Valley Forge Insurance Co. v. Sam's Plumbing Thomas, Thomas

• Court: Court of Appeals of Arizona
• Decided: March 19, 2009
• Docket: 2 CA-CV 2008-0095
• Status: Published

Opinion

FILED BY CLERK IN THE COURT OF APPEALS MAR 19 2009 STATE OF ARIZONA COURT OF APPEALS DIVISION TWO DIVISION TWO

VALLEY FORGE INSURANCE ) COMPANY, ) ) Plaintiff/Appellant, ) 2 CA-CV 2008-0095 ) DEPARTMENT B v. ) ) OPINION SAM’S PLUMBING, LLC, an Arizona ) Limited Liability Company; and ) SAMUEL N. THOMAS and LOIS ) THOMAS, husband and wife, ) ) Defendants/Appellees. ) )

APPEAL FROM THE SUPERIOR COURT OF PINAL COUNTY

Cause No. CV-200600364

Honorable Robert Carter Olson, Judge

REVERSED AND REMANDED

Shughart Thomson & Kilroy, P.C. By Robert O. Dyer and Andrew S. Jacob Phoenix Attorneys for Plaintiff/Appellant

Rai & Barone, P.C. By Rina Rai and Brian J. Schmidt Phoenix Attorneys for Defendants/Appellees

E C K E R S T R O M, Presiding Judge. ¶1 The plaintiff, Valley Forge Insurance Company, appeals from the trial court’s

entry of summary judgment in favor of defendants Sam’s Plumbing, LLC, and Samuel and

Lois Thomas (collectively, “Sam’s Plumbing”). Valley Forge argues the trial court erred in

finding its subrogated negligence claim barred by the economic loss rule. We agree and

reverse and remand for the reasons set forth below.

Factual and Procedural Background

¶2 This case arose from a gas explosion in a shopping center building in Pinal

County owned by Gustav Kuhn and insured by Valley Forge.1 Viewing the facts in the light

most favorable to Valley Forge, the party opposing summary judgment, see Grand v.

Nacchio, 214 Ariz. 9, ¶ 3, 147 P.3d 763, 767 (App. 2006), we accept for purposes of this

appeal that the explosion was caused by negligent gas line work performed by Sam’s

Plumbing pursuant to its contract with a tenant leasing a space in the shopping center. The

explosion “severely damaged” Kuhn’s shopping center, but it neither caused him bodily

injury nor damaged any of his personal property. Valley Forge paid more than $1.1 million

to Kuhn “for property and business-interruption damages” caused by the explosion, which

fully compensated Kuhn for the incident.2 Valley Forge then asserted a subrogated

1 Valley Forge’s complaint was originally filed in Maricopa County. When venue changed to Pinal County, the cause number CV-200701551 was assigned. This cause of action was later consolidated, along with several others, into CV-200600364. See Ariz. R. Civ. P. 42(a). 2 Although Valley Forge asserted in its opening brief that it paid Kuhn “more than $1.4 million for physical property damages and lost rents,” it failed to support this claim with citations to the record. In any event, the precise amount of damages the explosion caused is a factual issue irrelevant to our disposition of this appeal.

2 negligence claim against Sam’s Plumbing seeking to recover Kuhn’s damages resulting from

the explosion.

¶3 Sam’s Plumbing filed a motion for summary judgment and argued the

“economic loss rule” barred Valley Forge’s claim and therefore any claim against it sounded

in the law of contract rather than the law of tort. The trial court, relying on Carstens v. City

of Phoenix, 206 Ariz. 123, 75 P.3d 1081 (App. 2003), and Hayden Business Center

Condominiums Ass’n v. Pegasus Development Corp., 209 Ariz. 511, 105 P.3d 157 (App.

2005), disapproved of in part by Lofts at Fillmore Condominium Ass’n v. Reliance

Commercial Construction, Inc., 218 Ariz. 574, 190 P.3d 733 (2008), applied the “Economic

Loss Doctrine” to the case and found the damage to the building itself was not “qualifying

property damage for the purpose of bringing a negligence claim.” The court thus concluded

Valley Forge’s negligence claim was barred as a matter of law and granted summary

judgment in favor of Sam’s Plumbing. Following the entry of a final judgment pursuant to

Rule 54(b), Ariz. R. Civ. P., Valley Forge filed this timely appeal.

