Wisconsin Supreme Court Split on Economic Loss Doctrine
Brian C. Tokarz
In a 3-3 split, the Wisconsin Supreme Court on January 28, 2014 effectively affirmed the court of appeals’ decision in State Farm Fire and Casualty Co. v. Hague Quality Water, International, which held that the economic loss doctrine did not bar a homeowner from pursuing tort claims against the manufacturer of a water softener after his home sustained property damage caused by water leaks. Chief Justice Abrahamson, Justice Bradley and Justice Crooks would affirm the court of appeals, and Justice Roggensack, Justice Ziegler and Justice Gableman would reverse. Justice Prosser did not participate. A summary of the court of appeals’ decision follows below.
Larry Krueger (“Krueger”) purchased a water softener for his home that was manufactured by Hague Quality Water, International (“Hague”). Two years after the purchase, the water softener failed and caused roughly $45,000 in water damage to the drywall, flooring and woodwork in Kruger’s house. Krueger’s homeowners insurer, State Farm Fire and Casualty Company (“State Farm”), covered the damage and filed a lawsuit against Hague, alleging tort claims for the water softener. Hague moved for summary judgment on the basis that the economic loss doctrine barred State Farm’s tort claims. The trial court agreed and dismissed the action.
The Wisconsin Court of Appeals reversed and held that the economic loss doctrine did not bar State Farm’s tort claims. The court began its analysis by explaining that the economic loss doctrine generally bars recovery of purely economic losses through tort remedies when the only damage is to the product itself. However, the economic loss doctrine does not apply if the product causes damage to “other property,” i.e., property other than the product itself. Wisconsin courts employ a two-part analysis when determining whether the damage is to “other property.”
First, courts analyze whether the damaged property is part of an integrated system with the defective product. If so, any damage to that property is considered damage to the product itself. Second, if the damage is not part of an integrated system, courts then apply the “disappointed expectations” test. Under this analysis, courts focus on the expected function of the product and whether the purchaser should have foreseen that the product could cause the damage at issue. Only if the property damage satisfies both tests will it be considered damage to “other property” for a tort claim to defeat summary judgment.
Integrated System Test
Under the integrated system test, “[i]f a product has no function apart from its value as part of a larger system, the larger system and its component parts are not ‘other property.’” Applying this test, the court concluded that the damaged property—the drywall, flooring and woodwork—was not part of an integrated system with the water softener. The court drew comparisons to other Wisconsin cases in which the product and the property damage were part of the same system. For example, in Wausau Tile, Inc. v. County Concrete Corp., the defective product, cement, was an ingredient in the pavers that were allegedly damaged. Thus, the cement was an integral component of the final product, i.e., the pavers.
Disappointed Expectations Test
Under the disappointed expectations test, “[i]f a product is expected and intended to interact with other products and property and if the cause of the damage to those other products and property stems from the parties’ expectations of the function of the bargained-for product, then recovery in tort is precluded.” For example, Wisconsin courts have held that customers who bought livestock feed and feed systems that killed their livestock could not recover in tort because their damages arose from their disappointment that the products did not improve the nutrition and health of their animals.
Applying this test to the case at hand, the court held that the failure of the water softener had nothing to do with the purpose for which it was purchased. The court explained that “[t]he drywall, flooring, and woodwork were not damaged by a failure of the water softener to soften water but by a defect independent of the water softener’s function of softening water.” In other words, “[t]he purpose of buying a water softener is to soften one’s water. Tort recovery is not precluded . . . as the water softener was not expected, nor intended, to interact with the drywall, flooring and woodwork of Krueger’s home.” Consequently, the court of appeals concluded that the cause of the damage to Krueger’s home did not stem from a disappointment in how Krueger and Hague expected the product to soften Krueger’s water.
The information contained herein is not intended as and should not be construed as legal advice. Please consult with legal counsel before taking any action based on this information.