Kentucky Supreme Court Adopts the Economic Loss Doctrine

Owners, contractors, and subcontractors take care. In Kentucky, claims against suppliers for product defects are legally limited to the parties’ contract and warranties.

On June 16, 2011, the Kentucky Supreme Court joined the majority of other states and adopted what is commonly know as the economic loss doctrine. In Giddings & Lewis, Inc. v. Industrial Risk Insurers, the Court unanimously held that “a manufacturer in a commercial relationship has no duty under a negligence or strict products liability theory to prevent a product from injuring itself.” The Court wrote: “We believe the parties’ allocation of risk by contract should control without disturbance by the courts via product liability theories.” The Court’s holding ends years of speculation regarding the applicability of this doctrine in Kentucky.

In Giddings & Lewis, the manufacturer sold a sophisticated machining center to an industrial concern. The parties set forth their mutual obligations in a detailed commercial contract. After seven years of continuous operation, and after the contract’s express warranty expired, the machining center malfunctioned in a spectacular fashion—throwing chunks of steel weighing thousands of pounds across the factory floor.
The costs to repair the machining center and to get the business up and running again were almost $3 million. After reimbursing the machine’s owner for its losses, a consortium of insurance companies asserted a subrogation claim against the machining center’s manufacturer. With the warranty expired, the insurance companies sued in negligence, strict liability, negligent misrepresentation, and fraudulent misrepresentation. Applying the economic loss doctrine, the Kentucky Supreme Court held that the purchaser could not recover from the manufacturer under any tort theory. The consortium was limited to contractual remedies, all of which expired years earlier.

As first articulated by the U.S. Supreme Court in 1986, the economic loss doctrine is the only way to prevent contract law from drowning in a “sea of tort.” Kentucky’s highest court also rejected the so-called “calamitous event” exception that some states recognize even when applying the rule.

The Court sidestepped the claim for fraudulent misrepresentation, leaving it for another day, by holding that the insurance companies’ were actually claiming “fraud by omission,” which they could not prove as a matter of law.

Caveat emptor is alive and well in Kentucky. Construction project participants should review contracts carefully and negotiate warranties. Recovery will be limited to contract terms and statutory remedies.