This article was originally published in the Subrogator, a publication by the National Association of Subrogation Professionals, Fall 2004, Page 140. © Copyright 2004 by NASP. All rights reserved. Republished by Butler with permission from NASP.
When subrogating against an adverse party having a contractual relationship with your insured, it is routine to face the argument that your damages are barred by the economic loss rule. Most jurisdictions have carved out an exception to the sometimes harsh results that can flow from the operation of this rule. One such exception is the “other property” exception, which typically allows for tort recovery when the damaged “other property” is not a subject of the contract.
Virginia courts allow the recovery of damages both in contract and in tort when the parties are governed by a contract. However, Virginia courts have limited the application of this exception to cases where the duty breached is a common law duty, not a duty existing between the parties solely by virtue of the contract. In fact, the Supreme Court of Virginia has narrowly defined what constitutes a common law duty for the purposes of separating “contract” actions from “tort” actions.
In a long line of cases, the Supreme Court of Virginia has consistently rejected claims sounding in tort for economic losses resulting from breaches of duties between parties whose relationship stems from a contract. See generally Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 347 (Va. 1998). As an extension of these cases, this has become the unofficial “Rule” in Virginia: An action in tort (even to recover for “other property” damages) involving parties whose relationship arises solely from a contract is disallowed or not pursued. As a result, defendants who cause damage based on negligent performance under a contract have been extended benefits beyond the terms of the contract agreed to by the parties, because insureds and insurers have been denied (or been reluctant to pursue) the ability to recover damages to “other property.”
However, several Virginia courts recently have departed from the traditional interpretation of what constitutes a common law duty for the purposes of distinguishing contract limitations from tort recovery. In Gonella v. Lumbermans Mut. Casualty Co. and Master Roofing and Siding, 2004 WL 836031, at *1 (Va. Cir. Mar. 15, 2004), homeowners sued their insurer and a contractor, after having contracted with both, in negligence for property damages and additional expenses related to water losses that occurred in the house after roofing repairs were performed by the contractor at the request of the insurer. The court concluded that a party is not completely barred from recovery where the parties’ relationship arises from a contract, because the claim for damages in tort was beyond the economic expectations of the contract. The court explained that when a party performs repair work on another party’s residence, a duty exists to perform such work without creating an unreasonably dangerous condition on the property, and that this duty exists apart from expectations associated with the parties’ contract.
In an order issued in the currently pending case of Anne Taylor and David Taylor v. Shenandoah Electric Co., Inc., CL03—17 (Va. Cir. June 9, 2004),(1) the Circuit Court for Rockbridge County denied the Defendant’s demurrer and held the Defendant had failed to show that the Plaintiff’s negligence claims for damages were barred by the economic loss rule even though the parties were governed by a contract. In Taylor, the Plaintiffs’ house was severely damaged by fire as a result of alleged improperly installed wire by the Defendant, Shenandoah. The Taylors brought an action in negligence for damages to the house, its contents, and extra expense. The Defendant claimed that, pursuant to the economic loss rule, because the relationship between the parties was governed by a verbal contract, that the negligence claim of the Taylors was barred by the economic loss rule.
Although the Taylor court does not elaborate on its reasoning for allowing the Taylor’s negligence claims to go forward over the demurrer (based on the economic loss rule) of the Defendant, Plaintiff’s counsel cited Gonella in support of its negligence claims for damage to “other property,” and emphasized the distinction between the subject matter of a contract (damages to the property that was the subject of the contract) and damages to “other property” (unrelated to the subject matter of the contract).
These two rulings suggest that there may be a movement in Virginia towards allowing tort claims to exist side by side with contract claims, when the tort claims are for damages to other property, and arise solely because of the defendant’s duty to properly perform under the contract. This would be in line with a standard subrogation damages/recovery analysis well-accepted in many States.
Another important result of this distinction between contract damages and tort damages arising from the same set of circumstances, and in which an oral contract is involved, is that prior to these decisions, a plaintiff was seriously prejudiced by the fact that Virginia does not typically follow the “discovery rule.” In Virginia, the statute of limitations for a breach of a contract begins to run from the date that the contract is performed, and not from the date that the breach of the contract is discovered. The impact of this rule, when coupled with Virginia courts’ expansive treatment of the economic loss rule, is that when the work that is the subject of an oral contract causes damage to itself and to “other property” the injured party was barred from bringing a negligence action (five year statute of limitation) by the expiration of the shorter statute for breach of an oral contract (three years). This provided a benefit to the defendant by barring the plaintiff’s claim that happened to fall in that “post-three year” but “pre-five year” period.
In sum, the unofficial “Rule” in Virginia regarding recovery of damages to property not the subject of a contract may be losing its influence. At least two courts have now interpreted the law in Virginia to allow tort claims where the parties are related only through a contract, but where property is damaged beyond the subject matter of that contract. Perhaps more will follow.
The author wishes to thank Hobart M. Hind, Jr., Esq., Butler Weihmuller Katz Craig LLP, for his valuable assistance in writing this article.