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Virginia's Economic Loss Rule Demystified: The Basics

Broken ChainThe economic loss rule defines that most basic of questions: who can sue whom and for what claims.  Virginia still sticks to an extremely Conservative judicial model and this philosophical thread is readily apparent in cases dealing with this question.  The Virginia economic loss rule provides that in order to sue a party for "economic losses", the plaintiff generally needs to have a contract with the defendant.

The rule is simply stated in isolation, but proves to be a source of continuing debate, especially in construction litigation.  The seminal Virginia case, Sensenbrenner v. Rust, Orling & Neale, sets the groundwork with its definition of "economic losses".  In the Sensenbrenner case, the plaintiffs purchased a home with an indoor pool from a builder.  The plaintiffs claimed that the pool was negligently designed and built on fill, settled, and caused leaking from broken pipes.  This water in turn was alleged to have caused the bottom of the pool and the foundation of the house to crack.

The court discussed the differences between contract and tort.  While tort law easily handles legally imposed duties, tort law "is not designed, however, to compensate parties for losses suffered as a breach of duties assumed only by agreement."  The court found that the plaintiffs entered into a single contract for construction of a home with a pool.  When one part of the home damaged another, the plaintiffs suffered nothing more than "disappointed economic expectations."  Thus, their remedy sounded in contract.  They had no contract with the architect or pool installation subcontractor, so their claims failed as a matter of law.

When all the parties are still standing, the economic loss rule basically forces parties to stick to the food chain for their remedies.  This naturally means that risk allocation provisions really have teeth under Virginia law because courts will often block plaintiffs from slipping away from these clauses by restating their contract claims in tort.  In today's quite risky economy, the economic loss rule means that a bankruptcy at some point in the contract chain of privity can often let a whole chain of potentially liable parties off the hook.

  • Shareholder

    Timothy Hughes is the managing shareholder of Bean, Kinney & Korman. He also represents clients in construction and commercial litigation, as well as corporate, contracts and general business matters. With over 20 years ...