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The Takeaway

To build a good defense strategy against exceptions to the Moorman Doctrine (which bars recovery in tort for purely economic losses):

• Start developing your strategy near the beginning of the litigation process.
• If purely economic damages are suspected to be at issue, assert the Moorman Doctrine as an affirmative defense in responsive pleadings.
• Develop evidence that can close the door on exceptions to the Moorman Docctrine. (If successful, you’ve paved the way for summary judgment.)

What is Illinois’ Moorman Doctrine?

Since 1982, Illinois courts have generally barred recovery in tort for purely economic losses. Known as the “economic loss rule,” “economic loss doctrine,” or “Moorman Doctrine,” this rule was established by the seminal Illinois Supreme Court case Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 73, 435 N.E.2d 443, 444 (1982).

In Moorman, the plaintiff discovered a crack in one of its grain storage tanks and subsequently filed suit against the tank manufacturer, seeking recovery in tort for the cost of repair and loss of use of the tank. Notably, no person or other property was injured as a result of the alleged crack. The Illinois Supreme Court definitively held that plaintiffs may not recover for solely economic losses under the tort theories of negligence or strict liability.

The rationale behind this policy is that economic losses or business losses are best resolved under the rules of contract rather than tort. Purchasers can resolve their grievances against manufacturers by bargaining for a warranty, negotiating a lower purchase price, or seeking remedies under the Uniform Commercial Code (UCC).

Normally, a product defect that merely disappoints the purchaser’s expectations but causes no other damage results in a claim for contract damages but not a tort action. However, as discussed below, Illinois recognizes certain exceptions to that rule, which has opened the door for recovery in tort. Familiarizing yourself with these exceptions is essential to set up your case for a successful economic loss defense.

What is an Economic Loss?

Put simply, the Illinois Supreme Court defined economic loss as encompassing damages for the value of the defective product, cost of repair, cost of replacement, and loss of profits. Most importantly, purely economic losses don’t involve personal injury or damage to other property. For example, in Moorman, plaintiff sought recovery for the cost of repairs for the defective grain tank as well as the loss of its use. Because the crack in the grain tank was limited to the tank itself—and no person or other property was injured as a result—the damage was purely economic.

What are the Exceptions?

Illinois recognizes three exceptions to the economic loss doctrine:

• Plaintiff sustained damage (e.g., personal injury or property damage) that was the result a sudden, dangerous, or calamitous occurrence.
• Plaintiff's damages were proximately caused by a defendant's intentional, false misrepresentation.
• Plaintiff's damages were proximately caused by a negligent misrepresentation by a defendant who is in the business of supplying information for the guidance of others in their business transactions.

Sudden and Dangerous or Calamitous Event

The “sudden or dangerous occurrence” exception allows a purchaser to recover in tort when a product defect causes a sudden and calamitous occurrence that causes harm to people or other property. This intuitive exception is based on the idea that tort theory, rather than contract, is appropriate in cases of personal injury or property damage. American Drug Stores, Inc. v. A T & T Technologies, Inc., 222 Ill. App. 3d 153, 155, 583 N.E.2d 694, 695 (2nd Dist. 1991).

A common example of the sudden or dangerous occurrence exception involves fire and water damage. For instance, in United Air Lines, Inc. v. CEI Industries of Illinois, Inc., 148 Ill. App. 3d 332, 499 N.E.2d 558 (1st Dist. 1986), recovery in tort was allowed because defects in roofing panels caused a ceiling to collapse. In Scott & Fetzer Co. v. Montgomery Ward & Co., 112 Ill. 2d 378, 493 N.E.2d 1022 (1986), recovery in tort was allowed because defects in a fire detection system resulted in destruction of a warehouse.

When the purchaser is seeking damages for the loss of property other than the defective product, it falls within the “parameters of losses properly recoverable under tort theory.”

False and Intentional Misrepresentations

Even before the advent of the Moorman Doctrine, Illinois courts recognized that intentional, false representation can create an exception that allows for recovery of economic loss in tort. The Moorman Court acknowledged this exception, citing Soules v. General Motors Corp, 79 Ill. 2d 282 (1980).

Five elements are needed to define fraudulent misrepresentation:

(1) A party makes a false statement of material fact.

(2) The party making the false statement knows or believes that the statement is false.

(3) That party makes the false statement with the intention of inducing the other party to act.

(4) The other party acts relying on the statement being true.

(5) The damage to the other party results from relying on the statement as being true. Id. at 286. Furthermore, the other party must be justified in relying on the statement. Id.

While acknowledging this exception, the Moorman Court was quick to clarify that economic loss is not recoverable in tort for innocent misrepresentation. It reasoned that holding a manufacturer liable for economic loss for misrepresentations neither intentionally nor negligently made would effectively result in the imposition of strict liability, in violation of public policy. Moorman, 91 Ill. 2d at 89.

Negligent Misrepresentation

In addition, Illinois courts have also recognized that negligent misrepresentations can be an exception to Moorman Doctrine provided that the defendant liable for the resulting economic loss is in the business of supplying information. Fireman's Fund Insurance Co. v. SEC Donohue, 281 Ill. App. 3d 789, 666 N.E.2d 881 (1st Dist. 1996); In re Chicago Flood Litigation, 176 Ill. 2d 179, 199, 223 Ill. Dec. 532, 680 N.E.2d 265 (1997).

To assert the negligent misrepresentation exception to Moorman, plaintiff must demonstrate that defendant: (1) is in the business of supplying information for the guidance of others in their business dealings, (2) provided the information that constitutes a misrepresentation; and (3) supplied the information for guidance in the plaintiff's business dealings. Prime Leasing v. Kendig, 332 Ill. App. 3d 300, 311, 773 N.E.2d 84, 94 (1st Dist. 2002).

The court must undertake a “precise, case-specific inquiry” to determine whether the defendant is in the business of supplying information for the guidance of others in their transactions. In making this determination, the court must consider whether the intended result of the plaintiff-defendant relationship is for the defendant to create a product or tangible thing. If the end product of the relationship is a tangible product (which could be described in a contract), the exception won’t apply. See Fireman’s Fund Ins. Co., 281 Ill. App. 3d at 797.