The Economic Loss Doctrine and Why it Matters in Utility Damage Cases

ACME Excavation has a problem. Earlier this year, ACME contracted with XYC Telecommunications to install a new buried fiber optic cable between two existing handholes along the south side of Highway 1. In accordance with State law and safe excavation practices, ACME notifies 811 of its intent to excavate. The following day, Gas Company responds to the locate request and marks Gas Company’s buried pipeline in the proposed excavation area. Unbeknownst to ACME, Gas Company’s locator mismarked the pipeline and ACME damages the mismarked utility during the course of its excavation.

Fortunately, none of ACME’s equipment or employees were injured. However, ACME’s work was delayed for three days while Gas Company performed repairs. During this period, ACME could not use its equipment, paid idle employees, and incurred overtime expenses to timely complete the project when it was finally able to go back to work.

Adding insult to injury, six months later, ACME received an invoice from Gas Company for the cost of its repairs. ACME does not believe it is responsible for the damage to the pipeline because Gas Company’s locator failed to accurately mark the pipeline. In addition, ACME believes it should be able to offset Gas Company’s claim by the amount of downtime costs ACME incurred while Gas Company repaired the pipeline.

Is ACME entitled to credit its downtime costs against Gas Company’s claim? The answer, which should come as no surprise, is: Maybe.

Black’s Law Dictionary defines a tort as "a legal wrong committed upon the person or property independent of contract.” Negligence, the most common tort claim, is the failure to exercise the care that a reasonably prudent person would exercise in similar circumstances.

The Economic Loss Doctrine (ELD) is a court-developed doctrine that has been adopted by the majority of states. The ELD generally bars recovery in tort when the negligence of others results in purely economic losses, such as delay or downtime costs.

A majority of jurisdictions interpret the ELD to mean, “that a plaintiff who has suffered only economic loss, such as downtime, due to another’s negligence has not been injured in a manner that is legally cognizable or compensable.” These jurisdictions do not permit recovery in tort for purely economic losses. According to a recent state law survey, 27 states follow this majority view, including: Alabama, Delaware, Hawaii, Idaho, Indiana, Kentucky, Maine, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, Wisconsin, and Wyoming.

For example, in a case decided under Texas Law, Coastal Conduit & Ditching, Inc. v. Noram Energy Corp., Coastal, an excavator, sued Noram, a gas line operator. Coastal claimed Noram’s failure to mark, or to accurately mark, its lines caused Coastal to incur additional expenses (20 to 30 minutes on each job) to use hand tools to locate the gas lines. Noram claimed Coastal should not recover any damages because Coastal had alleged only economic loss and did not allege any property damage or personal injuries, and the ELD barred Coastal’s claims. The Court agreed, holding that in the absence of a contract, personal injury or property damage (to Coastal’s own property), Coastal was not entitled to purely economic damages (i.e., downtime).

Similarly, in the Pennsylvania case Excavation Technologies, Inc. v. Columbia Gas Co. Of Penn., Excavation Technologies, Inc. (“ETI”) requested Columbia Gas to mark the locations of its gas lines around the work sites pursuant to the Pennsylvania One Call Act (the “Act”). Columbia improperly marked some lines and failed to mark others. ETI struck various gas lines. This hampered ETI’s work and resulted in economic damages. ETI, however, did not sustain any physical injury or property damage. ETI sued Columbia, claiming Columbia failed to comply with its statutory duties under the Act. Columbia argued the ELD precluded liability to ETI. The Pennsylvania Court agreed, finding that “the legislature did not intend utility companies to be liable for economic harm caused by an inaccurate response under the Act, because it did not provide a private cause of action for economic losses.” The Court further reasoned that the purpose of the Act was to protect against physical harm to individuals working on construction sites, and to avoid property damage to utilities and surrounding property. The Court observed that under the Act, excavators, not utility owners, retain the duty to identify the precise location of buried facilities and opined that permitting recovery for economic losses would shift the burden of excavators who are in the best position to employ safe excavation practices to prevent utility damages to utility operators, the cost of which would inevitably be passed on to consumers. The Court concluded that until the legislature expressly permits excavators to recover purely economic losses under the Act, “we decline to afford heightened protection to the private interests of entities who are fully capable of protecting themselves, at the public’s expense.”

Thus, in states following the majority view, an excavator who damages an unmarked or mismarked buried utility may not recover downtime or delay damages against a utility operator in the absence of some personal injury to its employees or actual physical damage to its equipment.

In a minority of jurisdictions, recovery in tort is permitted for purely economic losses notwithstanding lack of privity among the parties. Courts applying this minority view allow tort recovery for economic loss in limited circumstances. A recent survey of state laws concluded that this view of the ELD has been applied in varying degrees is at least 18 states, including: Alaska, California, Colorado, Florida Georgia, Illinois, Iowa, Kansas, Maryland, Massachusetts, Michigan, Montana, New Hampshire, Oregon, Rhode Island, Utah, Washington, and West Virginia.

In the utility damage context, courts that permit excavators to recover purely economic losses in tort have typically done so in reliance upon the “Independent Duty Rule” exception to the ELD. In states like Illinois and Florida, this rule allows for the recovery of economic loss damages in tort when an independent duty exists, such as a duty imposed by state excavation damage prevention statutes.

For example, in Illinois Bell Tel. Co. v. Plote, Inc., Plote, a highway contractor, filed a counterclaim alleging that Bell’s failure to mark, and/or to adequately mark, the location of its facilities, caused delays in the construction resulting in downtime damages to Plote. The trial court dismissed Plote’s claims based on the ELD. On appeal, the Court of Appeals held that the Illinois Underground Facilities Damage Prevention Act imposed upon Bell a duty to mark the location of its underground facilities and that the ELD therefore did not bar Plote’s downtime claim.

Similarly, in A&L Underground, Inc. v. City of Port Richey, A&L was excavating in the City of Port Richey. The City failed to accurately locate and mark its underground utilities as required by Florida’s Underground Facility Damage Prevention and Safety Act (the “Act”). As a result, A&L hit the City’s underground lines, which caused A&L to incur delay and repair costs. When A&L sued the City for violation of the Act, the trial court held that because A&L had not suffered any physical injury or damage to its own property, A&L's claim was purely for economic losses, and that A&L could therefore not recover damages from the City. The Florida Court of Appeals reversed the trial court and concluded that the clear language of the Act allowed recovery for purely economic losses. The Act permits an excavator, such as A & L, to recover "for the total cost of any loss."

The ELD is widely misunderstood and often misapplied in the context of utility damage claims. In the majority of jurisdictions, the ELD precludes excavators from recovering delay, downtime, and other purely economic losses from utility owners who fail to mark, or mismark buried utilities in response to locate requests. However, in some jurisdictions, downtime claims may be recoverable.

Generally, the viability of downtime claims depends upon whether the applicable damage prevention statute imposes an independent duty upon utility owners, the breach of which creates a cause of action in favor of the excavator for purely economic losses. Proposed legislation in “majority view” states such as Oklahoma and others, if passed, may soon change the landscape for excavators like ACME. For example, in Oklahoma a recent bill would, if passed, permit “an excavator to recover damages from an operator for the cost of: . . . [d]elays associated with an operator not locating underground facilities within a maximum of three (3) business days, unless a documented agreement is in place to delay the locate.”. Because the recoverability of economic losses in utility damage cases may significantly impact utility operators, contract locators, excavators, insurers, and consumers alike, all stakeholders would be well served to stay abreast of One Call legislation in the jurisdictions in which they operate.

Anthony Jorgenson


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