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Legal Update

New Jersey Economic Loss Rule Bars Recovery in Tort for Cost of Replacing Defective Product

18 November 2010
Mayer Brown Legal Update

The Supreme Court of New Jersey has held that the economic loss rule codified in New Jersey’s Products Liability Act prohibits plaintiffs from recovering in tort for damage to a defective product manufactured by the defendant even if plaintiffs also lack a contractual remedy against the manufacturer.

In Dean v. Barrett Homes, Inc., 2010 WL 4569954 (N.J. Nov. 15, 2010), plaintiffs purchased a house that came equipped with an Exterior Insulation and Finish System (EIFS), sometimes called synthetic stucco. Affixed to the outside of plaintiffs’ house, the EIFS operated as a combined insulation and wall finish system. Plaintiffs removed and replaced the EIFS after discovering that toxic mold had leaked into their home, purportedly the result of defects in the EIFS.

Although plaintiffs did not allege any physical injuries, they sued the manufacturer of the EIFS, asserting claims for (among other things) strict liability under the New Jersey Products Liability Act (Act). Plaintiffs sought to recover both the cost of removing and replacing the EIFS as well as any damage that the EIFS caused to their home. The trial court granted summary judgment for the manufacturer, holding that the economic loss rule barred recovery, and the Appellate Court affirmed.

The New Jersey Supreme Court reversed in part. After tracing the origin of the economic loss rule and its codification in the Act, the court noted that many federal courts have “expand[ed] the economic loss rule through the adoption of an approach referred to as the integrated product doctrine.” That doctrine “extend[s] the economic loss rule to preclude tort-based recovery when a defective product is incorporated into another product which the defective product then damages.”

The court declined to resolve whether New Jersey recognizes the integrated product doctrine, holding that the EIFS “did not become an integral part of the structure itself, but was at all times distinct from the house.” Therefore, the court held that plaintiffs could recover in tort for “such damages as the EIFS caused to the house’s structure or to its environs.”

However, the court also held that the economic loss rule precluded plaintiffs from recovering in tort for the costs of removing and replacing the EIFS. The court thus rejected plaintiffs’ argument that the economic loss rule did not bar recovery in tort where, as here, non-commercial purchasers of an allegedly defective product lacked privity with, and contractual remedies against, the product’s manufacturer.

The court explained that, in passing the Act, the legislature sought “to serve the same purposes addressed by the well-established common law economic loss rule of drawing a clear line between remedies available in tort and contract.” The legislature did not intend the Act “to be a catch-all remedy that would fill the gap when ordinary contract remedies, including breach of contract, statutory causes of action, or express and implied warranty claims, were lost or unavailable.”

A dissenting justice agreed that plaintiffs could not recover for the cost of removing and replacing the EIFS, but would have adopted the integrated product doctrine and applied it to bar plaintiffs from recovering for damage caused by the EIFS to their home.

The New Jersey Supreme Court’s opinion is of substantial import to product manufacturers generally. By barring plaintiffs who lack a contractual remedy from recovering in tort for damage to a defective product, the court significantly cabined product manufacturers’ potential liability. The court also left open the important question of whether New Jersey recognizes the integrated product doctrine, a question likely to arise again in the near future.

For more information about the matters discussed in this Legal Update, please contact at +1 312 701 8857.

Learn more about our Consumer Litigation & Class Actions and Product Liability & Mass Torts practices.

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