Discussion

¶4 Valley Forge argues the “economic loss rule” does not apply to this case

because Sam’s Plumbing’s negligence did not simply cause physical harm to the piping

system—the “subject of th[e] bargain” with the tenant—but instead caused extensive damage

to the shopping center building owned by Kuhn. On appeal from summary judgment, we

determine de novo whether genuine issues of material fact exist and whether the trial court

erred in its application of the law. See Wells Fargo Bank v. Ariz. Laborers, Teamsters &

3 Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, ¶¶ 13-14, 38 P.3d 12, 20

(2002). We conclude the trial court erred in finding Valley Forge’s negligence claim barred

as a matter of law.

¶5 Generally, one may recover in tort for negligently caused property damage. See

Restatement (Second) of Torts § 281 (1965) (invasion of protected interest of another

element of negligence action); see also Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439,

445, 690 P.2d 158, 164 (App. 1984) (“‘Property interests . . . have generally been found to

merit protection from physical harm.’”), quoting Crowder v. Vandendeale, 564 S.W.2d 879,

882 (Mo. 1978). However, when the property damaged is the subject of a contract or

warranty, a typical feature of product liability and defective construction cases, the question

arises whether the plaintiff’s claims, if any, should sound in contract or tort. E.g., Salt River

Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 375,

694 P.2d 198, 205 (1984), abrogated on other grounds by Phelps v. Firebird Raceway, Inc.,

210 Ariz. 403, 111 P.3d 1003 (2005); Woodward v. Chirco Constr. Co., 141 Ariz. 514, 515,

687 P.2d 1269, 1270 (1984). This issue is resolved on a case-by-case basis with the court

analyzing the purposes of the respective bodies of law and applying whichever law is most

appropriate. Salt River, 143 Ariz. at 375-76, 694 P.2d at 205-06.

¶6 Contract law protects the expectation that the parties will receive the benefits

of their bargain and encourages the efficient private ordering of liabilities by allowing parties

to negotiate and distribute their respective responsibilities, while tort law promotes safety and

protects personal and property rights by imposing a baseline duty of care. See id.; Carstens,

4 206 Ariz. 123, ¶ 10, 75 P.3d at 1084. Accordingly, in the context of property damage,

contract law focuses on standards of quality as defined by the contracting parties; tort law on

the objective reasonableness of certain conduct and the actual harm it causes. Carstens, 206

Ariz. 123, ¶ 10, 75 P.3d at 1084.

¶7 With these principles in mind, our supreme court has directed Arizona courts

to consider three non-dispositive factors to determine whether tort or contract law should

apply to a particular claim: (1) the nature of the defect causing loss, (2) how the loss

occurred, and (3) “the type of loss for which the plaintiff seeks redress.” Salt River, 143

Ariz. at 376, 694 P.2d at 206. The first factor turns on whether quality or safety concerns are

primarily implicated. See id. at 376-77, 694 P.2d at 206-07. The second factor looks to

whether the loss results from a slow deterioration or a sudden accident or calamity. See id.

at 377-78, 694 P.2d at 207-08. The third factor examines the nature of the loss claimed as

well as any other contemporaneous losses. See id. at 379, 694 P.2d at 209. If damage occurs

suddenly and accidentally and the defect poses an unreasonable risk of danger to people or

other property, the claim will sound in tort, even if, as in Salt River, the only property

damaged is the defective product itself. See id.

¶8 Applying those principles here, we find no reason to bar Valley Forge’s tort

action. Sam’s Plumbing contracted with the tenant to do limited work to the tenant’s units,

and the resulting explosion severely damaged not only those units, but other parts of the

shopping center as well. The deficient work on the gas pipes did not simply fall below the

quality standards specified in the tenant’s contract, thereby disappointing the tenant’s

5 commercial expectations. Rather, that work presented an extreme risk of danger to everyone

and everything around the piping. And, the explosion was the very type of “sudden calamity

or . . . extraordinary event” that is the hallmark of tort liability. Id. at 378, 694 P.2d at 208.

Finally, the record suggests the losses suffered went far beyond damage to the gas lines

themselves and caused extensive damage to the shopping center. Thus, analysis of each of

the criteria our supreme court established for determining whether a claim should sound in

tort or contract clearly shows that the claim we consider here sounds in tort.

