no pet.).
But what is other property, and what is the product itself? Usually straightforward (Alcan, 133 F.Supp.2d at 503), Texas courts have had little difficulty with this distinction where a product, purchased by the plaintiff from a manufacturer, is damaged by a defective component that was an integrated part of the product when sold. There, Texas courts view the component part and product as a whole, precluding a finding of damage to “other property.” See, e.g., Lopez, 490 S.W.3d at 522 (quoting Pugh v. Gen. Terrazzo Supplies, Inc., 243 S.W.3d 84, 92 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) ) (“Texas courts have rejected the argument that damage to a finished product caused by a defective component part constitutes damage to ‘other property,’ so as to permit tort recovery for damage to the finished product.”); Mid Continent, 572 S.W.2d at 312–13 (rejecting a theory of recovery for damage to an airplane caused by a defective engine where the engine was a component part of an airplane). Federal courts have reached the same conclusion. See, e.g., Hininger v. Case Corp., 23 F.3d 124, 126–27 (5th Cir. 1994); Arkwright–Boston, 844 F.2d at 1177–78 (holding a turbine blade is part of the whole turbine, precluding damage to other proerty); see also Sanitarios Lamosa, 2005 WL 2405923, at *6 (citing Mid Continent, 572 S.W.2d at 311–13) (stating that the Texas Supreme Court has determined “when a component part sold as part of a whole product fails and damages the whole product, the damage is to the whole product and the suit cannot be brought in tort”).
And while it appears as of 2019 that the Texas Supreme Court has not specifically addressed the question of whether the economic loss doctrine applies to products damaged by replacement component parts furnished by the original manufacturer or supplier, lower Texas courts have shown no hesitation in extending its application. Grizzly Mountain Aviation, Inc. v. Honeywell Int’l, Inc., No. 13-11-00676-CV, 2013 WL 5676069, at *7 (Tex. App.—Corpus Christi Oct. 17, 2013, no pet.) (citing East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 873, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986) ) (replacement of an original engine in a helicopter with another defective engine from the same manufacturer did not make the helicopter ‘other property’).
When the economic loss doctrine applies, recovery is generally limited to remedies grounded in contract (or contract-based statutory remedies), rather than tort. Sharyland Water, 354 S.W.3d at 415; see A & H Props. P’ship v. GPM Eng’g, No. 03-13-00850-CV, 2015 WL 9435974, at *1–2 (Tex. App.–Austin Dec. 23, 2015, no pet.). Therefore, in order to obtain the best recovery possible on a loss, avoiding application of the economic loss doctrine is essential.