INDIANAPOLIS — The Indiana Supreme Court held Feb. 1 that the economic loss doctrine prevents a homeowner from pursuing a tort action to recover the cost of allegedly leaking siding, but it does not preclude tort recovery for damage to other parts of the home. Gunkel v. Renovations Inc., No. 76S01-0403-CV-133 (Ind. Sup. Ct.).

Writing for the court, Supreme Court Justice Boehm said, 'We hold that damages recoverable in tort for a defective product or service are governed by the 'economic loss' doctrine whether or not the product or service is supplied in a transaction subject to either the Products Liability Act or the Uniform Commercial Code, or both.'

Plaintiffs/Appellants Lawrence and Judy Lynn Gunkel appealed a ruling by the Indiana Court of Appeals barring the Gunkels' negligence claim against J&N Stone Inc., which installed the stone and masonry exterior of their home.

The Gunkels complained that leaks in the siding caused water and mold damage to ceilings, floors, drywall, and carpets in their Fremont, Ind., home. They sued Renovations Inc., the company they hired to build the home for $435,000 in 1999. The Gunkels later added contract and negligence claims against J&N, the masonry firm they retained six months after contracting with Renovations for the construction.

The trial court awarded summary judgment to J&N on the contract claim. J&N contended that it was not a party to the contract between the Gunkels and Renovation, and had no separate contract with the homeowners.

J&N also argued that the Gunkels were seeking purely economic damages, which are not available under the negligence theory. The trial court agreed and granted summary judgment on that count, as well, but allowing for an immediate appeal.

The Court of Appeals affirmed and the Gunkels appealed to the Supreme Court, which reversed.

Other Property

Justice Boehm explained that the economic loss doctrine provides that contract is the sole remedy for a defective product or failed service.

Indiana courts have applied that doctrine in cases brought under the Products Liability Act (Fleetwood Enterprises, Inc. v. Progressive Northern Insurance Co., 749 N.E.2d 492 [Ind. 2001]) and it applies equally to goods sold subject to the Uniform Commercial Code, Justice Boehm said.

'Indeed,' he noted, 'in Progressive Insurance, we observed that viewing losses as purely 'economic loss'; and not personal or property damage loss is consistent with Indiana law in the context of claims for negligent construction such as we have here.'

But while the doctrine limits claims for damage to the product itself, it allows for damages for personal injury or injury to 'other property,' he continued.

'We think that the theory supporting the economic loss doctrine supplies the answer to whether damage to 'other property' is involved,' Justice Boehm explained.

The justice said that only the supplier of the defective property can properly bargain with the purchaser to allocate risk. 'If a component is sold to the first user as a part of the finished product, the consequences of its failure are fully within the rationale of the economic loss doctrine. It therefore is not 'other property,'' he emphasized.

'But property acquired separately from the defective good or service is 'other property,' whether or not it is, or is intended to be, incorporated into the same physical object,' he said. 'Although we express our reasoning slightly differently, we align ourselves with the courts that have concluded that the 'product' is the product purchased by the plaintiff, not the product furnished by the defendant.'

Here, the Gunkels dealt directly with J&N, Justice Boehm noted.

'The same formulation of the demarcation between contract and tort remedies is controlling — property acquired by the plaintiff separately from the defective goods or services is 'other property' whose damage is recoverable in tort,' the justice said 'That formulation excludes from 'other property' other parts of a finished product damaged by components supplied to the seller by other [manufacturers] and imported into the seller's product. But it does make property acquired separately 'other property ' for purposes of the economic loss rule even if the defective product is to be incorporated into a completed product for use or resale.'

The Court of Appeals erred in holding that the entire house, including J&N's stone facade, was the product, Justice Boehm explained.

The product the Gunkels purchased from J&N was the stone facade, and J&N installed it independently of the work the Gunkels purchased from Renovation, the justice said.

'Therefore, the economic loss rule precludes tort recovery for damage to the facade itself, but tort recovery for damage to the home, and its parts, caused by the allegedly negligent installation of the facade is not limited by the economic loss rule,' Justice Boehm concluded.

David W. Stone IV of Anderson, Ind., and Christopher J. Wheeler of Stout & Wheeler in Angola, Ind., represented the Gunkels.

Glenn L. Duncan and Jacob S. Frost of Thorne Grodnik represented J&N Stone Inc.

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