¶9 Although Salt River specifically addressed the application of tort and contract

law in the products liability context, the economic loss rule contemplated in Salt River

involves the same policy concerns as those present in defective construction cases. See

Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A

Critical Analysis, 40 S.C. L. Rev. 891, 897 (1989) (noting rationales for limiting tort claims

and observing “[t]he economic loss doctrine often is described as a creature of product defect

litigation”). And, we can find no basis for distinguishing Salt River from Woodward, a

defective construction case decided by the supreme court approximately three months earlier.

See Woodward, 141 Ariz. at 515-16, 687 P.2d at 1270-71 (recognizing both contract and tort

claims may be available in construction defect cases). Woodward only briefly suggested

what types of damages would be presumptively actionable under contract and tort law

respectively and did so only in dicta. See id. at 516, 687 P.2d at 1271 (“For example, if a

fireplace collapses, the purchaser can sue in contract for the cost of remedying the structural

defects and sue in tort for damage to personal property or personal injury caused by the

6 collapse.”). That reasoning fell far short of concluding tort claims are categorically

precluded when a claimant has exclusively suffered damage to property subject to warranty

or contract. Indeed, in its far more comprehensive treatment of the topic in Salt River, the

supreme court characterized the type of loss suffered as merely one of several factors to be

considered when determining whether property damage is actionable in tort. 143 Ariz. at

376, 694 P.2d at 206. We therefore do not read Woodward, a construction defect case, as

setting forth a different rule for resolving application-of-law questions than Salt River, a

products liability case.

¶10 Nevertheless, Sam’s Plumbing contends, and the trial court found, that

controlling Arizona jurisprudence in the defective construction context has expressly barred

recovery for property damages in tort when the plaintiff has suffered neither personal injury

nor damage to personal property. Indeed, several court of appeals cases have applied a per

se rule, barring negligence claims when damage involves only the structure itself. In Nastri,

a case decided before Salt River, this court held that, in an action between a homeowner and

a builder, only bodily injury or damage to personal property was actionable in tort, not

damage solely to the structure. Nastri, 142 Ariz. at 444-45, 690 P.2d at 163-64. Citing

Nastri, Division One reiterated that holding in Carstens, a case decided after Salt River.

Carstens, 206 Ariz. 123, ¶¶ 2, 11, 13, 75 P.3d at 1082, 1084-85. 3 There, the court

3 Carstens, like Nastri, interpreted Woodward v. Chirco Construction Co., 141 Ariz. 514, 687 P.2d 1269 (1984), to require that holding. See Carstens, 206 Ariz. 123, ¶ 13, 75 P.3d at 1084-85; Nastri, 142 Ariz. at 445, 690 P.2d at 164. However, as discussed, supra, ¶ 9, that interpretation of Woodward cannot be harmonized with the reasoning of Salt River.

7 specifically rejected any consideration of the dangerousness of a building defect in

determining whether an action could sound in tort, reasoning that to do so would “undermine

the bright-line test of actual injury set out by the economic loss rule.” Id. ¶¶ 20-21 & n.3, 75

P.3d at 1085-86 & n.3; see also Hayden Bus. Ctr. Condos. Ass’n, 209 Ariz. 511, ¶¶ 26-27,

105 P.2d at 162 (holding condominium association could bring tort action only for personal

injury or damage to personal property), disapproved of in part by Lofts at Fillmore Condo.

Ass’n.

¶11 As our discussion of Salt River makes clear, however, our supreme court

provided a list of factors, not a bright-line test, for determining whether to apply tort or

contract law to a given situation when property has been damaged. 143 Ariz. at 376, 379-80,

694 P.2d at 206, 209-10 (“Each case must be examined to determine whether the facts

preponderate in favor of the application of tort law or commercial law exclusively or a

combination of the two.”). And Carstens overlooks that one of the factors articulated by the

court as relevant to a determination of whether a property damage claim sounds in tort is the

dangerousness of the defect. Salt River, 143 Ariz. at 376, 694 P.2d at 206. Furthermore, Salt

River teaches, in direct contradiction to the per se rule advocated by Sam’s Plumbing, and

adopted in Carstens, that a claimant may recover in tort when only the defective property is

damaged. Id. at 378-79, 694 P.2d at 208-09.4

4 Although we acknowledge that Salt River does not address the topic, we also question Carstens’s conclusion that the availability of contractual remedies to the claimant is irrelevant in assessing the availability of tort remedies in the defective construction context. See Carstens, 206 Ariz. 123, ¶ 17, 75 P.3d at 1085 (“[I]rrespective of a plaintiff’s contractual claims against a defendant, the [economic loss] rule bars recovery of economic

8 ¶12 Notably, the United States Supreme Court has adopted the per se rule for

determining whether a claim sounds in tort or contract in federal maritime cases. See E.

