Assessing The Future Of Colorado's Economic Loss Rule

Assessing The Future Of Colorado's Economic Loss Rule

By David Holman (February 15, 2024), Expert Analysis - Law360

The Colorado Supreme Court appears ready to either protect the economic loss rule, or hasten its decline.

Earlier this month, the Supreme Court granted a certiorari petition and will review the Colorado Court of Appeals' 2023 decision in Mid-Century Insurance Co. v. HIVE Construction Inc.[1]

The court will decide "[w]hether the division erred in concluding that Colorado's economic loss rule precludes Mid-Century Insurance Company's negligence claim alleging that HIVE Construction, Inc.'s willful and wanton conduct resulted in a fire and property damage."

The HIVE Construction decision was an encouraging sign that Colorado's economic loss rule may see a comeback after the Colorado Supreme Court's dicta footnote in Bermel v. BlueRadios Inc. in 2019.[2]

The economic loss rule is a common law doctrine designed to prevent tort law from swallowing contract law. Beginning in Colorado with the Supreme Court's decision in Town of Alma v. AZCO Construction Inc. in 2000,[3] the economic loss rule barred tort claims where the plaintiff "suffer[ed] only economic loss from the breach of an express or implied contractual duty ... absent an independent duty of care under tort law."

The court better defined the rule in BRW Inc. v. Dufficy & Sons Inc. in 2004,[4] by setting out a three-factor test to determine if the contract established an overlapping duty of care, and therefore barred the tort claim:

(1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.

As a whole, then, if the parties agreed to a duty of care in their contract, "it follows that the plaintiff has not shown any duty independent of the interrelated contracts and the economic loss rule bars the tort claim and holds the parties to the contracts' terms."

Before Bermel, Colorado courts generally applied the economic loss rule to bar all tort claims for purely economic damages based on a negligence duty that was the same as the contractual duty. But Bermel opened up a major exception.

In that case, a communications hardware and software company sued its independent contractor for forwarding thousands of company emails containing proprietary information to his personal email address. The parties' contract had prohibited the contractor's removal of any company materials containing proprietary information.

Based on these facts, the plaintiff brought claims for both breach of contract and a statutory claim for civil theft, which allows the recovery of treble damages and attorney fees. The trial court rejected the contractor's economic loss rule argument, and found him liable on both claims.

After the intermediate appellate court affirmed the verdict, the Supreme Court did as well. The economic loss rule did not bar the civil theft claim, the court reasoned, because this statutory claim preceded the economic loss rule, and "to limit or abrogate a clear legislative pronouncement by reason of such judicial policy concerns would offend the separation of powers."[5]

This new carveout was significant on its own. But the Bermel court then ventured beyond the holding in a footnote, and "note[d] that the economic loss rule generally should not be available to shield intentional tortfeasors from liability for misconduct that happens also to breach a contractual obligation."[6]

Some lower and federal courts followed Bermel's footnote to allow tort claims alleging intentional conduct despite the economic loss rule, but two Court of Appeals panels, including HIVE Construction, recognized the footnote as dicta.

In HIVE Construction, the plaintiff Mid-Century brought subrogation claims against its insured's general contractor. The parties' contract had required the contractor's performance "in accordance with the Contract Documents," and included a warranty that the work would conform to the contract documents and be defect-free.[7]

The contractor substituted noncombustible materials, as required by the contract for a certain area of the kitchen, for combustible materials, which later caused a fire.[8]

Mid-Century brought only a negligence claim for economic damages based on the contractor's breach of its duty to comply with contractual specifications. The trial court denied the contractor's motion for a directed verdict based on the economic loss rule, citing the rationale of Bermel's footnote. The jury then delivered a verdict of nearly half a million dollars on Mid-Century's negligence claim.

The Court of Appeals' HIVE Construction decision observed that Bermel "did not hold that the economic loss rule categorically applies or does not apply to any type of tort claim."[9]

Therefore, Bermel's "statement regarding the frequency with which the economic loss rule should apply to intentional torts was not necessary to its holding, and thus constitutes dictum."[10]

The HIVE Construction court also analyzed the economic loss rule and its primary purpose of "maintain[ing] the distinction between contract and tort law on the theory that parties to a contract should confidently allocate risks in the contract and that such allocations should be respected once made."[11]

By limiting Bermel to its holding and relying on a robust economic loss rule, the Court of Appeals reversed the judgment, and remanded with instructions to direct a verdict for the contractor.

Mid-Century requested the Supreme Court's review. In its cert petition, Mid-Century tried to frame the appellate panel's decision as "expanding the economic loss rule beyond the limits this Court recognized in [Town of] Alma and reaffirmed in Bermel." According to Mid-Century, then, Bermel's footnote constitutes precedent, and the Court of Appeals erred in reviving the economic loss rule.

The stakes for Colorado businesses are high. Most businesses depend on their contractual allocations of risk, and act accordingly. If those allocated expectations are placed at even greater risk, the cost of doing business in Colorado will almost certainly increase as a result.

The Supreme Court has at least three paths in its review of HIVE Construction: (1) affirm the Court of Appeals' reasoning, thereby blessing the panel's limitation of Bermel's footnote, and protecting the economic loss rule against further decline; (2) reverse the Court of Appeals decision by fully adopting Bermel's footnote as a holding, and likely marking the effective end of the economic loss rule; or (3) affirm the Court of Appeals' decision, and completely overturn Bermel.

The third option seems highly unlikely — after all, every member of the court that decided Bermel is still sitting, with the lone exception of Justice Maria Berkenkotter's replacement of Justice Nathan Coats.

Given the Supreme Court's recent pace for important civil cases, the court will likely hear oral arguments in the fall of 2024, followed by a decision sometime in 2025.

David Holman is a partner at Crisham & Holman LLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Mid-Century Insurance Co. v. HIVE Construction, Inc. 531 P.3d 427 (Colo. App. 2023).

[2] Bermel v. BlueRadios, Inc., 440 P.3d 1150 (Colo. 2019).

[3] Town of Alma v. AZCO Construction, Inc., 10 P.3d 1256 (Colo. 2000).

[4] BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).

[5] 440 P.3d at 1157.

[6] Id. at 1154 n.6.

[7] 531 P.3d at 433.

[8] Id. at 430.

[9] 531 P.3d at 435.

[10] Id.

[11] Id.