Since 1984, Arizona’s “economic loss rule” has prevented an aggrieved party from recovering purely economic damages under tort law unless the tort (e.g., negligence) was accompanied by physical harm—either in the form of personal injury or damage to other property. 
   The economic loss rule has historically applied to construction cases. However, in its March 2009 decision in Valley Forge Insurance Company v. Sam’s Plumbing, the Arizona Court of Appeals surprised the state’s construction industry (and construction attorneys) by ruling that the economic loss rule did not bar a negligence claim against a plumbing subcontractor for damages caused by a gas line explosion.

 

Gas Explosion

This case arose from a gas explosion that occurred in a southern Arizona shopping center that was insured by Valley Forge. The explosion, which severely damaged the shopping center but did not cause bodily injury or damage to any personal property, was allegedly caused by negligent gas line work performed by Sam’s Plumbing.

   The shopping center owner put in a claim to Valley Forge for property and business interruption damages caused by the gas explosion. Valley Forge paid more than $1.1 million to the shopping center owner as full compensation for the damages.

   Valley Forge then asserted a subrogation claim for negligence against Sam’s Plumbing to recover its $1.1 million payout. Sam’s Plumbing filed a motion for summary judgment, arguing the economic loss rule barred Valley Forge’s claim. Based on prior cases the trial court granted Sam’s Plumbing’s motion.

 

The Court of Appeals first looked at the protections afforded by contract law versus tort law. The Court noted that, in the property damage context, contract law focuses on standards of quality as defined by the contracting parties, while tort law focuses on the objective reasonableness of certain conduct and the actual harm it causes. The Court then explained that the decision as to whether contract or tort law applies is not a hard and fast rule (as the economic loss rule has been applied over the years in Arizona), but instead is based on three equally important factors:

 

   • The nature of the defect causing the loss;

   • How the loss occurred; and;

   • The type of loss for which the plaintiff seeks redress.

 

The Court further noted that the first factor looks at whether quality or safety concerns are primary; the second considers whether the loss results from a slow deterioration or a sudden accident or calamity; and the third examines the nature of the loss claimed.

   Applying these factors to the facts present in Valley Forge, the Court determined that there was no reason to preclude the tort action. The Court noted that Sam’s Plumbing contracted with the tenant to do limited work to the tenant’s space, and the resulting explosion severely damaged not only the tenant’s space but other parts of the shopping center as well. The Court determined that the deficient work on the gas pipes did not simply fall below the quality standards specified in the tenant’s contract. Instead, the work presented an extreme risk of danger to everyone and everything around the piping.

   Finally, the Court found that the explosion in this case is the exact type of sudden calamity or extraordinary event that is routinely governed by tort law.

 

The Court ruled that, in a construction defect case, the economic loss rule should be analyzed as it was by the Arizona Supreme Court in a products liability case, Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp. The Court explained that, in Salt River, the Supreme Court did not create a bright-line test for determining whether to apply tort or contract law to a given case but, rather, utilized a balancing-of-the-factors test.

   Finally, although the Court of Appeals recognized the public policy goals of the economic loss rule to assure that contract law does not “drown in a sea of tort” and to encourage parties to efficiently negotiate the potential liabilities arising from contractual relationships, the Court noted that tort law also pursues important societal goals.

   The Court found that Sam’s Plumbing had a general duty under tort law, separate from any contractually assumed obligation, to exercise reasonable care in any work undertaken. This duty included the specific duty to take precautions to avoid a dangerous gas explosion.

   The Court held, therefore, that if Sam’s Plumbing breached this duty, Sam’s Plumbing was liable for all of the resulting economic damages.

 

Impact on Contractors

If the economic loss rule no longer precludes tort claims in Arizona construction defect cases, what is the consequence for contractors?

   One major effect of the Valley Forge decision is that Arizona’s statute of repose (A.R.S. § 12-552) would no longer provide the same degree of protection to contractors. Prior to Valley Forge, contractors could be sued for property damage only under contract law. The statute of repose mandates that no claim under contract law can be brought longer than eight years after the project was completed.

   However, by its very wording, the statute of repose applies only to contract claims. Tort claims, on the other hand, can be brought at any time within two years after the claim is discovered. Under Valley Forge, owners can now bring claims against contractors under tort law as long as the claim is brought within two years after it is discovered.

   In other words, the statute of repose would no longer provide a date certain after which the contractor was safe from being sued for claims arising from work it performed.