River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 870-71 (1986). And the

authorities cited by Carstens explaining such a rule in construction defect cases each referred

to the Court’s reasoning in Delaval. See Calloway v. City of Reno, 993 P.2d 1259, 1263-64

(Nev. 2000), overruled on other grounds by Olson v. Richard, 89 P.3d 31 (Nev. 2004);

Barrett, supra, at 915-17. Delaval, in turn, adopted the per se rule based on the reasoning

and holding of Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965). See Delaval, 476

U.S. at 871. Our supreme court, however, expressly rejected Seely’s approach in Salt River.

143 Ariz. at 379, 694 P.2d at 209. Thus, Carstens not only set forth an economic loss rule

at odds with the analysis required by our supreme court in Salt River, but it anchored its

reasoning in a stream of legal authority expressly rejected in Salt River.5

¶13 We are not at liberty to disregard the clear holdings of our supreme court even

when, as here, those holdings have been overlooked by subsequent case law from our

intermediate appellate courts. See State v. Bejarano, ___ Ariz. ___, ¶ 6, 200 P.3d 1015, 1017

(App. 2008). We conclude, therefore, that the trial court erred when it dismissed Valley

damages in tort because such damages are not cognizable in tort absent actual injury.”). But see Woodward, 141 Ariz. at 516, 687 P.2d at 1271 (suggesting contract remedies most appropriate in home construction context when “defects render the home less than the purchaser bargained for”); Dan B. Dobbs, An Introduction to Non-Statutory Economic Loss Claims, 48 Ariz. L. Rev. 713, 726 (2006) (cautioning “the contractual economic loss rule should not bar tort relief to strangers whose rights against the defendant do not arise out of a consensual arrangement that is expected to limit tort rights”). 5 The trial court also relied erroneously on Delaval.

9 Forge’s tort claims in reliance on those appellate cases and did so on the exclusive grounds

that Valley Forge’s subrogee had suffered no personal injury or personal property loss arising

from the alleged defective workmanship on the gas line.

¶14 We acknowledge the public policy goals of the economic loss rule, which the

trial court identified in its scholarly order: to assure that contract law does not “drown in a

sea of tort” and to encourage parties to efficiently negotiate the distribution of potential

liabilities arising from their contractual relationships. Delaval, 476 U.S. at 866. But, as our

supreme court’s extensive discussion of the problem in the context of products liability aptly

demonstrates, the law of tort also pursues important societal goals. Salt River, 143 Ariz. at

376-78, 694 P.2d at 206-08 (emphasizing role of tort law in protecting public and

“preventing accidents by deterring the distribution of unsafe products”). For that reason,

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 dangerous gas explosions. Insofar as Sam’s

Plumbing breached that duty—a factual question that remains to be determined—it is liable

for the actual damages it caused. See U.S. Fid. & Guar. Co. v. Davis, 3 Ariz. App. 259, 263,

413 P.2d 590, 594 (1966) (actual damages those “‘in satisfaction of, or in recompense for,

loss or injury sustained; such compensation or damages for an injury as follow from the

nature and character of the act, and will put the injured party in the position in which he was

before he was injured’”), quoting 25 C.J.S. Damages § 2 (1966); see also Strawberry Water

Co. v. Paulsen, 535 Ariz. Adv. Rep. 25, ¶ 42 (Ct. App. Jul. 29, 2008) (“[L]ost profits may

10 be considered as part of actual damages but are not the sole measure of actual damages.”)

(citations omitted).

¶15 The trial court’s judgment dismissing Valley Forge’s subrogated negligence

claim is reversed and the case remanded for further proceedings.

____________________________________ PETER J. ECKERSTROM, Presiding Judge

CONCURRING:

____________________________________ J. WILLIAM BRAMMER, JR., Judge

____________________________________ GARYE L. VÁSQUEZ, Judge