Sixth Circuit Refuses to Apply Kentucky’s Economic Loss Doctrine to Purchases by Consumers

The Sixth Circuit recently held that it would not apply Kentucky’s economic loss doctrine to consumer purchases, and consumers are free to pursue tort claims against manufacturers even when damage occurs only to a product itself.

The Sixth Circuit was sitting in diversity and ruled in State Farm Mut. Auto. Ins. Co. v. Norcold, Inc., that the plaintiff could pursue its product liability claims and the economic loss doctrine was inapplicable to the plaintiff’s subrogation action under Kentucky law. Plaintiff State Farm provided property insurance to its insured (an individual) who purchased a used recreational vehicle (RV). The RV came equipped with a Norcold refrigerator that was incorporated into the vehicle by the RV manufacturer. About a year after the RV was sold to State Farm’s insured the refrigerator caused a fire.

The fire caused no personal injuries or property damage other than to the RV itself. State Farm paid its insured for the damage and brought a subrogation claim against the refrigerator’s manufacturer, Norcold.

Norcold argued that Kentucky’s economic loss doctrine precluded State Farm’s product liability claims, and State Farm was limited only to contract damages. State Farm argued that Kentucky’s economic loss doctrine would not apply because the purchaser of the RV was a consumer, and not a commercial entity. The Sixth Circuit agreed with State Farm.

The Sixth Circuit noted that the Kentucky Supreme Court had not ruled specifically on whether the economic loss doctrine applied to consumers. Kentucky’s Supreme Court only recently adopted the economic loss doctrine in Giddings & Lewis, Inc. v. Indus. Risk Insurers, 348 S.W.3d 729 (Ky. 2011), which dealt with application of the doctrine to a product purchased by a commercial entity. The Sixth Circuit used Giddings & Lewis, Inc. as guidance and predicted that the Kentucky Supreme Court would not apply the economic loss doctrine to a tort claim brought by an consumer.

In Giddings & Lewis, Inc. the Kentucky Supreme Court limited its ruling specifically to commercial purchases, and provided three policy reasons for applying the economic loss doctrine to those transactions: (1) maintaining the distinction between tort and contract law; (2) protecting the freedom to contractually allocate economic risk; and (3) encouraging the party best situated to assess the risk of economic loss to insure against that risk. The Sixth Circuit in Norcold, Inc. determined that these policies would not be satisfied by applying the economic loss doctrine to consumers. Specifically relating to (2) and (3).

The Sixth Circuit held that consumers are typically unsophisticated purchasers who do cannot engage in meaningful negotiations with a manufacturer and are often unaware of inherent risks of a product. Additionally, the court found that a manufacturer typically has a better understanding of a product’s performance than an average consumer, and the manufacturer can better insure against the risk of the product failing to perform.

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