“Damaging event” in “economic loss” to real estate applied and was jury question; summary judgment reversed: HACK V. LONE OAK DEVELOPMENT, INC. (COA 6/13/2008)

REAL ESTATE:  Economic loss rule for damage to real estate; privity
DATE: 6/13/2008

CA reverses and remands entry of SJ for developer and drain installer in this homeowner’s negligence claim.

Homeowners purchased lot from sellers who had purchased from Lone Oak Developers. Prior to this purchase, the developer contracted with Central Paving to install drain pipe. Nearly two years later the driveway and a portion of the yard collapse because Central Paving had used tree stumps and vegetation as fill under its drain pipe, which subsequently collapsed. Repairs exceeded $50,000. The issue presented is whether, absent privity of contract, the Hacks can pursue a negligence action against the developer and installer. Homeowners admit no privity and assert claims in negligence.

Negligence does not require privity, however, when the damage is exclusive to property, the plaintiffs seeking to recover under a theory of negligent construction have encountered a legal quagmire because "one who is not a party to the contract or in privity thereto may not maintain an action for negligence which consists merely in the breach of the contract." In these homebuilder cases, there is a trend to deny a subsequent purchaser compensation for losses caused by the negligent construction under the theory of what is commonly referred to as the "economic loss rule."

The Kentucky Supreme Court implicitly adopted the economic loss rule in Real Estate Marketing, Inc. v. Franz, 855 S.W.2d 921 (Ky. 1994). "[T]his court recognizes that recovery is contingent upon damage from a destructive occurrence as contrasted with economic loss related solely to diminution in value, even though, as to property damage, both may be measured by the cost of repair. The rule was intended as a line of demarcation between contract and tort law, but some bemoan its increasing application, including construction litigation. In the present analysis, the court finds the use of the language "damaging event" in Franz pivotal.

The "damaging event" here was not limited to the drain pipe. This issue is properly left for a jury to determine. Under the circumstances of this case, the Court holds that the developer and installer owed the purchasers the duty to use reasonable care when the drainage pipe was installed. SJ is reversed.

Digested by John E. Hamlet

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