The Economic Loss Rule and Tort Claims by Owners against Design Professionals

This blog post looks at the question of when a project owner, who has a contract with the design professional, may assert an action against a design professional in negligence for purely economic losses. Actions against design professional can arise under a number of legal theories, but the two most common are contract and tort. Tort claims focus on duties imposed by law, while contract claims center on obligations agreed upon by the parties. The distinction often determines whether a plaintiff can recover purely economic losses and whether privity of contract is required.

The distinction between contract and tort is significant due to the availability of different remedies, limitations periods, and burdens of proof. It is normally to a plaintiff's advantage to get both tort and contract claims before the trier of fact when the same facts will sustain either cause of action, because access to multiple theories of recovery may permit a plaintiff to avoid legal or remedial pitfalls which may apply to one cause of action but not another. Niagara Mohawk Power Corp. v. Stone & Webster Eng'g Corp., 725 F. Supp. 656 (N.D.N.Y. 1989).

Economic Loss Rule

In some jurisdictions the ability to recover purely economic losses in tort is limited or precluded by the economic loss rule. “The economic loss rule holds that when the bargained-for level of quality in a contract is not met, the law of contracts provides the sole remedy. Tort recovery is not available because the contract defines the breach and the damages.” McConnell v. Servinsky Eng'g, PLLC, 22 F. Supp. 3d 610 (W.D. Va. 2014).

Jurisdictions That Apply the Economic Loss Rule to Tort Claims against Design Professionals 

As the Hawaiian Supreme Court has noted: “In the context of construction litigation involving design professionals, sound policy reasons counsel against providing open-ended tort recovery to parties who have negotiated a contractual relationship.”  The court went on to state that if tort and contract remedies were allowed to overlap, certainty in allocating risk would decrease and the construction industry would suffer, because it is the industry in which we see most clearly the importance of the precise allocation of risk as secured by contract. City Exp., Inc. v. Express Partners, 959 P.2d 836 (Haw. 1998).

The Arizona Supreme Court, following the same logic, held that the economic loss rule precluded an owner’s claims against an architect whose designs for an apartment complex did not comply with HUD regulations, and which required the owner to incur substantial costs to come into compliance with those regulations. The court went on to state that in the construction defect context, involving only pecuniary losses, there were no strong policy reasons to impose tort liability in addition to contractual remedies. “The economic loss doctrine appropriately applies in this context because construction contracts typically are negotiated on a project-specific basis and the parties should be encouraged to prospectively allocate risk and identify remedies within their agreements.” Flagstaff Affordable Hous. Ltd. P'ship v. Design All., Inc., 223 P.3d 664 (Ariz. 2010).

Jurisdictions That Do Not Apply the Economic Loss Rule to Tort Claims against Design Professionals 

Nonetheless, some jurisdictions, even those that apply the economic loss rule in other contexts, allow tort actions against design professionals by project owners. In Florida, which applies the economic loss rule in products liability cases, the Florida Supreme Court has held that the economic loss rule did not bar a cause of action against a design professional for negligence, even where purely economic damages resulted. Moransais v. Heathman, 744 So.2d 973 (Fla. 1999).

Similarly, the Fifth Circuit, applying Mississippi law, has held that the economic loss rule did not preclude negligence claims against an engineer, because Mississippi law did not apply the rule outside the context of products liability. Lyndon Property Ins. Co. v. Duke Levy and Assoc., 475 F.3d 268 (5th Cir. 2007).

Alaskan courts have created an exception to the economic loss rule for matters involving design professionals and have held that “a project owner may sue a design professional in tort for economic losses arising from the professional’s malpractice, despite the existence of a contractual relationship between the parties.” State, Dep't of Nat. Res. v. Transamerica Premier Ins. Co., 856 P.2d 766 (Alaska 1993).

Nebraska, which generally limits the economic loss rule to products liability and breaches of contractual duties where no independent tort duty exists, allows tort claims by owners against design professionals, even in the absence of personal injury or damage to other property. Getzschman v. Miller Chem. Co., 443 N.W.2d 260 (Neb. 1989).

Louisiana also appears to recognize the right of a project owner to pursue tort claims against a design professional. However, a tort claim versus a contract claim may be something of a distinction without a difference, as Louisiana does not broadly apply the economic loss rule and the limitations period is likely the same regardless of whether the claim against the design professional is in tort or contract. See City of Shreveport v. CDM Smith, Inc., 2025 WL 1947593.

The Special Relationship Exclusion to the Economic Loss Rule

Finally, even in jurisdictions that do not allow tort claims by owners against design professionals because of the economic loss rule, there may nonetheless be a cause of action in tort if there is a special relationship which creates a duty of care. See, e.g., Niagara Mohawk Power Corp. v. Stone & Webster Eng'g Corp., and Blahd v. Richard B. Smith, Inc., 108 P.3d 996 (Idaho 2005).

Conclusion 

In conclusion, while negligence actions by project owners against design professionals may be precluded by the economic loss rule in some jurisdictions that apply the rule broadly, other jurisdictions either do not apply the economic loss rule in the context of design professional negligence or have created exceptions that allow such claim. In some jurisdictions that do not allow tort claims by an owner against design professionals because of the economic loss rule, there may still be a cause of action in tort when there is a special relationship that creates a duty independent of the contractual relationship.

Author and Editor Stu Richeson is an attorney with Riess LeMieux in New Orleans, primarily focusing on commercial litigation with an emphasis on construction matters.