Valley Forge Insurance Co. v. Sam’s Plumbing, LLC – 3/19/2009

March 24, 2009

Arizona Court of Appeals Division Two Holds that Claim for Property Damage Resulting from Deficient Contractual Performance May Be Actionable in Tort Under Economic Loss Rule Even Absent Damage to Other Personal Property.

A gas explosion caused severe damage to a shopping mall in Pinal County but did not cause bodily injury or damage to the insured’s personal property.  The insurer paid $1.1 million to the insured for business interruption losses and property damage and then brought a subrogated negligence claim against the plumbing company (“Sam’s”) that allegedly caused the explosion. 

Sam’s moved for summary judgment, arguing that under the “Economic Loss Rule,” any claim against it sounded in contract only and not in tort.  The Superior Court granted summary judgment, finding that, under Carstens v. City of Phoenix, 206 Ariz. 123, 75 P.3d 1081 (App. 2003), the damage to the building was not “qualifying property damage” for the purpose of bringing a negligence claim. 

The insurer appealed, arguing that the “Economic Loss Rule” did not apply because the plumbing company’s negligence had not simply caused physical harm to the piping system — the “subject of th[e] bargain” with the tenant — but instead caused extensive damage to the shopping center building.  The Court of Appeals agreed, reversed and remanded. 

A plaintiff generally may recover in tort for negligently caused property damage.  When the damaged property is the subject of a warranty or contract, however, courts must determine on a case-by-case basis whether any action for the property damage sounds in contract or tort. 

Courts consider three non-dispositive factors to determine whether tort or contract law should apply to a particular claim: (1) the nature of the defect causing loss, (2) how the loss occurred, and (3) the type of loss for which the plaintiff seeks redress.  Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 376, 694 P.2d 198, 206 (1984), abrogated on other grounds by Phelps v. Firebird Raceway, Inc.,210 Ariz. 403, 111 P.3d 1003 (2005).  The first factor turns on whether quality or safety concerns are primarily implicated, the second factor looks to whether the loss results from a slow deterioration or a sudden accident or calamity and the third factor examines the nature of the loss claimed as well as any other contemporaneous losses.  If damage occurs suddenly and accidentally and the defect poses an unreasonable risk of danger to people or other property, the claim will sound in tort even if the only property damaged is the defective product itself.

Here, the allegedly negligent work did not merely fall below contractual expectations.  Instead, the work endangered persons and property in the vicinity and resulted in the sort of sudden calamity that is the hallmark of tort liability.  The resulting damage was not limited to the gas lines themselves but extended to other surrounding property. 

The court rejected the per se approach, reflected in Division One’s decision in Carstens, that in an action between homebuyer and builder, only bodily injury and damage to personal property —as distinct from damage to the structure — are actionable in tort.  Salt River adopted a fact-specific factors analysis, not a bright-line rule.  The dangerousness of the defect is a key factor.  Salt River also demonstrates, contrary to Carstens, that a claim may sound in tort when only the defective property itself is damaged.  143 Ariz. 378-79, 694 P.2d at 208-09.

The trial court therefore erred by granting summary judgment on the basis that the insurer’s subrogee had suffered no personal injury or personal property loss.

 Judge Eckerstrom authored the opinion; Judges Brammer and Vásquez concurred.