• Economic Loss Ruling Expected to Have Minimal Impact on Florida Agents
  • November 8, 2013 | Authors: Kathleen Hopkins Alsina; Jane R. Goldsmith
  • Law Firms: Phelps Dunbar LLP - Houston Office ; Phelps Dunbar LLP - Baton Rouge Office
  • The Florida Supreme Court recently issued its much-discussed opinion in Tiara Condominium Association, Inc., etc., v. Marsh & McLennan Companies, Inc., etc., et al. (No. SC10-1022). Strictly speaking, the Court’s ruling does nothing more than limit the applicability of an arcane legal theory known as the “Economic Loss Rule.” While the Court’s ruling eliminates any remaining argument that the Economic Loss Rule (“ELR”) might provide a defense in agent malpractice cases, in practice the Tiara decision will have little impact on Florida’s insurance agents.

    The ELR is a judicially-created doctrine. Historically, the ELR was used to prohibit a negligence claim and any resulting non-economic damage when a contract existed that specifically defined the limits of liability and risk. Stated another way, a traditional application of the ELR prevented a claimant, who was a party to a contract, from recovering under a negligence theory (also known as a tort theory) without a distinct claim for personal injury or property damage. The doctrine originally applied only in products liability cases. In Fla. Power & Light, 510 So. 2d 899 (Fla. 1987), a Florida electric company sued the manufacturer of electric turbines asserting a negligence (or tort) theory in an attempt to recover for damages to the turbines caused by the turbine’s malfunction. The court dismissed the negligence claim because the damages alleged were the subject of a contract between the parties. Applying the ELR, the court held that the electric company could sue in negligence only if the turbines’ malfunction caused personal injury or property damage to property other than the turbines, which was not the case. As applied, the ELR had the effect of eliminating claims for negligence where a party alleges breach of the contract and an additional count for negligently breaching that contract.

    Although a simple concept in theory, the ELR has been the source of much confusion in the Florida courts. The problems in Florida began in 1987 when the Florida Supreme Court, in AFM Corp. v. Southern Bell, 515 So. 2d 180 (Fla. 1987), expanded the ELR to include contracts for services. As the years went by the Florida courts continued to expand the doctrine’s application. There were also judicially-created exceptions to the ELR, such as the exception for professional services. The expansions, together with the exceptions, created a confusing body of law.

    The Tiara case began in federal court when a condo association sued its insurance broker alleging the broker failed to advise the association of its complete insurance needs. The insurance broker argued that the ELR barred the negligence (tort) claim. The Eleventh Circuit certified the following question to the Florida Supreme Court:
    Does an insurance broker provide a ‘professional service’ such that
    the insurance broker is unable to successfully assert the economic loss rule as a bar to tort claims seeking economic damages that arise from the contractual relationship between the insurance broker and the insured?

    The Florida Supreme Court rephrased the certified question as follows: “Does the Economic Loss rule bar an Insured’s suit against an insurance broker where the parties are in contractual privity with one another and the damages sought are solely for economic losses?” In its opinion, the Supreme Court did not answer the question before it, but instead limited the ELR to products liability cases only. Thus, the Tiara decision has rightfully received a good deal of attention because the Court abolished practically every ELR decision since 1987, including the expansions and the exceptions, and returned the law in Florida to its pre-1987 status.

    Even prior to Tiara, however, it was never clear whether the ELR applied to actions against Florida insurance agents. Some trial courts would apply it and some would not. This ambiguity resulted largely from the professional services exception to the ELR. Because Florida courts treat insurance agents as professionals on some but not all matters, considerable confusion existed as to whether the ELR applied to the agreements between agents and their clients. The only known case to address the specific issue concluded that the ELR did not apply to actions against insurance agents because the relationship between an agent and insured involved extra-contractual duties. Randolph v. Mitchell, 677 So. 2d 976 (Fla. 5th DCA 1996) suggested that an insurance agent’s relationship with his client was not unlike the relationship between an attorney and his client. If Mitchell was the law of the land, which was never clear, then Tiara changes nothing for Florida’s insurance agents.

    To the extent Tiara represents a bright-line ruling on use of the ELR, it is still not likely to be material in most insurance agent cases. There were always advantages and disadvantages to invoking the ELR in an agent malpractice case. The obvious advantage of the ELR was that the parties were limited to the terms of the oral (and occasionally the written) agreement to procure insurance coverage. When invoked, a cause of action for negligence could not stand. Since this left only the contract claim, such advantages were frequently outweighed by the significant disadvantages. By requesting that the action proceed solely in contract the agent was forced to give up any defenses directed to the negligence claim, including comparative negligence. In a typical insurance agency case, comparative negligence can be the best defense. It is not unusual for an insured to sue an insurance agent despite never taking the time or effort to read his or her policy, or other pertinent documents and communication. Most courts would agree that such failures constitute comparative negligence, thereby reducing the potential liability of the insurance agent. Comparative negligence is not available as a defense to a contract action, thus when the ELR was invoked the agent had to give up any comparative negligence arguments. As a result, agents defending against such claims often intentionally abandoned the ELR defense.

    In sum, the Tiara decision does little more than return Florida to the state of the law as existed pre-1987. That is to say, an insurance agent’s client may again sue in the same action for both breach of the contract and negligence. Importantly, however, the decision does not expand the duties an agent owes to an insured, nor does the decision affect the general limitation of damages recoverable against an agent.