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Does the Economic Loss Rule Apply to Professional Liability Claims? An Analysis.

Posted by: on Mon, Nov 19, 2012

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Nevada law generally provides that a party who has no privity of contract with a defendant, and who is therefore suing in tort, not contract, is required to allege that the defendant’s conduct caused some personal injury or property damage in order to state a viable negligence claim, and cannot sue in negligence for purely economic losses.

In Nevada, the economic loss doctrine prevents claimants from suing in tort for purely economic losses, where no claimed personal injury or damage to separate property is involved. As such, it prevents parties who have no contractual privity with a Defendant, from suing for purely economic losses.

“The economic loss doctrine is a judicially created rule . . . [which] marks the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care, and thereby [generally] encourages citizens to avoid causing physical harm to others.” Terracon Consultants Western, Inc. v. Mandalay Resort Group; et al, 125 Nev. 66, 206 P.3d 81, 85-86 (2009) (citations omitted).

The “primary purpose of the economic loss doctrine” is “to shield the defendant from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable.” Id., at 86-87. This purpose would be defeated if plaintiffs could “sue under a negligence theory for purely economic losses, without accompanying personal injury or property damage.” Id. (citations omitted).

Notwithstanding the economic loss doctrine, certain types of long-recognized claims, which might be characterized as hybrid contract-negligence claims, will stand, such as for the professional malpractice of a lawyer. On the other hand, in the Terracon decision, the Nevada Supreme Court declined to allow a professional negligence claim to stand against engineers and architects for allegedly negligent services rendered in a commercial construction project. In Terracon, the Court was asked to review certain certified questions, from the United States District Court for the District of Nevada, Robert C. Jones, Judge, which the Nevada Supreme Court chose to conflate into a single question, namely: “Does the economic loss doctrine apply to preclude negligence-based claims against design professionals, such as engineers and architects, who provide services in the commercial property development or improvement process, when the plaintiffs seek to recover purely economic losses?” Terracon, 206 P.3d, at 83.

The Terracon court ultimately ruled in the affirmative on this question, holding as follows:

[W]e conclude that the economic loss doctrine should apply to bar the professional negligence claim at issue here.

In the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims. This legal line between contract and tort liability promotes useful commercial economic activity, while still allowing tort recovery when personal injury or property damage are present. Further, as in this case, contracting parties often address the issue of economic losses in contract provisions.

Id.

, at p. 89.
The Terracon decision has been described as representative of a majority trend in cases involving design professionals providing services for commercial construction projects. Nevertheless, this ruling seems to otherwise run against the grain and carve out an exception to the general rule typically allowing negligence claims to stand in a professional malpractice setting. As the Terracon decision itself recognized, despite the economic loss rule, recovery for professional negligence actions may be pursued against attorneys, accountants, real estate professionals and other similarly situated defendants. Id., 206 P.3d, at p. 87. Such professional negligence and malpractice types of actions will obviously typically involve privity of contract between the professional and the injured party. For example, one of the elements of a legal malpractice claim is the existence of an attorney-client relationship, without which no claim for legal malpractice will stand. See, Warmbrodt v. Blanchard, 100 Nev. 703, 706-707, 692 P.2d 1282, 1285 (1984)(identifying the elements of a cause of action for legal malpractice as (1) the existence of an attorney-client relationship; (2) the existence of a duty on the part of the lawyer; (3) failure to perform the duty; and (4) this negligent failure proximately causing damage to the client).

Similarly, Nevada recognizes a cause of action for appraiser negligence, but only in favor of those who are entitled to rely on an appraiser’s work product. Goodrich & Pennington Mortgage Fund, Inc. v. J.R. Woolard, Inc., 120 Nev. 777, 101 P.3d 792 (2004). The Goodrich case involved a mortgage issuer successfully suing for damages stemming from its reliance on an appraisal which negligently failed to note the existence of construction defects in a property and which negligently indicated construction was complete, when it was not. The appraiser Defendant in Goodrich, however, conceded, among other things, that the Plaintiff “was entitled to rely on the representations” set forth in the appraisal, in a case where such “justifiable reliance” was an element of the claim. Id., 120 Nev. at 781, 101 P.3d at 795. Thus, if an appraiser was sued in negligence by someone who did not have a contractual relationship with the appraiser, but claimed to be damaged by his work product, the economic loss rule could arguably be asserted as an effective defense.

The argument would be that, just as only an attorney’s client can sue an attorney for legal malpractice, only a party who contracted with an appraiser should be able to claim justifiable reliance on the assertions of the appraisal report. See, e.g., Huntington Mortgage Co. v. Mortgage Power Financial Services, Inc., 90 F. Supp.2d 670 (D. Maryland 2000)(rejecting argument that real estate appraisers have a duty to third parties, even in the absence of privity of contract and holding that, under applicable law, absent privity of contract, real estate appraiser owed no duty to third parties relying on appraisal for purposes of establishing duty element of a negligence claim); The Provident Bank v. O’Brien, 53 Va. Cir. 107 (Virginia Circuit Court 2000)(rejecting Plaintiff’s claims for negligence, professional malpractice, and negligent misrepresentation where Plaintiff was not in privity with defendant appraisers).

The economic loss doctrine is an important defense in many suits involving losses that are purely monetary in nature, and do not involve personal injury or property damage. In some cases, as shown by the Terracon decision, the doctrine may even be utilized to limit liability for traditionally accepted professional liability claims. However, the general rule is that the doctrine is not a protection for such claims, and the question would need to be analyzed carefully with competent counsel based on the facts of any particular case.

D. Chris Albright

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our law practice includes a strong emphasis on all areas of construction law.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.