Appeals Court Carves Out Condominium Exception to ‘Economic Loss Rule’

The “economic loss rule” prohibits a plaintiff from suing for negligence to recover “pure economic losses,” such as lost profits or the cost of replacing an allegedly-defective product. The rule requires a showing of harm to person or property in a negligence case. If a defective product is involved, any property damage asserted must involve property other than the defective product itself.

The economic loss rule is generally regarded as a “black letter” rule of law, and, historically, it has provided a near-absolute bar allowing builders, manufacturers, and other defendants to avoid negligence claims based solely on the failure of a product or building where additional harm did not occur.

Just last month, however, in Wyman v. Ayer Properties, LLC, 83 Mass. App. Ct. 21 (2012), the Appeals Court fashioned an exception to the economic loss rule in the condominium context.

In Wyman, a condominium trust sued the condominium builder for negligence (among other claims) for defectively constructing the roof, windows, and exterior masonry façade of the condominium building. The trial judge viewed the building as two separate properties: the common areas, on the one hand, which included the roof, windows, and exterior masonry; and, on the other hand, the privately-owned individual units. The problems with the windows and roof caused water damage to the individual units, and so the economic loss rule did not bar the trust’s claims as to those defective elements of the common areas. The defects in the exterior masonry, however, only resulted in damage to the masonry itself. Thus, even though the condominium trust paid $80,000 to repair the masonry, the trial court decided that the economic loss rule barred it from recouping that cost on a negligence theory.

The trust appealed, and the Appeals Court overturned the trial court on the defective masonry claim. Although the trial court “conscientiously applied the mechanics of the [economic loss] rule to the masonry claim,” the Appeals Court ruled that without an exception to the economic loss rule, the trust would be left with no remedy for the builder’s negligent construction of the masonry. The Appeals Court wrote that “the [economic loss] rule does not require a court to leave a wronged claimant with no remedy,” and that “an overly mechanical application of the rule would diverge from its purpose.” The Appeals Court ultimately modified the judgment to award damages to the trust for the defective masonry, writing that, “[i]n the present circumstances, liability should not hinge on the fortuity of secondary harm (such as damage to an interior unit), however minor, to a separate property.”

The Appeals Court’s holding is expressly limited to the condominium context, in circumstances where: (i) the plaintiff’s damages are reasonably determinable, (ii) the plaintiff would otherwise lack a remedy, and (iii) the plaintiff acted within the time allowed by the applicable statute of limitations or statute of repose.

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