New Jersey Supreme Court Reverses Appellate Division in Seminal Economic Loss Rule Case
On Monday, November 15th, 2010, the New Jersey Supreme Court issued its highly anticipated decision in the controversial case of Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), cert. granted, 200 N.J. 207, 976 (2009). The contested issue in Dean was whether the economic loss doctrine, a judicial construct which bars recovery in tort for damage a product causes only to itself, applied to bar a homeowner’s tort claim for a defective exterior finishing system installed on their home during construction. The salient question the Supreme Court had to answer was whether a home built with the exterior siding product, in this case manufactured by defendant Sto Corporation (“Sto”), was considered the “product itself” for purposes of delineating Sto’s tort liability. If the exterior siding product was considered to be fully integrated into the home, then home purchasers would be precluded from pursuing products liability relief against manufacturers of allegedly defective products permanently affixed to the outside of the home, for damage those products caused to the home. In a triumph for home purchasers, innocent builders and developers, the Supreme Court held that Sto’s exterior finishing product, Exterior Insulation and Finish System (“EIFS”), was a separate product from, and not fully integrated into, plaintiffs’ home. A cause of action, therefore, exists against Sto to the extent that its EIFS product caused damage to the house or its structural components.
The New Jersey Products Liability Act (the “Act”) creates a tort cause of action against a manufacturer or seller of a defective product. N.J.S.A. 2A:58C-2. However, the Act specifically limits recovery to the harm done to people or property, other than the product itself. N.J.S.A. 2A:58C-1b(2). If a defective product causes damage exclusively to itself, the loss is said to be strictly “economic” and the claimant does not have a cause of action in tort. Thus, the judicial construct known as the “economic loss rule” was embodied by the legislature in the Act and serves to bar tort remedies in strict liability or negligence when the only claim is for damage to the product itself. See Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555 (1985).
In Dean, the plaintiffs, Robert, Jennifer, and Mary Sue Dean, purchased a home in 2002 from its original owners. The home had been built with EIFS. Prior to closing, plaintiffs hired a home inspector to conduct an investigation. The inspection report raised some concerns regarding the EIFS siding. Later, plaintiffs learned that their insurer would not transfer their existing homeowner’s policy to the new property, allegedly because of the EIFS. Nonetheless, plaintiffs purchased the home and moved in. About one year after moving in, they started noticing black lines on the exterior of their home and consequently hired an industrial hygienist to inspect their house. The industrial hygienist found toxic mold that he attributed to leaks from the EIFS. Plaintiffs eventually had all of the EIFS cladding removed and replaced. In May 2004, plaintiffs filed suit against multiple defendants including Sto Corp., the manufacturer of the EIFS. As the case progressed, plaintiffs settled with all of the defendants except Sto. Sto moved for summary judgment, which the Court granted, reasoning that the EIFS was so integrated into the home that the home itself was the product and any damage to its structural elements was strictly an economic loss. In other words, the Court used the integrated product doctrine to conclude that the attachment of the EIFS to the home made the home itself the “product” at issue and then relied on the economic loss rule to bar plaintiffs’ tort claim against Sto because their cause of action only alleged damage to their house, the “product”. On appeal, the Appellate Division affirmed the trial court’s grant of summary judgment. Appeal to the New Jersey Supreme Court followed.
The Supreme Court granted certification to decide first, whether it will adopt the integrated product doctrine and, if so, whether the EIFS was sufficiently integrated into plaintiffs’ home that the economic loss rule bars any recovery for damages to the EIFS or to the home. The Court reasoned that “a product that is merely attached to or included as part of the structure is not necessarily considered to be an integrated part thereof”, particularly in the case of homes. Noting that California courts have declined to apply the integrated product doctrine to products used in building houses, the Court concluded that the affixed EIFS did not become a fundamental part of the house structure itself, and at all times was distinct from the house. Holding that the EIFS was a separate and distinct product from the home itself, the Court concluded that the economic loss rule precluded plaintiffs from recovering for damage to the EIFS itself i.e. cost of replacement, however, they were not precluded from recovering for damage “the EIFS caused to the house’s structure or to its environs.” Thus, “to the extent that the EIFS caused damage to the structure of the house or its immediate environs,” plaintiffs retained a viable cause of action against Sto, the product’s manufacturer.