Defective Structures and Economic Loss in the United States: Law and Policy

Abstract:     
This article surveys the recent development of contractor liability for defective construction. The "economic loss rule" that precludes damages for economic losses from defective construction remains relatively firm in the U.S. for commercial construction, but has eroded in some jurisdictions for home construction. A variety of judicial and legislative approaches have caused this erosion, which allows recovery in tort rather than in contract in most cases, and can extend liability to owners other than the first buyer. Some courts have simply imposed a common law duty of care on home builders, while others have legislated such liability, while still others have not deviated from the economic loss rule. The variety of approaches mirrors that in England, Australia, Canada and New Zealand. The effects of imposing liability for economic loss in these cases is reflected in higher liability premiums and reduced coverage for contractors' insurance in this market, which has made conventional liability insurance unaffordable by some smaller homebuilders, who are required either to form or participate in a captive insurance company to obtain affordable coverage. Insurers are working with the building industry to reduce risks, evidence that liability rules do affect levels of care taken. Finally, the article examines the policy concerns that might underlie a distinction in liability rules for commercial and home construction, noting the greater ability of commercial buyers to obtain contractual protections due to awareness of the risk, a distinction not made in judicial opinions.

Number of Pages in PDF File: 26

Keywords: product liability, builder, tort, contract, home, economic loss rule

JEL Classification: K12, K13

Accepted Paper Series