My colleague Ralph Anzivino has a helpful new article that explores the fine line between contract law and tort law: The Economic Loss Doctrine: Distinguishing Economic Loss from Non-Economic Loss, 91 Marq. L. Rev. 1081 (2008). As developed by Wisconsin and many other states, the economic loss doctrine indicates that purely economic losses are recoverable in contract, while non-economic losses are recoverable in tort. The difficulty lies in distinguishing economic from non-economic, particularly with respect to property damage resulting from product failure. (Imagine, for instance, a defective garage door opener that causes a garage door to close on the owner’s car.)
Ralph nicely summarizes the abundant (and not entirely consistent) case law and other legal authorities on this question, focusing especially on Wisconsin law. He then argues that the courts should look to insurance law to help clarify the line between economic and non-economic losses. Standard commercial liability policies make similar distinctions between property damage that is tortious or contractual in nature, which turns on whether there has been “physical damage to tangible property.” Ralph’s instincts seem quite sensible (and echo some of the work of my colleague Keith Sharfman on valuation): as the courts deal with allocating responsibility for damages after the fact, it may be helpful for them to draw on the way that sophisticated players allocate responsibilities by contract (here, insurance contract)–if bargaining occurs in a rational way, it should result in an economically efficient distribution of liabilities.