Economic Loss Rule in Suits for Defective Construction in California

In Aas v. Superior Court (2000) 24 Cal.4th 627, the California Supreme Court concluded that the economic loss rule applies in tort actions for defective construction. (24 Cal.4th at pp. 648-653.)

In that case, the plaintiffs alleged that their single-family homes suffered from a variety of construction defects.

They sued the developer and general contractor and many of the subcontractors, asserting causes of action for negligence, strict liability, and breach of express and implied warranty.

The plaintiffs sought, among other things, the cost of repairing the alleged defects. (24 Cal.4th at p. 633.)

The defendants brought a motion in limine to exclude evidence of any construction defect that had not yet caused property damage.

The trial court granted the defendants' motion as to the tort claims only, and the Court of Appeal denied writ relief. (Aas, supra, 24 Cal.4th at pp. 633-634.)

The California Supreme Court granted review and concluded that in actions for negligence in home construction, a manufacturer's liability is limited to damages for injury to person or property.

In so holding, the court invoked the economic loss rule, and expressly disapproved the holding in Huang v. Garner (1984) 157 Cal. App. 3d 404. (Id. at pp. 648-649, 652-653.)

In Huang, supra, 157 Cal. App. 3d 404, the plaintiffs had sought recovery of the cost of repairing defects in an apartment building where some of those defects had resulted in property damage, and some had not. (Id. at pp. 419-425.)

As a result of such defects the plaintiffs had become subject to an administrative order of abatement citing likely structural failure and requiring certain repairs.

The Huang court concluded that the abatement order provided the "certainty" of injury required for a cause of action under the principles articulated in J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 804. (Id. at p. 424, fn. 13.)

The Supreme Court in Aas expressed the view that, "Huang's analysis is not entirely satisfactory because other alleged construction defects in that case had neither caused property damage nor been cited in the notice of abatement. (Compare Huang at pp. 419-420 summary of alleged defects with Huang at p. 424, fn. 13 order of abatement.)

Even accepting for the sake of argument the Huang court's suggestion that a notice of abatement might suffice to convert repair costs into tort damages, the decision offers no adequate explanation for permitting the plaintiffs, consistently with Seely , to recover repair costs for the other defects that had neither appeared in the notice nor resulted in property damage. Accordingly, we disapprove Huang to the extent it is inconsistent with the views set out in this opinion." (Aas, supra, 24 Cal.4th at p. 649.)

The court explained that under the economic loss rule, "appreciable, nonspeculative, present injury is an essential element of a tort cause of action." (Aas, supra, 24 Cal.4th at p. 646.)

"Construction defects that have not ripened into property damage, or at least into involuntary out-of-pocket losses, do not comfortably fit the definition of ' "appreciable harm" ' - an essential element of a negligence claim." (Ibid.; see also Zamora v. Shell Oil Co., supra, 55 Cal.App.4th at pp. 208-211 finding no recovery for the cost of replacing defective pipes that had not yet leaked; San Francisco Unified School Dist. v. W.R. Grace & Co, supra, 37 Cal.App.4th at pp. 1327-1330 finding school district could not state a cause of action in negligence or strict liability based on the presence of asbestos products in the building, when the products had not contaminated the building; Sacramento Regional Transit Dist. v. Grumman Flxible, supra, 158 Cal. App. 3d at pp. 293-298 precluding recovery in negligence or strict liability for the cost of repairing defective bus parts that had not caused further damage.)