Arizona's Economic Loss Rule

John R. Hoopes

In September 2003, the Arizona Court of Appeals confirmed and clarified some important legal principles, including the economic loss rule, that are applicable to contractors.

In Carstens v. City of Phoenix (408 Ariz.Adv.Rep. 9, 75 P.3d 1081 [App. 2003]), Carstens purchased a $2 million home in the Biltmore Estates. Carstens' home contained many defects not noted by City of Phoenix building inspectors as a result of the inspectors' gross negligence. Carstens sued the City for the considerable damages they suffered as a result of the need to substantially rebuild their house. Because Mr. & Mrs. Carstens had no contract with the City, they could sue the City only for negligence in what the law calls a "tort" claim. (Car accident cases and malpractice actions are a form of negligence tort claims.) Carstens also pursued claims against the seller, the contractor, and subcontractors. Only Carstens' claims against the City are discussed in the Court of Appeals opinion.

The court held that in a tort claim—at least in a negligence claim in the context of construction—the plaintiff may not recover economic losses. Economic losses are contrasted with personal injury or direct damage to other property, which may be recovered in a tort case. Economic losses in the Carstens case included the cost to properly rebuild their home. The court reaffirmed the economic loss rule in the construction context and held that Carstens could not recovery those damages in a negligence action. The court also explained that the economic loss rule applied regardless of whether the plaintiff has a contract with the defendant and applies even though the alleged negligence raises issues of safety.

The Carstens ruling is important to contractors because it confirms that the economic loss rule bars negligence claims to recover economic losses in a construction defect case. If, for example, a contractor or supplier has no contractual relationship with the owner (or whomever claims the loss), then that contractor should not be liable for economic loss.