In State Farm Mutual Automobile Insurance Company v. Norcold, Inc., 849 F.3d 328 (6th Cir. 2017), the United States Court of Appeals for the Sixth Circuit considered whether Kentucky’s economic loss rule applies to consumer transactions. The economic loss rule prevents the buyer of a product from suing in tort to recover for economic losses when the product damages only itself. The Sixth Circuit predicted that Kentucky would not extend the economic loss rule to consumer transactions. The Norcold case reminds us that, while the economic loss rule can be a significant impediment to products liability subrogation claims, it is important to consider whether there are exceptions available to overcome this defense.
In Norcold, Larry Swerdloff (Swerdloff), purchased a used 2007 Phaeton Recreational Vehicle (RV) in 2012. The vehicle was equipped with a refrigerator manufactured by defendant, Norcold, Inc. (Norcold). When Swerdloff purchased the RV, the manufacturer’s warranty had expired. Swerdloff insured the vehicle through State Farm Mutual Insurance Company (State Farm). In September 2013, the vehicle’s refrigerator overheated, causing a fire and destroying the RV. As a result of the fire, State Farm paid Swerdloff for the damage to the vehicle.
In 2014, State Farm filed suit against Norcold, pursing negligence and strict liability claims. Norcold filed a motion for partial summary judgment based on the economic loss rule. Although Norcold did not dispute that the refrigerator caused the fire, it argued that State Farm’s tort claims were barred by Kentucky’s economic loss rule because the refrigerator was a component part of the RV and, thus, to the extent that the plaintiff could recover damages, the plaintiff was limited to contractual remedies. The district court denied the motion, refusing to apply the economic loss rule to a consumer transaction such as Swerdloff’s purchase of the RV. Ultimately, the issue reached the United States Court of Appeals for the Sixth Circuit.
Noting that no Kentucky cases directly address the question of whether the economic loss rule applies to consumer transactions, the Sixth Circuit noted that the policy reasons for the economic loss rule are to maintain the distinction between tort and contract law, protect the freedom to contractually allocate economic risk and encourage the party best situated to assess the risk of economic loss to insure against that risk. While the court found that the first policy – maintaining the distinction between tort and contract law – applied to consumer and commercial transactions alike, it found that the other noted policy reasons had different implications with respect to consumer transactions. The court reasoned that consumers have more of a risk of bargaining with unequal power and less knowledge of the products. It also noted that consumers may be less sophisticated, and thus unable to properly assess the risk of economic loss and negotiate the appropriate contractual terms. Since consumers are less likely to understand the risks inherent in the product’s use and, thus, may not secure the appropriate insurance for that risk, the court concluded that consumers should be afforded tort law protection. For these reasons, the Sixth Circuit affirmed the lower court’s ruling. In addition, the court denied Norcold’s request to certify the question of whether the economic loss rule applies to consumer transactions to the Supreme Court of Kentucky.
Because the Norcold case holds that, in Kentucky, the economic loss rule does not apply to consumer transactions, when faced with an economic loss rule defense, it is critical to consider whether the transaction is a consumer or commercial transaction. Although the Norcold decision is not controlling on state courts in Kentucky, if the transaction is a consumer transaction governed by Kentucky law, subrogation professionals should work to maintain the consumer/commercial distinction the Norcold court recognized.