When Losses Are Too Big: Evaluating the Economic Loss Doctrine in California

40 Pages Posted: 23 May 2020

Date Written: May 19, 2020

Abstract

The pure economic loss doctrine is a rule developed by common law courts to shield a defendant from exposure to negligence suits where a party has not suffered physical injury or property damage, and the only losses someone suffers are economic in nature-- such as lost profits or wages. Most recently, the California Supreme Court evaluated whether the doctrine should be applied in a case involving a massive environmental disaster, holding that the doctrine shielded a utility from liability for the economic losses to neighboring businesses caused by its putative negligence.

In October of 2015, a huge underground natural gas storage facility operated by Southern California Gas Company (“SoCalGas”) suffered a breathtaking blowout. Over a four-month period until the leak was capped, the facility blew 100,000 tons of natural gas into the atmosphere and surrounding communities. Public health officials directed the utility to evacuate nearly 15,000 residents within a five-mile radius of the storage facility. Numerous signs indicated SoCalGas was not only negligent, but potentially grossly negligent in removing or failing to install safety valves on the injection wells and having no system in place to monitor several failing wellheads. Businesses within the evacuation zone that saw their revenues plummet brought suit against the company seeking recovery of the economic losses they suffered as a result of the evacuation.

This Article evaluates the California Supreme Court’s decision, recognizing the worries that court and others have expressed concerning how to limit a cascade of economic losses stemming from potentially minor acts of negligence. However, the Article argues that a rule that might be justified in particular contexts (e.g., an automobile accident in a tunnel that might hold up thousands of commuters) should not apply to the destruction following enormous environmental disasters, where a single grossly negligent defendant might destroy the livelihoods of entire communities as well as the natural environment.

While critiquing the decision on moral, economic, and pragmatic grounds, the Article evaluates many leading cases to suggest how allowing recovery in special settings would not threaten undue liability. The Article argues that the economic loss rule should not apply in instances of massive environmental disasters, where significant losses suffered by nearby enterprises can be readily identified, and the number of potential claimants can be limited--—such as here, where the five-mile zone during the four month evacuation period provides a ready, ascertainable limit on who might be able to claim their economic losses and for a limited period of time.

Suggested Citation

Nockleby, John T., When Losses Are Too Big: Evaluating the Economic Loss Doctrine in California (May 19, 2020). Loyola of Los Angeles Law Review, Forthcoming; Loyola Law School, Los Angeles Legal Studies Research Paper No. 2020-15. Available at SSRN: https://ssrn.com/abstract=3605856

John T. Nockleby (Contact Author)

Loyola Law School Los Angeles ( email )

919 Albany Street
Los Angeles, CA 90015-1211
United States

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