City of Whiting v. Whitney, Bailey, Cox & Magnani, LLC, 2018 U.S. Dist. LEXIS 44943 (N.D. Ind. Mar. 20, 2018)

The City of Whiting, Indiana (the “City”) undertook a 26-acre lakefront development project.  It hired an engineering firm to serve as the consultant for the project.  The consultant subcontracted with a subconsultant for marine engineering services, including design of a rock revetment on the lakefront for shoreline protection.  According to the City, the revetment failed on three occasions, resulting in damage to the City’s property at the project site, including a walking path, landscaping and existing trees, a gazebo, and an existing Gun Club structure, which the City had planned to convert to a restaurant.

After accepting assignment of the consultant’s contract with the subconsultant, the City filed a six-count complaint and alleged that the subconsultant’s negligent revetment design caused damage to the City’s property.  The subconsultant moved for summary judgment on the City’s negligence claim, arguing that the economic loss rule precluded liability against it in tort.  The court noted that Indiana’s economic loss rule bars tort liability when there is damage only to the product contracted for itself, but that the rule does not preclude tort liability if there is personal injury or damage to “other property.”

The parties offered competing interpretations of the “product contracted for” and of “other property” in the context of the lakefront development project.  The subconsultant argued that the entire development project was the product contracted for and that damage to any part of the lakefront would therefore be subject to the economic loss rule.  The City contended that the development project was a collection of several, separately contracted for sub-projects.  The City thus argued that the revetment work was the product contracted for and that damage to other parts of the lakefront project would not be subject to the economic loss rule.

Citing case law from the Supreme Court of Indiana, the court explained that the economic loss rule applies to the product purchased by the owner, rather than the product furnished by the contractor.  The court concluded that the City made one purchase of an entire lakefront park, rather than a series of separate purchases for each component of the park.  As a result, if one defective component of the project damaged another component of the project, the damage was only to the product contracted for itself, not damage to other property.  Because the revetment was purchased under the City’s contract for the lakefront project, the court granted the subconsultant summary judgment to the extent the negligence claim sought recovery for damage to other property also acquired under the City’s contract for the project.  The City’s claimed damages to property that pre-dated the project, such as the pre-existing trees and Gun Club structure, were not barred by the economic loss rule.

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