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In Mid-Century Insurance Co., v. HIVE Construction, Inc., a Colorado court of appeals recently reversed the decision of a lower court that had refused to apply the economic loss rule to a negligence claim alleging wanton or willful misconduct. The appellate court determined that, where the negligence claim was based solely on the breach of a contractual duty, it was barred by the economic loss rule regardless of whether the negligence was willful or wanton.

The project at issue involved the buildout of a restaurant in Denver, Colorado. The general contractor substituted a layer of fire-resistant plywood in place of a layer of drywall used to separate the kitchen and dining room of the restaurant. Although fire-resistant, the plywood was combustible, and the broiler selected for the kitchen required eight inches of clearance from combustible materials. The parties disputed whether the owner was on notice of the substitution. The owner installed the broiler only an inch from the plywood layered wall. Despite that, the kitchen passed inspection.

Two years later, a fire broke out in the wall next to the broiler, and the owner’s expert opined that the ignition of the plywood due to heat radiated from the broiler caused the fire. The owner asserted a single negligence claim against the contractor alleging, in part, that the contractor’s installation of the combustible plywood demonstrated a careless and reckless disregard for the rights and safety of others, which constituted willful and wanton conduct.

The contractor answered the complaint by arguing the economic loss rule barred recovery on the negligence claim. After the jury returned a verdict in favor of the owner, the contractor moved for a directed verdict based on the economic loss rule. The trial court denied the motion, relying primarily on prior Colorado precedent that the “economic loss rule does not apply to intentional conduct.” The contractor appealed.

Per the appellate court, the “economic loss rule generally provides that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such breach absent an independent duty of care under tort law.” The rule is intended to maintain a distinction between breaches of contractual obligations/promises and breaches of duties imposed by law without agreement or contract (tort). “Even if the duty allegedly breached is separately recognized under tort law, it is not ‘independent’ of the contract for the purposes of the economic loss rule if it addresses the same obligations created by the contract.

The parties agreed that the relief sought by the owner under the negligence claim was identical to the relief it could have sought under a breach of contract claim — purely economic damages. The appellate court concluded the duty allegedly breached under the negligence claim was indistinguishable from the duty the contractor owed under the parties’ contract. In other words, no independent duty existed.

In rejecting the trial court’s application of existing Colorado precedent, the appellate court noted that there was no allegation of  an intentional tort. Specifically, the court wrote “willful and wanton conduct is that which approaches but does not include an intentional tort nor can it be classified as such.” The court further noted that there was no need for an exception from the economic loss rule for wanton or willful misconduct. That sort of conduct cannot be abrogated or limited by contract in Colorado, so the wronged party maintains a remedy under the contract. Per the court, application of the economic loss rule depends more on the nature of the duty owed and not on the nature of the defendant’s conduct. The appellate court reversed the trial judge’s denial and remanded with instructions to grant the directed verdict.

The Colorado appellate court’s opinion is instructive in describing the basis for and application of the economic loss rule. Inexplicably, the owner in Mid-Century did not file a corresponding breach of contract claim, which resulted in a particularly harsh outcome in this case. Parties to a contract may want to be careful to pursue tort claims in the alternative to or in addition to contract claims to prevent this sort of result. Parties sometimes pursue tort claims to avoid contractual limitations on remedies, and there may be exceptions to the economic loss rule that permit this approach. But, relying solely on those exceptions to pursue a claim may result in an unfavorable or unexpected ruling. If you have any questions about the economic loss rule or this decision, please do not hesitate to contact Aman Kahlon or Carly Miller.