In a November 2010 decision, the Washington Supreme Court replaced the longstanding “economic loss rule” with a what it has termed the “independent duty doctrine.” The case, Affiliated FM Ins. Co. v. LTK Consulting Services, Inc. , stemmed from a fire in Seattle’s Monorail System. Prior to the fire, the City of Seattle had contracted with SMS to run the monorail, and had also contracted with LTK to perform engineering services on the system. After the fire, SMS’ subrogating carrier, Affiliated FM, sued LTK in tort (alleging its negligence caused the fire). However, LTK argued, and the trial court agreed, that Affiliated FM’s tort claim was properly dismissed under Washington’s economic loss rule because the alleged damages (repair costs and business interruption) were solely economic and therefore only compensable under a contract claim. Since SMS (Affiliated FM’s insured) did not contract with LTK, the trial court effectively ruled that Affiliated FM had no cause of action against LTK even if its engineering work did indeed cause the fire.
The Washington Supreme Court ruled otherwise, holding that Affiliated FM could proceed with a tort claim against LTK. After discussing the confusion and misapplication surrounding the economic loss rule, the Court stated that a “court’s task is not to superficially classify the plaintiff’s injury as economic or noneconomic.” Instead, the Court continued, “an injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract.” In the case of LTK, the Court found that “engineers who undertake engineering services in this state are under a duty of reasonable care.” Since this independent duty existed, it was irrelevant to the Court that SMS did not contract with LTK, that SMS’ damages were “economic” in nature, or that SMS did not actually own the property that was damaged (it was owned by the City, but SMS was contractually obligated to pay for repairs).
We believe that this decision marks an important clarification in what has otherwise been a vague and often improperly applied doctrine, and will give subrogating carriers an opportunity to proceed with a variety claims that may have previously been barred.