Beware of Defendants Who Attempt to Push the Boundaries of the Economic Loss Rule (Texas)

by Cozen O'Connor

In most jurisdictions today, to recover under a strict products liability theory, the Plaintiff must prove that a defect in the subject product was a producing cause of the Plaintiff’s damages. More importantly, in order to recover under a strict products liability theory, the Plaintiff must show that the defective product caused physical harm to person(s) and/or property other than the defective product itself. In East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 866, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1985), a unanimous U.S. Supreme Court ruled that when a defective product injures only itself and causes only economic harm, tort claims (i.e., negligence, strict products liability) do not apply. Justice Harry A. Blackmun, writing for the Court, stated "a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself." Therefore, in East River, suit could only be brought under a warranty theory. Suit under a warranty theory could no longer be filed because of a time limit in the contract, so the Plaintiff was left with no remedy. That, in a nutshell, is the Economic Loss Rule.

Quoting from Vincent R. Johnson, The Boundary – Line Function of the Economic Loss Rule, 66 Wash. & Lee L.Rev. 523, 534–35 (2009), the Texas Supreme Court emphasized that using the term “the economic loss rule” is “something of a misnomer” because “there is not one economic loss rule that is broadly applicable throughout the field of torts, but rather several more limited rules that govern recovery of economic losses in selected areas of the law.” Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011). In products liability cases, when a loss arises from failure of a defective product and the damage or loss is limited to the product itself, “recovery is generally limited to remedies grounded in contract (or contract-based statutory remedies), rather than tort.” Id. at 415. However, the economic loss rule “does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer or other property of the user or consumer in addition to causing damage to the product itself.” Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex. 2007) (citing Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 79-80 (Tex. 1977)); Signal Oil & Gas Co. v. Universal Oil Prods., 572 S.W.2d 320, 325 (Tex. 1978); Mid Continent Aircraft Corp. v. Curry County Spraying Serv., 572 S.W.2d 308, 313 (Tex.1978)).

In recent years, some courts have held that when a defective product is “integrated” into another product or system, the whole integrated product is “the product itself” for purposes of the economic loss rule. For example, in Pugh v. Gen. Terrazzo Supplies, Inc., 243 S.W.3d 84 (Tex. App.—Houston [1st Dist.] 2007, pet. denied), the First District Court of Appeals of Texas concluded that strict products liability and negligence claims brought by the purchasers of a home against the supplier of EIFS were barred by the economic loss rule. Pugh, 243 S.W.3d at 93. The homeowners in Pugh alleged that the EIFS, which had been applied on their home, allowed moisture to penetrate into their home and caused damage to their home consisting of “decayed wood framing, water damage, and mold” and “warping in their hardwood flooring.” Id. at 86-87. The Pugh court noted that all of the alleged damages were property damages to the home and found that, “under the controlling case law, there was no personal injury or damage to other property that would have permitted the [homeowners] to assert a tort claim that would be excepted from the economic loss doctrine.” Id. at 94.

Pugh and cases in other jurisdictions like it raise interesting questions regarding the breadth of the economic loss rule. Should the integrated products approach apply only when a component part is integrated into another product? Should the rule apply to products installed in homes, which are not products per se, but improvements to real property? Should the rule apply to replacement products that were added to the original product, or just to the original product and its component parts? What is required to show a product is “integrated” into another product? If the rule applies to residential or commercial structures, what products are truly integrated? Prefabricated fireplaces? EIFS? Kitchen appliances? Extension cords? Light bulbs? Toilet ball cock valves? Toilet tank connectors? What if the product was added by the property owner years after the property was built?

In addition to products liability claims, some courts have applied the economic loss rule to construction claims. The doctrine has been applied to preclude tort claims brought to recover economic losses when those losses are the subject matter of a contract. See Jim Walter Homes, Inc. v. Reed, 77 S.W.2d 617, 618 (Tex. 1988). In Jim Walter Homes, the Court held that when the injury suffered is limited to economic loss to the subject of the contract itself, the action sounds in contract alone. Id. In Schambacher v. R.E.I. Elec., Inc., 2010 WL 3075703 (Tex.App. – Fort Worth 2010, no pet.), the Fort Worth Court of Appeals held the economic loss rule barred tort claims against two subcontractors who performed electrical and insulation work during the construction of a house that was damaged by fire. Jim Walter Homes and Schambacher also raise questions regarding the scope of the economic loss rule. Does the rule apply in the absence of privity of contract between the plaintiff and the defendant? If the defendant’s work was limited to the installation of the electrical systems, which cause a fire that ultimately destroys a home, does the economic loss rule bar recovery in tort for the entire home or just the subject of the subcontract?

The above cases relating to the economic loss rule have come from Texas, but every jurisdiction has their own interpretation as to the scope of the economic loss rule.  As a result, it is important that you review these cases with counsel as your state may allow tort causes of action under the specific facts of your case.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cozen O'Connor | Attorney Advertising

Written by:

Cozen O'Connor

Cozen O'Connor on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.